Wednesday, November 26, 2014

The Heart of the US Election

CHICAGO – A real debate is emerging in America’s presidential election campaign. It is superficially about health care and taxes. More fundamentally, it is about democracy and free enterprise.

Democracy and free enterprise appear to be mutually reinforcing – it is hard to think of any flourishing democracy that is not a market economy. Moreover, while a number of nominally socialist economies have embraced free enterprise (or “socialism with Chinese characteristics,” as the Chinese Communist Party would say), it seems to be only a matter of time before they are forced to become more democratic.

Yet it is not clear a priori why democracy and free enterprise should be mutually supportive. After all, democracy implies regarding individuals as equal and treating them as such, with every adult getting an equal vote, whereas free enterprise empowers individuals based on how much economic value they create and how much property they own.

What prevents the median voter in a democracy from voting to dispossess the rich and successful? And why do the latter not erode the political power of the former? Echoes of such a tension are playing out as President Barack Obama tries to tap into middle-class anger, while former Massachusetts governor Mitt Romney appeals to disgruntled businesspeople.

One reason that the median voter rationally agrees to protect the property of the rich may be that she sees the rich as more efficient managers of that property. So, to the extent that the rich are self-made, and have come out winners in a fair, competitive, and transparent market, society may be better off allowing them to own and manage their wealth, while getting a reasonable share as taxes. The more, however, that the rich are seen as idle or crooked – as having simply inherited or, worse, gained their wealth nefariously – the more the median voter should be willing to vote for tough regulations and punitive taxes on them.

In today’s Russia, for example, property rights do not enjoy widespread popular support, because so many of the country’s fabulously wealthy oligarchs are seen as having acquired their wealth through dubious means. They grew rich because they managed the system, not because they managed their businesses well. When the government goes after a rich oil tycoon like Mikhail Khodorkovsky, few voices are raised in protest. And, as the rich kowtow to the authorities to protect their wealth, a strong check on official arbitrariness disappears. Government is free to become more autocratic.

Now consider a competitive free-enterprise system with a level playing field for all. Such a system generally tends to permit the most efficient to acquire wealth. The fairness of the competition improves perceptions of legitimacy.

Moreover, under conditions of fair competition, the process of creative destruction tends to pull down badly managed inherited wealth, replacing it with new and dynamic wealth. Great inequality, built up over generations, does not become a source of great popular resentment.

On the contrary, everyone can dream that they, too, will become rich.

When such aspirations seem plausible, the system gains added democratic support. The rich, confident of popular legitimacy, can then use the independence that accompanies wealth to limit arbitrary government and protect democracy. Free enterprise and democracy sustain each other.

There is a popular belief that democratic systems support property and enterprise because votes and legislators can be bought, and the capitalists have the money. But that view is probably wrong. As Russia suggests, without popular support, wealth is protected only by increasingly coercive measures. Ultimately, such a system loses any vestige of either democracy or free enterprise.

Back, then, to America’s presidential election. The recent crisis, followed by huge bailouts of financial institutions, has raised questions about how at least one segment of business – the bankers – make their money. As the misdeeds of “banksters” come to light, the system no longer seems fair.

Moreover, the American Dream seems to be slipping out of reach, in part because a good education, which seems to be the passport to prosperity, is increasingly unaffordable for many in the middle class. This erodes support for the free-enterprise system.

Obama understands this, which explains his appeal to, and focus on, the middle class. He is the standard bearer for democracy.

On the other hand, successful professionals and entrepreneurs believe that they have come by their wealth legitimately. They are the working rich, and dislike the growing burden of regulations and the prospect of higher taxes. They feel like they are being blamed for their success, and they resent it. Romney understands that America’s strength relies heavily on free enterprise.

Ordinarily, there would be no contest here. The weight of votes in the middle class would carry the day. The middle class, however, is divided: some want to protect whatever entitlements and property they already have, while others want the government to give them a fairer chance. Moreover, the Supreme Court’s Citizens United decision in 2010, which allows unlimited independent political expenditure by organizations like corporations or unions, has helped Romney more than Obama.

Whatever the outcome of the election, the tension between democracy and free enterprise that is central to it does not bode well for either. A free-enterprise system that is sustained only by the moneyed power of the successful is not stable, and unlikely to remain vibrant for long.

The United States needs to restore the possibility of achieving the American Dream for its middle class, even while it reaffirms the historically light regulation and relatively low tax burden that have allowed enterprise to flourish. The virtue of democracy is that debate may lead to just such a consensus. We can only hope.

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    1. CommentedPrabhakar Krishnamurthy

      The analysis is superficial but an oversimplification. But it is not just about democracy and free enterprise. It is about inequality and the perpetuation of inequality. While, Obama has taken the side of the oppressed, his opponent clearly associated with oppressors. The Occupy Movements and total disenchantment with obscenely rich trying to suppress poor, not being environmental friendly (drilling and drilling) are some of the strongest reasons for failure of Mitt Romney. Do we have some lessons to learn from US elections?

    2. CommentedFrancisco Menendez Vidal

      With the intervention of the government in the Economy and the increase in regulation of the market

      This is the battle between two ideas: is the free market betrayed by one party or the equality of opportunities betrayed by the other one?

    3. CommentedFrancisco Menendez Vidal

      (Sorry, I continue) with the help of the stand (or tax payers)

      - middle class is angry also with those that take into advantage the system for paying less than X % of income tax (it can be 13% or 20%), compared with the rest of the people (another unfair inequality)

      - but business people are angry also with the intervention

    4. CommentedFrancisco Menendez Vidal

      Very interesting article: democracy of the middle class vs. Meritocracy of the business people.
      Some points on my side (although I'm observing the situación from outside):

      - middle class is angry with the unfair inequality. That once percibed by those "banksters" receiving big bonuses

    5. CommentedAndrés Arellano Báez

      As a society we will look for equity of opportunities. Once we achieve that, the inequity in people is totally legit. Excelente article.

        CommentedLOVEKESH BHATI

        Equality means easy access to quality institutions like good educational institutions, environment without repression, a fair judiciary to enforce legal contracts. US has the best institutions in almost every field, it still attracts the best talent in the world. What it needs is to break the grip of these capitalists who take advantage of their position to exploit the person in need. It's hard to digest how a free market has failed in providing cheap medicare for it's citizens, why college has become dream for middle class people.

        CommentedSibabrata Ray

        I`d like to see the reference that says that about half of the billionairs started from scratch. Also, did they start as inner city kids?

        The important information needed is what is the probability that a pennyless child will become a billionaire vis-a-vis a multi-millionair`s son will become a billionaire.

        If these two probabilities are not close, then the claim of equality of opportunity is hard to swallow.

        CommentedMark Pitts

        According to HCSB, half of all billionaires started from scratch.

        CommentedSibabrata Ray

        I always wonder what is really meant by the equality of opportunity. How can a trust fund baby and a child from inner city ghetto may have equal opportunity?

        I'd like to have same opportunity as Mr. Romney or Mr. Bush. How can I get that without having a rich and connected dad first?

    6. Commentedsrinivasan gopalan

      The article by Mr Raghuram Rajan is interesting and edifying but the reality is that the Obama Administration batting for the middle class as opposed to Republican candidate who is all for business was also seen assisting big investment banks when they used ingenious financial instruments to defraud a lot of stakeholders and public trust, by bailing them out when the chips were down. The alibi deployed was they are too big to fail! At the end of the day, the capitalist US economy can ill-afford to lose its sheen of being the bastion of big business for promoting enterprise while simultaneously trotting out its democratic and inclusive values to the rest of the world. For me, the US today represents a paradox without parallel just as China which has married Marx and Market without promising any democratic loosening to its legions of people. The paradox that the world's two majors the US and China today presents is too stark to be set aside. Ultimately the universal verities such as democracy, wealth creation and preservation or guided democracy would have no meaning if in the process the inequalities among people widen and contribute to social tension and avoidable friction. The backlash against outsourcing from India in the US or export to the US from China is all a dreary manifestation of the growing inequalities within the US-- a country that has in the past gratuitously encouraged and is still encouraging a multicultural mix in its midst. Unless both the contending candidates understand that they represent not only the people of the US but also a wider population of the world, the citizens from different stocks settled in the US and speak in a less belligerent tone, the future of this bulwark against all frailties for which other countries are prone to, is fraught with forebodings. G.Srinivasan New Delhi.

    7. CommentedStefan Siewert

      I share the thinking and arguments. Furthermore, the US, as the spearhead of the global economy, has a clear advantage in terms of entrepreneurial spirit and innovation and is therefore, on average, much more free enterprise than Europe or Japan, which partly compensate the wealth difference with the US with more public services, deepening at the same time the difference in wealth as they can not mobilize entrepreneurship to a similar extent.
      The other questions is whether the balance between democracy and free enterprise is defined by political will or underlying trends. To the extent that the later is true, the pendulum went to the right and the financial crisis has shown how difficult it is to rebalance. Eventually, the current way to a plutocracy is dead end. The debate in America's election campaign will show the world, where - with still a wide margin - the leading global economy is positioning itself.

    8. CommentedProcyon Mukherjee

      Democracy, or the system of governance through discussion, has to deal with the conflicting demands as highlighted by Raghuram; the nature of the debate specially in the context of the Presidential elections goes further than just the conflicts of alternate hypothesis as we see positions taken around logical arguments that do not help the polity take rational choices to its fruition.

      First of all individual freedom to act where there is a level playing field where success could flourish from the individual’s intrinsic ability to perform through skills and perseverance is a very well cited example to the cause of Republican rhetoric that it is all about individualism and not government and regulation that made America progress; in a place where College education is limited and the jobs that would need less educated to do well have been moving out of the country, it makes a thrilling paradox that it is really a field where fortunes allow an individual to do better.

      The institutions that made America, government included, sometimes is getting misplaced as regulatory bodies, which is a very sad denouement as it is not regulation that they have been espousing, but facilitation to allow common good to happen to those who are less fortunate.

      Procyon Mukherjee

    9. CommentedAly Kamadia

      This article states, "Moreover, under conditions of fair competition, the process of creative destruction tends to pull down badly managed inherited wealth, replacing it with new and dynamic wealth. Great inequality, built up over generations, does not become a source of great popular resentment."

      I agree with the first sentence. However, the claim that follows (ie. second sentence) is simply spurious; there is not context to support it. Although this article was interesting, this is a gross oversimplification of 'creative destruction'. -

    10. CommentedFrank O'Callaghan

      "What prevents the median voter in a democracy from voting to dispossess the rich and successful? And why do the latter not erode the political power of the former?"

      There are those who believe that one of the above possibilities is now happening across the world but most acutely in the U.S. of A. There are those who believe that this in itself will cause the alternative possibility to happen as a reaction.

    11. CommentedMark Pitts

      Excellent article.

      It would be interesting if there was more discussion about what politicians can actually do for the middle class.

      The core problem, it seems to me, is that the competitive environment has changed. Unlike 30 years ago, there are now skilled Asian and East European workers who are willing to work for much less than skilled US workers. And, immigrants from Latin America are willing to work for significantly less than US-born unskilled workers.

      Can the government really do much about this?