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Capitalism and the Democratic Economy*

Published online by Cambridge University Press:  13 January 2009

John E. Elliott
Economics, University of Southern California


Mainstream economics evaluates capitalism primarily from the perspective of efficiency. Social philosophy typically applies other or additional normative criteria, such as equality, democracy, and community. This essay examines the implications of these contrasting sets of criteria in the evaluation of capitalism. Its first two sections consider the criteria themselves, assuming that a trade-off exists between them. The last three sections question whether such a trade-off necessarily occurs, and explore the claim that improvements in nonefficiency dimensions of capitalist society may enhance, rather than conflict with, efficiency.

Research Article
Copyright © Social Philosophy and Policy Foundation 1998

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1 Dahl, Robert A. and Lindblom, Charles E., Politics, Economics, and Welfare (New York: Harper and Row, 1953), pp. 41ff.Google Scholar

2 Macpherson, C.B., The Life and Times of Liberal Democracy (New York: Oxford, 1977)Google Scholar; Elliott, John E. and Scott, Joanna V., “Theories of Liberal Capitalist Democracy: Alternative Perspectives,” International Journal of Social Economics, vol. 14 (1987), pp. 5287.CrossRefGoogle Scholar

3 Sen has observed that it is not sufficient to defend capitalism using a more restrictive conception of efficiency, such as the efficiency of the market mechanism per se, for “the specification of the market mechanism is essentially an incomplete specification of a social arrangement.” Sen, Amartya, “The Moral Standing of the Market,” Social Philosophy & Policy, vol. 2 (1985), pp. 119.CrossRefGoogle Scholar The quotation is found on page 18.

4 This component of efficiency includes both “allocative” and, for want of a better expression, “X” efficiency dimensions. The former refers to efficiencies associated with the allocation and combination of resources within and between enterprises (for example, that the ratio of marginal costs for any pair of commodities is equal for any pair of enterprises). The latter refers to maximizing output per unit of input through management and labor effort, organization of work, worker morale and spirit, etc.; see Leibenstein, Harvey, “Allocative vs. ‘X Efficiency’,” American Economic Review, vol. 56 (1966).Google Scholar Through either “X” efficiency or this dimension of “allocative” efficiency, output of any one product, given inputs and technology, may rise without reducing the output of any other product.

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7 Note that allocative efficiency and justice are not identical concepts. Allocative efficiency refers to a state wherein resources are fully deployed to produce a set of goods which provide maximum satisfaction to societal members, given those members' endowments of wealth, their preferences for various output goods, and the income earned on resources (including labor) committed by societal members to production. The question of whether the wealth and resource endowments which societal members “own” is “just” may be separately considered, even though it is beyond the scope of allocative efficiency considerations.

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10 The following provides a clear and representative statement of the priority of efficiency and the view that nonefficiency claims, such as justice, can be better met after and within the framework of maximum efficiency:

“To some people, it may appear irrelevant to demand maximum efficiency when the objective is to achieve a ‘just’ distribution of income or wealth in society. On closer inspection, this is a doubtful argument, perhaps most readily seen once we observe that in general the higher the level of efficiency the more there will be to transfer to those it is desired to favour, given the amount that is to be taken away from others.” [Bohm, Peter, Social Efficiency: A Concise Introduction to Welfare Economics (New York: Wiley, 1973), p. 73]Google Scholar

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18 The phrase “not sufficient” recognizes that many capitalist societies are illiberal and undemocratic. Macpherson aptly observes that historical correlation does not in itself demonstrate causation, and that the empirical data is consistent both with the interpretation that liberal political society was conducive to the development of capitalism and with the converse argument. See Elliott, John E. and Cownie, John, Competing Philosophies in American Political Economics (Santa Monica: Goodyear, 1975).Google Scholar Whatever one's conclusion on this debate, it is clear that democracy is at best a secondary and supplementary normative criterion in the mainstream tradition.

19 For incisive recent analyses of the disproportionate influence of the wealthy in U.S. dectoral processes and government policy decisions, see Edsall, Thomas B., The New Politics of Inequality (New York: W.W. Norton, 1984)Google Scholar; Ferguson, Thomas and Rogers, Joel, Right Turn: The Decline of the Democrats and the Future of American Politics (New York: Hill and Wang, 1986)Google Scholar; Greider, William, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon and Schuster, 1987).Google Scholar

20 In a discussion of James Tobin's financial theory, Sargent writes that:

… in this line of model [that is, in neoclassical equilibrium models of the financial sector], the parameters of cross substitutabilities of asset demands remain important, but are not themselves among the free parameters of a model, instead being dependent on deeper aspects of the model such as agents' locations in time and space and their preferences, production possibilities, the probability laws governing the random variables in the model, the structure of legal restrictions on intermediaries, and monetary and fiscal policy, in the sense of laws of motion for the components of government indebtedness. It is the parameters of this list of objects which are the free parameters of the model… [Sargent, Thomas, “Beyond Supply and Demand Curves in Macroeconomics,” Staff Report 77, (Research Department: Federal Reserve Bank of Minnesota, February 1982), p. 6].Google Scholar

21 Simons, Henry, Economic Policy for a Free Society (Chicago: University Press, 1948).Google Scholar

22 Tobin, James, “On Limiting the Domain of Inequality,” E.S., Phelps, ed., Economic Justice (Baltimore: Penguin, 1973).Google Scholar

23 Graff, J. De V., Theoretical Welfare Economics (New York: Cambridge University, 1967).Google Scholar

24 In their analysis of capitalism and democracy, Bowles and Gintis have termed this separation an “isomorphism of sites and practices” [Bowles, Samuel and Gintis, Herbert, Democracy and Capitalism (New York: Basic Books, 1986), p. 100].Google Scholar See also Bowles, , “The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models,” American Economic Review, vol. 75 (1985), pp. 1636.Google Scholar

25 See, for example, Hirschman, Albert O., Exit, Voice, Loyalty (Cambridge: Harvard University, 1970).Google Scholar

26 Macpherson, Life and Times.

27 Galbraith, John K., The Affluent Society (Boston: Houghton Mifflin, 1957).Google Scholar

28 Schumpeter, , Economic Development, p. 70.Google Scholar

29 Graff, , Welfare Economics, p. 67.Google Scholar

30 Samuelson, Paul A., Foundations of Economic Analysis (Cambridge: Harvard, 1947).Google Scholar

31 Elliott, John E., “Continuity and Change in the Evolution of Marx's Theory of Alienation: From the Manuscripts through the Grundrisse to Capital,” History of Political Economy, vol. 11 (1979), pp. 317362.CrossRefGoogle Scholar See also Elliott, , “Marx's Category and Typology of Exploitation,” mimeo, Los Angeles: University of Southern California, 1988.Google Scholar

32 Elliott, John E., “Karl Marx, Founding Father of Workers' Self-Governance?” Economics and Industrial Democracy (August 1987).Google Scholar

33 Tawney, Richard H., The Radical Tradition, ed. Rita, Hinden (London: Allen and Unwin, 1964), pp. 139140.Google Scholar

34 Tawney, Richard H., Equality (New York: Harcourt Brace, 1931), pp. 221226.Google Scholar

35 ibid., pp. 131, 148. See also Tawney, , The Radical Tradition, p. 121.Google Scholar

36 Tawney's view and our own clearly clashes with Walzer's argument that an evaluative assessment of society can examine the various social domains separately; see Walzer, Michael, Spheres of Justice (New York: Basic Books, 1983).Google Scholar

37 Tawney believed that democratizing economic life would increase economic efficiency (see Section IV below), and viewed increases in efficiency consistent with liberty – and hence with equality, community, and democracy – as desirable. But efficiency considerations must always yield to these more basic values, when they conflict. Efficiency is not an acceptable “substitute for liberty” as an evaluative norm. Nor, over a wide range, is efficiency superior to justice, for what is at stake is not whether capitalism “is efficient, but whether it is just. If industry could be so organized that the mass of workers would feel that the social order was just, a decrease in efficiency would be cheap at the price.” Indeed, the deposition of England's ruling “economic oligarchy” is worth a “generation of disorder and inefficiency…” [Tawney, , R.H. Tawney's Commonplace Book, ed. J.M., Winter and D.M., Joslin (Cambridge: Cambridge University, 1972)]Google Scholar

38 For an analysis interpreting Rawls in this way, see Reiman, Jeffrey, “The Labor Theory of the Difference Principle,” Philosophy & Public Affairs, vol. 12 (1983), pp. 133159.Google Scholar

39 Rawls, John, A Theory of Justice (Cambridge: Harvard University, 1971), pp. 542, 543.Google Scholar

40 The following sources provide alternative recent discussions of relationships among liberty, equality, and democracy: Verba, Sidney and Orren, Gary, “The Meaning of Equality in America,” Political Science Quarterly, vol. 100 (1985), pp. 369388CrossRefGoogle Scholar; Green, Philip, “Equality Since Rawls: Objective Philosophers, Subjective Citizens, and Rational Choice,” Journal of Politics, vol. 47 (1985), pp. 972997CrossRefGoogle Scholar; Narveson, Jan, “Equality vs. Liberty: Advantage, Liberty,” Social Philosophy & Policy, vol. 2, no. 1 (Autumn 1984), 3360CrossRefGoogle Scholar; Bowles, and Gintis, , Democracy, p. 4ff.Google Scholar

41 Okun, Arthur M., Equality and Efficiency: The Big Tradeoff (Washington: Brookings, 1975), pp. 4849.Google Scholar The very notion of an equality/efficiency trade-off suggests that inequality is required for efficiency. But this assumes that incentives are important only to motivate those at the upper end of the income scale; that is, entrepreneurial and managerial activities alone must be stimulated, not those undertaken in production processes by lower-paid workers. Here again is the fundamental neoclassical assumption that production is technical.

42 ibid., p. 41.

43 Coase, Ronald, “The Nature of the Firm,” Economica, New Series vol. IV (1937), pp. 386405.CrossRefGoogle Scholar The quotation is on p. 397.

44 Aoki has also argued that Coase's theory of the firm requires a conception of behavioral coordination beyond that which the market can supply. Grubb finds empirical support for the notion that there are indivisible aspects of contributions to production. Aoki, Masahiko, The Co-operative Game Theory of the Firm (New York: Oxford University, 1984).Google ScholarGrubb, David, “Ability and Power over Production in the Distribution of Earnings,” Review of Economics and Statistics, vol. 67 (1985), pp. 188194.CrossRefGoogle Scholar

45 See Akerlof, George and Yellen, Janet, Efficiency Wage Models of the Labor Market (Cambridge: Cambridge University, 1986).CrossRefGoogle Scholar

46 Rosen, Sherwin, “Implicit Contracts: A Survey,” Journal of Economic Literature, vol. 23 (1985), pp. 11441175.Google Scholar Stiglitz also argues that models incorporating private information repeal the law of supply and demand; see Stiglitz, Joseph, “The Causes and Consequences of he Dependence of Quality on Price,” Journal of Economic Literature, vol. 25 (1987), pp. 148.Google Scholar

47 See, respectively: Akerlof, George, “Labor Contracts as Partial Gift Exchange,” Quarterly Journal of Economics, vol. 97 (1982), pp. 543569; Bowles and Gintis, Democracy; Hirschman,CrossRefGoogle Scholar

48 Akerlof, “Labor Contracts.”

49 The gift analogy might be further extended. Suppose workers evaluate social interaction using a justice criterion wherein kindness should be shown to the weak. If the firm's manager performs an act which shows consciousness of this criterion – for example, by granting extracontractual benefits to a fellow worker stricken by an unusual emergency – then workers might increase their output in exchange.

50 Bowles, “Production Process”; and Bowles and Gintis, Democracy. The presence of surveillance methods in production suggests that Akerlof's depiction on the “sociology” of production is incomplete.

51 Bowles, and Gintis, , Democracy, p. 211.Google Scholar

52 Ward, Benjamin, The Socialist Economy: A Study of Organizational Alternatives (New York: Random House, 1967).Google Scholar

53 Horvat, Bronko, “On the Theory of the Labor-managed Firm,” B., Horvat, M., Markovic, and R., Supek, eds., Self-Goveming Socialism, Vol. II (White Plains: International Arts and Sciences Press, 1975), pp. 229240Google Scholar; Sisk, David E., “The Cooperative Model vs. Cooperative Organization,” Journal of Economic Issues, vol. 6 (1982), pp. 211220.CrossRefGoogle Scholar

54 Meade, James E., Alternative Systems of Business Organization and Workers' Remuneration (Winchester: Allen and Unwin, 1986).Google Scholar

55 Vanek, Jaroslav, “Toward a Just, Efficient, and Fully Democratic Society,” D., Jones and J., Svejnar, eds., Advances in the Economic Analysis of Participatory and Labor Managed Firms, Vol. 2 (Greenwich: JAI Press, 1987)Google Scholar; Vanek, , “Decentralization under Workers' Management: A Theoretical Appraisal,” J., Vanek, ed., Self-Management: Economic Liberation of Man (Baltimore: Penguin, 1975).Google Scholar

56 Marx, Karl, Grundrisse (New York: Random House, 1973), pp. 709, 712.Google Scholar

57 Tawney, , Radical Tradition, p. 103Google Scholar; Tawney, , Equality, pp. 131, 135.Google Scholar The following sources provide empirical assessment (generally favorable) of efficiency and other performance criteria under workers' self-management: Derek, Jones and Jan, Svegnar, eds. Participatory and Self-Managed Firms: Evaluating Economic Performance (Lexington: Lexington, 1982)Google Scholar; Hem, Jain, ed., Worker Participation: Success and Problems (New York: Praeger, 1980)Google Scholar; Sachs, Stephen, Self-Management and Efficiency: Large Corporations in Yugoslavia (London: George Allen and Unwin, 1983)Google Scholar; Schweickart, David, Capitalism or Worker Control? An Ethical and Economic Appraisal (New York: Praeger, 1980)Google Scholar; Thomas, Henk and Logan, Chris, Mondragon: An Economic Analysis (Winchester: George Allen and Unwin, 1982).Google Scholar

58 The second question is not identical to that asked in Section I. There, the question was whether a capitalist economic sector governed by the primacy of efficiency is consistent with democratic politics. In this section, the question is whether capitalism is compatible with a society in which democratic principles have been diffused throughout both the polity and the economy.

59 Bowles, and Gintis, , Democracy, p. 80.Google Scholar

60 Tawney, , Commonplace Book, p. 26.Google Scholar

61 Joseph Schumpeter, to take a prominent example, believed that “entrepreneurs” constitute a “special type of person,” engaged in a “special type of conduct” (innovation) and guided by special kinds of motives (the “will to conquer,” to “found a private kingdom,” and to create). Such conduct “is accessible in very unequal measure and to relatively few people.” The special character of entrepreneurial leadership creates a “boundary beyond which the majority of people do not function promptly by themselves and require help from a minority.” Moreover, entrepreneurs must overcome opposition to innovations by groups threatened by them as well as win over consumers to new products. Schumpeter, , The Theory of Economic Development, pp. 83n, 87, 93.Google Scholar If this view is correct, democratic participation, majority rule, and reductions in wealth and income inequalities would be discordant with robust innovation.

“Natural” inequality in industrial authority and decision making power is sometimes justified also by reference to alternative preference orderings. Suppose, for example, that the economic world is divided into (a large number of) “risk averters” and (a small number of) “risk takers.” We shouldn't be surprised if the former become sellers of labor power, contenting themselves with a smaller but relatively more stable and secure contractual income, and the latter become capitalist employers, accepting the risks of more volatile, but on the whole higher, residual incomes.

62 Miller, Richard W., Analyzing Marx: Morality, Power, and History (Princeton: Princeton, 1984), p. 209. It is quite possible, Miller states, that an economy dominated by peasants and artisans would have been just as efficient or more so than the feudal economic structure in late medieval Europe. But “sustained unity and collective discipline over large geographic areas would have been required to break the bonds that the overlords forged from the surpluses they controlled.” Moreover, landowning families were able to sustain elements of wealth, power, and privilege long into the capitalist era even though feudal economic structures were manifestly inferior to capitalist ones.Google Scholar

63 Bowles, and Gintis, , Democracy, p. 86.Google Scholar

64 Tawney, , The Radical Tradition, pp. 103, 109.Google Scholar

65 Harrington, Michael, Socialism (New York: Saturday Review of Literature, 1972)Google Scholar; Carnoy, Martin and Shearer, Derek, Economic Democracy: The Challenge of the 1980s (Armonk, New York: M.E. Sharpe, 1980)Google Scholar; Carnoy, Shearer and Rumberger, Russell, A New Social Contract: The Economy and Government after Reagan (New York: Harper and Row, 1983).Google Scholar

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