Conventional wisdom today has capitalism out and democracy in.
The financial crash supposedly proved markets don’t work, at least not for most of the people. Democracy, on the other hand, is all the rage. From Egypt to Oakland, protesters and pundits insist they are “the 99%,” and that every political and economic policy must be judged by whether it is more or less democratic.
This idea of democracy is obviously about more than just election processes. But while a few ideologues really desire raw majority rule, more Americans seem to favor what is often called a “democratic society,” where individuals are empowered to live their own lives without being manipulated or controlled by others.
Milton Friedman pointed out in many writings and talks that the economic system that best approaches this standard of democracy is capitalism. Every other system involves—in fact, is defined by—allowing one group to control everyone else.
This week, on what would have been the Nobel laureate’s 101st birthday, it is a fitting time to begin knitting the ideas of capitalism and democracy back together.
The very foundations of American law and prosperity rest on this understanding of capitalism and democracy. To put it another way, before there was Milton Friedman, there was James Madison.
Madison wrote eloquently in Federalist No. 10 about where property rights come from, why they must be protected, and why government power must be limited and checked to prevent groups of people from harnessing that power to interfere with the property rights of others. (All emphases in the quotes is my own.)
Madison explains that “the rights of property originate [from] the diversity in the faculties of men.”
The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.
What Madison is interested in is justice and liberty, which are made possible by the rule of law. His argument is that groups of people (“factions”) will try to use government power to their advantage at the expense of other people and of justice.
The latent causes of faction are thus sown in the nature of man; and we see them everywhere brought into different degrees of activity, according to the different circumstances of civil society. … the most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination. A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views. The regulation of these various and interfering interests forms the principal task of modern legislation, and involves the spirit of party and faction in the necessary and ordinary operations of the government.
Madison points out the conflict between the idea of democracy as simply majority rule versus the idea of a democratic society: a government that allows a majority of voters to plunder the few is simply lawless. (This is the version of democracy described as “two wolves and a lamb voting on what’s for dinner.”)
Finally, Madison sketches an argument against reliance on central planning, good intentions, and what Friedrich Hayek will later call “the fatal conceit.”
It is in vain to say that enlightened statesmen will be able to adjust these clashing interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm. Nor, in many cases, can such an adjustment be made at all without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole.
Our constitutional system was designed to protect property rights, first from other individuals and then from government. It was designed to do this not in order to create prosperity—that was a side effect and not well understood until 20th Century economists like Milton Friedman. Rather it was based on the understanding of the connection between democracy and capitalism.
Check out our series of essays and study guides to re-explain to Americans the democracy inherent in free markets.
This was originally posted at the Freedom Foundation of Washington state’s website.