Capitalism is essential to democracy for at least one empirical reason: there has never been a democracy without a market economy. To make this point clear, first it is necessary to explain how capitalism differs from socialism. While capitalism is a system of production based on market forces and private ownership; socialism is a system of production based on state control and public ownership. Assuming these definitions are accurate, even an often-cited “socialist” country like Sweden (even in the heyday of the Swedish Social Democratic Party) would have to be considered a capitalist country. The confusion here is one between production and distribution. Sweden, like most other Northern European democracies, has developed a very generous welfare state—that is, a very elaborate system of distribution and redistribution of wealth. This welfare state, however, even in its Scandinavian apotheosis, continues to rest on a capitalist system of production, as only the affluence created by the latter makes the welfare state possible. Thus, contrary to what some experts have argued, Sweden is not a socialist democracy, but yet another variation of democratic capitalism.
The main question here is whether there can be a market economy without private property, or, put differently, whether there could be such a thing as “market socialism”—a system in which the most important enterprises remain publicly owned while competing with one another under market forces. In fact, at different points in the second half of the twentieth century both Yugoslavia and Hungary experimented with a form of “market socialism”; however, almost two decades after the end of the Cold War, it is clear that these experiments failed, forcing both countries to embrace capitalism and integrate their economies with the rest of Europe. What accounts for this failure? The fundamental reason is that the success of entrepreneurial ventures and the security of financial controls over these risks (say, a person starting a business and a banker loaning this person the necessary capital for this venture) depend heavily on the will of private owners, less because of the joys of ownership than because of the control that ownership bestows when it is legally secure. For this reason, the manager of a socialist enterprise who is told by his superiors to act as an entrepreneur is in fact being asked to do the impossible or at best the highly improbable—to stimulate capitalist entrepreneurship. In practice this does not work; what does work is to open up sectors of a socialist economy to private capital. This is precisely what has happened in China and India since the 1980s, where the capitalist sectors of the economy have developed such dynamism that they have gradually replaced the much-less productive socialist sectors.
The discussion above suggests that while capitalism is a necessary though not sufficient condition for democracy, democracy is not a precondition for capitalism. Capitalism is necessary for democracy because it provides the necessary social space for individuals, groups, and entire institutions to develop independently from state control. In other words, capitalism creates the space and opportunities necessary for the development of civil society. Conversely, the empirical correlation between socialism and autocracy can be explained precisely by the absence of social space and civil society. To achieve this effect, needless to say, it does not matter whether the original capitalist class is or is not inspired by democratic ideals, for it is the consequences of capitalism, not its motives, that can eventually open space for democracy and democratic institutions.
The same sociological perspective goes a long way in explaining the democratizing effects of sustained and successful capitalism. When well implemented, capitalism can open a social space for civil society, which in turn allows for political organizations to spring independent from the state, its official party, and the government-sponsored labor unions. Conversely, since socialism makes widespread affluence less likely, it tends to close the social space necessary for the development of democracy. At this point, it is important to understand that the undemocratic effects of socialism are structural in origin, and not just the result of some contingent variety of Marxism. While Marxist conceptions of society as an all-embracing fraternity or the Communist Party as the infallible embodiment of historical forces have certainly served to legitimate autocratic regimes and to inspire their cadres, socialism makes democracy highly unlikely even in the absence of such ideas. The reason behind this outcome is pretty straightforward: although socialist utopias have risen to defend the control of the economy by independent associations of producers, these have remained just that: utopias that are empirically unrealizable except perhaps in small voluntary communities such as the Israeli kibbutzim.
Given the complex nature of a modern or even a modernizing economy, socialism must invariably mean state control of the economy. In other words, in a truly socialist country, the state, not the market, is regarded as the only viable mechanism to coordinate the economy and control society. But because of modern technology, the state is already a fearsome agglomeration of power. Even the most restrained, democratic state today has more power at its disposal than the most efficient autocratic regime of pre-modern times. Thus, to give the modern state direct control over the economy—that is, control over the very livelihood of all or most of its citizens—is to bring about a quantum leap in state power. Such extensive power is difficult if not impossible to reconcile with democratic values.
To make this latter point clear, another relevant point may be added. Socialism, as conceived by Karl Marx, can only be established by a titanic act of expropriation. Yet, given the current conditions of human life in society, it is reasonable to expect individual property to spring up again even after a massive act of expropriation. This entails that the socialist expropriation of private property cannot be a single, isolated event; but that, to succeed, it must be repeated over and over again, most likely through coercion and the use of force. As such, socialism would require the eternal vigilance of society, which in turn would make constant expropriation of private property a source of endless conflict, as those who are to be expropriated would be free to organize and resist. Taken together, these points make clear that socialism and its redistributive project based on massive expropriation can only be accomplished in an autocratic regime, not in a full-fledged democracy.
Once we grasp these basic structural facts about modern societies, all talk about a third way between capitalism and socialism stands revealed as nonsensical. There is no such thing as a socialist democracy. There are, to be sure, variations of capitalism, as there have been variations of socialism. And if one prefers to speak of a “mixed economy,” every existing economy is “mixed” in the sense that it exhibits some combination of market forces and state regulations. Thus, the terms capitalism and socialism continue to be appropriate and useful. They refer to the two major alternative forms of economic organization since the turn of the twentieth century; however, as I have tried to explain, these terms must not be taken as absolutes, but rather as “ideal types” that approximate but do not fully represent empirical reality. For this reason, I suggest thinking about these terms as constituting the two extremes of a continuum, where the two extremes are empirically inexistent and where in the middle it may be occasionally difficult to decide which term to apply.
Thus, to recapitulate, social democracy, in the Scandinavian or any other form, is not an alternative model located somewhere outside the capitalist-socialist continuum; but a variation of capitalism that sees the redistribution of wealth as a priority and that regards economic equality as a desirable and realizable goal. This is why capitalism is essential to democracy, despite the fact that democracy is not essential to capitalism.
La Sobremesa 