Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Finding Democracy in Capitalism

Written by johnleemk on 1:45:11 pm Jun 20, 2007.
Categories: ,

The Nobel Prize-winning economist Milton Friedman once said that "Underlying most arguments against the free market is a lack of belief in freedom itself." Although sounding oddly dogmatic, I think the statement stands on logical grounds.

Most people associate the market with the soul-crushing power of big business. However, all but the crackpot economists associate the market with the liberating power of consumer choice; Friedman himself once said "With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves."

The reason is simple — in a market system, it is the consumers, and not the businesses, who hold true power. A capitalist economy is not a pro-business economy.

Indeed, as our understanding of economics has advanced, so has the apparent power of the consumer. Friedman was instrumental in how economists view monetary policy, and as our understanding of money has improved, so has our capacity to appreciate consumer power.

For instance, take your garden variety bank run. (A bank run occurs when consumers withdraw their savings from a bank, to the point where the bank has no more money to give to its customers — a phenomenon I have explained in more detail before.)

A bank run occurs only when consumers believe that the bank is going to collapse. In many cases, this is a self-fulfilling prophecy — the bank may not have been on the brink of failure before, but once faced with so many withdrawals, it would have a hard time not going out of business. Even the most formidable bank isn't immune to this.

Institutions are simply not immune to consumer power. A government can try to fix an exchange rate, but this only works as long as individual investors actually believe the government is serious about this policy. If they do, they won't bother undercutting the currency because they figure the institution will just keep on propping it up. If they don't, the self-fulfilling prophecy becomes a reality when they all undercut the currency — at some point the government runs out of foreign reserves, and all hell breaks loose.

That is why, if you ask me, capitalism resembles democracy. Consumers and producers all have an economic vote — but despite this theoretical equality, some have more power than others because of lobbying and assertion of power. (Some apathetic individuals never vote, never voice their views; some apathetic consumers never vote with their wallet, never complain about their service.)

Likewise, perception plays a huge role in whether an institution sinks or swims, both in democracy and capitalism. If the voters think a candidate will lose they won't bother voting for him (a major dilemma for third parties in a two-party system, and second parties in a one-party system).

Of course, Friedman seems to have assumed that absolute freedom is desirable. But no freedom is absolute; even freedom of speech has its limits. Just as we limit democracy to avoid a tyranny of the majority, so too must we limit capitalism to avoid excessive power being concentrated in the hands of big business and to avoid other market failures.

If you'd like to keep informed about updates to the site, consider subscribing to our web feed:

Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

Infernal Ramblings is run by John Lee. For more, see the About section. If you have any questions or comments, do drop him a line.

Najib's Orwellian 1Malaysia

Most Recently Read

  1. Absolute vs Comparative Advantage
  2. Malaysia, A Statist Economy
  3. Bahasa Rojak, the True National Language
  4. Learn the Right Lessons From May 13
  5. Rephrase the Problem
  6. Malaysian Automobiles and the Infant Industry Argument
  7. Make the Yang di-Pertuan Agong Reign For Life
  8. God Can't Be (Dis)Proven
  9. Girl, Your Marginal Benefit Is Far Greater Than Your Marginal Cost
  10. Separating Head of State from Head of Government
Quoth the webserver...
Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.
— Alan Blinder