Friday, August 7, 2009

Democracy v Capitalism

If you plot a scatter diagram with democracy representing the X-axis and capitalism as for the other – you will have countries like US and UK positioned somewhere on the top right corner and some developing countries that have low economic creation with political conflict, civil wars and less developed democratic institutions such as those in the South African parts at the lower left end corner. In between you will have scattered dots of countries and few extremes that reside beyond the majority population.

All in all, you will, roughly, find a straight 45 degree line that denotes a positive relationship between democracy and capitalism. The higher the level of democracy – the more prosperous the countries are. That is something that you can interpret and reckon from that relationship. However, what is more important is to understand whether the relationship is independent or dependent with each other? In other words, whether democracy causes and pushes capitalism or vice versa or you can not have good capitalism without democracy or vice versa.

Is it a chicken and egg question or something that is more than just that? I opt for the latter and would argue that it is a question of correlation and causation. The fact that democracy and capitalism are correlated to one another does not mean that they both act as the opposite-causation agent for that correlation ( i.e. capitalism causes democracy and vice versa). I would like to argue that it is all based on the motivation or the key drivers for each part. Capitalism is motivated by wealth creation and for wealth creation to take place you need some degree of economic liberalisation in the forms of capital ownership, resource mobilisation etcetera etcetera.

The same goes to democracy in which the main motive of democracy is freedom. And for freedom to exist, you need political liberalisation in the form of freedom to choose and freedom to vote etcetera etcetera.What we can conclude is that both democracy and capitalism share a common trait or denominator in the form of liberalisation.

Because capitalism needs economic liberalisation to prosper and because democracy requires political liberalisation for it to develop, you will find, as a result, an underlying positive relationship between capitalism and democracy due to commonly shared denominator of liberalisation – be it economics liberalisation or political liberalisation.

Mathematically, we can illustrate them as follows (having said that, to those who are good in maths – please correct me on any mistake):

Where, C = capitalism, D = Democracy, EL =Economic Liberalisation and PL = Political LiberalisationLet say that capitalism is a function of economic liberalisation and henceC= f(EL)

(1)Let say that democracy is a function of political liberalisation and hence D = f(PL)

(2)From the scatter diagram, we can observe a positive relationship between capitalism and democracy and henceC = D

(3)By combining and exchanging equations (1) and (2) into (3), we will getC = Df(EL) = f(PL)

By doing simple elimination, we will getEL = PLE = P (4)The final equation says that economics is equal to politics and vice versa. It would be ethically wrong to argue that economics is an equivalent unit of politics, vice versa and hence the interpretation of this equation is more important than its face value.

I think we should not take it as a mere equation or identity (if you like), I think we should take the lateral meanings and relationship – in other words the dependency value.

We know that: 1 = 1 (right), 1 = 3 (wrong), 1 = 5 – 4 (right), 3 – 2 = 1 (right) i.e. the value of the left side is dependent on the correct existence of the value of the other side.

From the above, we can say the value of economics is mutually interdependent upon the value of politics, vice versa. IT IS NOT THAT ECONOMICS IS EQUAL TO OR THE IDENTITY OF POLITICS, vice versa, it is the values of them that are mutually interdependent.