The Future of Democratic Capitalism

In the eighteenth century, a host of thinkers began to use the compound term “political economy” to refer to the traditional subject matter of politics. Both parts are needed to express the complex social system necessary to human liberty and flourishing. For human liberty and human flourishing are fulfilled by neither politics alone nor economics alone. Rather, they require economic activity within a free polity, under the rule of law, and through the daily practice of personal habits of wisdom and self-control. Madison, Hamilton, Jefferson, and their colleagues referred to the intellectual movement that led to this new conception of social well-being as the new science of politics.

When I proposed the idea of “democratic capitalism” in the 1980s, it was as a new name for the sort of political economy that characterized the free world. Democratic capitalism means a system of natural liberty, incorporating both political liberty and economic liberty. Prior to those two is a particular moral and cultural system, constituted by civic institutions and well-ordered personal habits. True liberty must be derived from self-control, and such liberty is best ordered by laws. Hence the need for a third ­science, the science of moral ecology, to discern all the institutions and personal moral habits essential for the flourishing of self-governing peoples.

Liberty under this view does not mean freedom from all restraints; rather, liberty means ordering one’s own life—that is, self-government—through reflection and deliberation. Democratic capitalism, therefore, is a system of three liberties: political liberty, economic liberty, and liberty in religion and conscience, in arts and science, and in cultural expression.

Without due attention to the interactions between these three systems, arguments pitched against democratic capitalism fall like arrows short of their target. During the thirty years since I offered this three-limbed vision of a free society in The Spirit of Democratic Capitalism, many critics have attacked it only in amputated form. Some think of it as no more than a libertarian system, concerned with economic liberty alone, exaggeratedly individualistic, indifferent or even antithetical to welfare programs for the poor, unconcerned with the public good, focused solely on markets and private profit. Others think of it as libertarian mainly in the moral sense: pivoting solely on the ego of the individual (as in the thought of Ayn Rand), her pleasures, her contentment, her will-to-power.

In truth, democratic capitalism requires all three dimensions of human flourishing: economic, political, and moral. Although all are required, each generation must discern which of the three is weakest and most needs buttressing. Thirty years ago, it was economic and political liberty. When Ronald Reagan took office in 1981, the huge populations of China and the Soviet Union had communist political economies, and India was governed under a mildly socialist economy. The majority of the rest of the world lived under fairly fierce dictatorships, including most of Latin America, Africa, Southeast Asia, Eastern and Central Europe, North Korea, Cuba, and nearly all of the Middle East except Israel.

But history was turning. During the 1980s, most of the communist and socialist nations of the world were already quietly dropping their failed economic systems and turning to markets, private property, and personal enterprise. Why? Because one system didn’t work and the other one did; one system was in accord with human nature and the other was not. India started the tide, the Chinese saw its success, and the Soviets envied its success.

Whether capitalism or socialism is a better system for dramatically reducing poverty was thus a well-settled question by the mid-1980s. As I wrote in The Spirit of Democratic Capitalism, the most under­reported fact of the twentieth century was the death of socialism. It was dead, all right, but that underreported death would take a little more time to become overpoweringly evident to all. The global turn toward capitalism began not long after, in 1989, and within twenty-five years some two billion people had begun moving from communism and socialism toward capitalism, and thence out of poverty and into steadily advancing standards of living.

Pope John Paul II recognized some of the signs of the times in Centesimus Annus (1991), where he wrote that man “can transcend his immediate interest and still remain bound to it. The social order will be all the more stable, the more it takes this fact into account and does not place in opposition personal interest and the interests of society as a whole, but ­rather seeks ways to bring them into fruitful ­harmony.”

John Paul II pointed out that, although held in low esteem by aristocrats and artists, business corporations give a role to individual persons working in a productive enterprise that the Church has always valued:

It is precisely the ability to foresee both the needs of others and the combinations of productive factors most adapted to satisfying those needs that constitutes another important source of wealth in modern society. . . . Many goods cannot be adequately produced through the work of an isolated individual; they require the cooperation of many people in working towards a common goal. Organizing such a productive effort, planning its duration in time, making sure that it corresponds in a positive way to the demands which it must satisfy, and taking the necessary risks—all this too is a source of wealth in today’s society.

By 2008, the world’s population had risen to roughly seven billion people, most of them living longer than ever before, through the blessing of sophisticated new medicines pioneered in advanced capitalist countries. Today there are still about a billion more persons who need to be raised up out of poverty. This project remains the moral priority of our time.

I started to write about democratic capitalism in the 1970s in an effort to explain to my ­overseas friends (and to myself) just what the new order was that would best promote the global common good. Each of the three systems—­economic, political, and moral—of democratic capitalism depends on the other two. The economy cannot work without a polity of law respectful of natural rights, as well as the cultural habits or virtues necessary to support all three systems-in-one. The polity cannot work without the habits of the heart that respect both the ordinances of the law and the rights of every other person in the political system.

Capitalism centers on the mind. It springs up from the creative power of insight, invention, and discovery. As we observe in the case of the United States of America, this economic system is ordered by laws and institutions that regulate and support the dynamism of creativity and invention. These include such things as the patent and copyright clause of the ­Constitution, as well as institutions of venture capital, credit unions, and other investment houses. Sources of investment capital are indispensable because the movement from a creative idea to actual production requires a great deal of borrowing, the more so if the inventor is without personal wealth. Therefore, interest rates need to be reasonably low, secure, and reliable for both borrower and lender. The right of new businesses to obtain legal incorporation is also crucial.

Open markets are not the essence of capitalism, but they are an important social institution. They allow for new products, even entirely new industries, to be presented to the public for examination and rejection or purchase. The competition thus induced brings down prices, as newer products offer more attractive features or even wholly new possibilities.

Observe the development of computers, smartphones, digital cameras, medical devices of all sorts, and genetic therapies. At first these products are too expensive for you and me. But successes attract imitators and rivals. Competing products come into existence to please a wider range and variety of buyers. Today, more than two-thirds of poor households in America have cable or satellite television, and nearly half have a personal computer. Just twenty-five years earlier, these goods were not even available for consumption by the general population.

Free markets are dynamic and creative because they are open to the dynamism and creativity intrinsic to our humanity. On the ceiling of the Sistine Chapel in the Vatican is a great fresco of the creation of Adam by the energy emanating from the finger of the Creator. If you look closely, there is a violet cloak behind the head of the Creator, in the shape of a man’s cranium. The capacity of the human cranium for creative energy is one way in which Adam and Eve are made in the image of their Creator.

But economic liberty alone is not democratic capitalism. Some observers have asked whether, for certain aspiring nations, ­China’s political economy now serves as a better model than does democratic capitalism. The question is an empirical one to be settled by observable evidence.

As a matter of principle, the Chinese leadership is betting on the possibility of sustaining economic liberty without political liberties. It is currently willing to risk its future without the checks and balances built into a republican form of democracy. I judge that this project will not be successful. Once there are a sufficient number of successful entrepreneurs, they will see that in important respects they are smarter and larger in mental horizon than are the party commissars. They will resent the errors made by apparatchiks. They will demand their own representation in national decisions—that is, representative government with its checks and balances.

Notwithstanding what happens in China, the sad fact is that almost everywhere in the world today, systems properly called capitalist and democratic are facing grave difficulties. It cannot be supposed that human beings always love liberty. Free persons must meet the burdens of personal responsibility, and for some, that responsibility is too onerous. If I may paraphrase Dostoevsky: “When people cry out for liberty, give it to them—in fifteen minutes they will give it back.” For most of history, humans have been remarkably un-rebellious under tyranny. If their simplest appetites are met, why should they take up irksome responsibilities?

So it is today. Not all human beings desire to be economically free. If they are free, they are obligated to bear responsibility for their own welfare. Of course, there is always some percentage of the population too old or too young, too ill or too disabled, to carry their own weight in economic responsibility. There will always be some people who rightly depend upon the help of others. By its own moral identity, any honest Jewish, Christian, or even secular humanist society must come to their aid.

Yet, as John Paul II pointed out in Centesimus Annus, there are huge drawbacks in entrusting such welfare exclusively to the administrative state. Such a state is a highly flawed instrument for helping the poor. For one thing, it tends to treat them (indeed, by legal requirements of equal protection, must treat them) as interchangeable units of the citizenry, and too often this means impersonally. That is, the state must treat them as clients rather than as full-fledged, responsible persons with their own unique backgrounds, needs, and aspirations.

Some do not trust private efforts, private businesses, corporations, or even individuals and civic associations to bring sufficient care to the able-bodied poor. Instead, they prefer to trust government to do so, even if only by borrowing money, for which task they pledge the obligations of their children and their grandchildren. Such persons may be models of compassion, but their generosity is dubious when they do not resolve to pay for their own moral actions.

One of the great imperatives of our time is to help the last remaining billion poor persons today to escape poverty. Some tend to think that this help must be done mostly through the state because no one else will do it. Others think the best way is to set up a beneficent circle through which creative work generates new wealth from the bottom of society up, and such wealth is again invested in new enterprises and new industries.

Consider South Korea, Singapore, Hong Kong, and Taiwan after, say, 1960. Even India and Bangladesh have become net exporters of food and manufactured goods, and the average age of mortality in each has risen sharply and impressively. (The average age of mortality is one of the best indices of human progress, for it measures what is not solely material.) The progress one sees in Poland, Slovakia, and the Czech Republic since 1989 is nothing short of stunning.

A society can barely survive under a hostile economic system driven by cupidity, envy, and smothering control by the state. We saw as much in the 1980s, which was why so many socialists abandoned socialist or quasi-socialist modes of government control. Nor can it survive under a hostile polity contemptuous of truth, justice, law, and beauty: It will fall into lassitude and nihilism unless it maintains its longing for the transcendent, its upward thrust into the future, and the highest aspirations of the human heart. As Tocqueville saw, without that upward thrust, belief in the inviolable dignity of every single person will not survive, nor will respect for truth in public discourse. Belief in immortality and the certainty of divine judgment are indispensable supports of public virtue, our founders thought. In other words, an economy without beauty, love, human rights, respect for one another, civic friendship, and strong families is not likely long to be loved, or to survive.

Reflect on this a little: Many of the inspirations of the threefold system of political economy derive from evangelical ­inspirations such as personal creativity, personal responsibility, freedom, the love for community through association and mutual ­cooperation, the aim of bettering the condition of every person on earth, the cultivation of the rule of law, respect for the natural rights of others, the preference for persuasion by reason rather than by coercion, and a powerful sense of sin. All these spring from the Bible. That is why capitalism—and societies free not only in their economic system but also in their polity and their culture—have arisen with less friction in areas where Jewish and Christian traditions are strong.

Some who speak from a Christian perspective still think that mildly socialist ideas such as­ ­anti-individualism, collectivist projects, income equality, and a vision of full state welfare benefits are closer to the mandate of the Gospel than are democratic capitalist institutions. Some of the ­earliest American settlers from Europe, the first Pilgrims in Massachusetts, also thought so—until nearly all of them starved to death by the end of the first winter. Our forebears learned the practical effects of collectivist methods: No one in a commune feels a personal motive to stay up at night with a sick cow (someone else will do it, I’m too tired), and the hardest workers who observe the loafers and free riders will begin to reduce their own labors.

Personal responsibility matters. Incentives matter. Personal labor and earning your own bread by the sweat of your brow matter (Gen. 3:19). Personal responsibility for one’s own dependents and for needy neighbors matters. Biblical religion lays heavy duties on responsible persons. As Franklin D. Roosevelt stressed in his 1935 State of the Union address, state welfare systems must avoid the danger that welfare corrupts, destroys incentives, and encourages attitudes of laziness and irresponsibility: “The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual disintegration fundamentally destructive to the national fiber. To dole our relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.”

There is nothing automatic about democratic capitalism—no invisible hand makes it happen. It requires a moral ecology built by the efforts of many individuals acting in concert. Here is how we must proceed in our efforts to continue its advance: Begin with the story of creation and apply it to the economic order. Hold to a vision of the creation of wealth for all nations, not just for a few individuals. Be open to the rare and powerful talents that God has implanted in the poorest among us. Count it the aim of the good economy and the good polity to struggle until every able-bodied man and woman within their jurisdiction (and also abroad) is raised out of poverty.

Accomplish these aims by doing the following: (1) Make the legal incorporation of economic entities low-cost, quick, and bribe-free. (2) Put in place institutions that support economic activism and solidarity among all human persons, the rich, the middle-class, and the poor. Chief among these are institutions that lend money to new small business entrepreneurs, who sometimes need only micro-loans, and lend at low rates for sufficient periods of time. When such institutions also lend expert advice to fledgling start-ups, they increase the chances of recovering their loans through the success of those they mean to help. (3) Develop an educational system that prepares young people to start their own businesses, to think ­creatively about their economic future, and to learn techniques of success in economic activities. Among the poorest of the poor, God has inspired many creative minds, vivid imaginations, and willing and hardworking hands.

But for the poor to get their inventions and discoveries into the hands of all who might benefit from them takes many institutions: some for setting up sound business plans, some for venture capital, some for timely professional advice and guidance. The ensemble of all those institutions that support creative and inventive minds is what we mean by capitalism rightly understood. These include a polity and a culture that nourish the moral habits that create wealth rather than merely consume it, and that instill ambition, discipline, and self-denial for the sake of future good, rather than merely indulging in what one receives from others.

As the former motto of Amsterdam put it, Commercium et Pax. Commerce needs and encourages peace. It does so through its reliance on and encouragement of the rule of law. Without wise laws, human behaviors are erratic, if not wild and unpredictable. In such circumstances commerce cannot prosper. Indeed, in extensive commerce under the rule of law, St. Ephrem of Syria (306–373) and other Church Fathers saw the dependence of one country upon others, each having different products, each being indispensable to one another. They saw in such global commerce a worldly illustration of the unity of the human race and how the mystical body of Christ works, each distinctive part contributing to the others.

Whether in evangelical, practical, or intellectual terms, the combination of the three systems in one—the democratic republic, a creative and dynamic economy, and an open, free, and pluralistic culture—has a proven modern record, surpassed by none, of raising up the poor. It is a system born of Judaism and Christianity and is most congenial to them.

We are very far from having built the Kingdom of God on earth. But we have dramatically reduced poverty, shown ways to build institutions that respect human rights and liberties, virtually eliminated famines, found ways to prevent and remedy diseases, dramatically increased the longevity of people everywhere, and come to include more and more persons in the “circle of exchange.” But that, too, has not yet been achieved in full. There still remain about a billion persons on earth not yet included. For their sake and for everyone else’s, the project of democratic capitalism must continue.

Michael Novak is a distinguished visiting professor at Ave Maria University. An expanded version of this essay is available from the Institute for Faith, Work & Economics in both digital and print formats.