Why democracy creates better economies

Is democracy the best political system for a thriving economy? Or is some kind of authoritarian- or even dictatorship-based system better if we look at it in a strictly economic sense?

Let me start out by making it very clear what I personally think about this, by using a famous quote from Winston Churchill who said “…democracy is the worst form of Government except for all those other forms…”

I share this view 100%.

Democracy is far from perfect, but I am quite sure that “perfect” is an illusion in all aspects of life. Nothing is perfect. At least not in the long run, and long run is what matters.

Democracy is an idea created by the ancient Greeks and reinvented by the American founders when they established the United States of America, July 4th, 1776. America was an English colony at that time, but they wanted to break free from the English monarchy that passed political power, rights and privileges based on inheritance. If you belonged to a certain class of people in England, you were entitled to rule and to tax all other people. It was the same system everywhere in Europe at that time. This created the poverty and the injustice that forced millions of people to migrate to the new colonies in America in the hope to escape desperate life-conditions.

USA was established as a republic, which means that no-one could ever inherit political power. You had to be elected by the people and act as the people’s representative – “Ombud” as we say in Scandinavia – and there would be elections where citizens could participate with regular and predictable intervals. Elected politicians are not above the people, they are only representatives of the people that elected them.

That’s the basic idea of democracy as we afterwards also adopted in Europe, first in France with the French revolution in 1789, where they also abolished the monarchy. In other European countries we kept the monarchy but completely “castrated” their political power by establishing what is called constitutional monarchy’s, where the royal only has a ceremonial and symbolic head-of-state role, and where a parliament is elected by the people in democratic elections, and the parliament then appoints a government based on the parliamentarian majority. This is how the constitutional monarchies works in England, Norway, Sweden, Denmark, The Netherlands and Spain. Other European countries are republican democracies, like the USA.

If we look at our resent human history, democracies are by far more successful in creating prosperity, welfare and equality, than any other system. The reason is actually very simple.

A democratic system will keep a better check and balance to make sure that no-one is allowed to steal huge national assets, get rich and powerful by being protected by the government. Free elections will much better protect the country from corruption and unrightful privileges to the few, because you will simply be overthrown by the majority of the people if they don’t accept what you are doing. Democracy simply gives a better distribution of wealth. When more people are taking part of the economic growth, there will be more economic activity because more people are having more purchasing power, and the more the economy will grow!

This is also why capitalism – the economic principle based on individual rights to own property and assets and operate free enterprises in order to trade products and services on a market to free consumers – works better in a democracy than in any other political system.

The freedom to speak without repercussions from people with power or the state is a precondition for a democracy. If this principle is absent, it cannot be a not a true democracy. Freedom of speech simply makes it more difficult to undermine the economic system through corruption and oligarchic theft. People will – and do – speak out if people with power try to steal or control their assets or the nations assets.

And maybe the most important aspect of why capitalism and democracy go so well together is that both capitalism as an economic system and democracy as a political system, requires and promote diversity.

It is in my opinion a very good reason why USA, England, Germany and France are by far the countries with the highest number of Nobel prizes in science. It is because they are all democracies, where diversity and conflicts of opinions are not only allowed, but even encouraged. That is how you create free thinking which is the precondition of scientific progress. People in e.g., China or Russia are not less intelligent – maybe too the contrary – but they have not been allowed to think and express different ideas, or to live the way they want to live. In these countries you are even punished if you are a freethinker or “different”.

Even in a democracy both businesses and political parties are however trying to get monopoly like size, but we all understand that competition and diversity is good because it is a permanent improvement driver. In a democracy there are rules against monopolies. If a company get too large and can control price and market-conditions, it can be broken up in smaller units by the legal system. That this instrument is not used very often, is in my opinion too bad. When we say about companies that they are “too big to fail” – which usually mean that they will be saved by the government when they get in trouble – does in my opinion just prove that they are simply “too big”. They should already have been broken up in separate, independent and smaller units.

In a non-democratic system this will work in the opposite way; both the authoritarian political system and the oligarchic economy, protected by the political system, will have no “counterweight” in establishing monopoly of both political and economic power. They will even make sure they control the legal system so they can be “protected” by the courts, and have their political opponents put away.

A typical objection or question if you like, is that e.g., China, which is not a democracy, have an incredible economic growth, yes even better than in Europe and USA, so are you sure that a dictatorship cannot be more successful in creating economic progress and growth? Some people even claims that both Stalin and Hitler created strong economic progress that wouldn’t been possible in a democratic system.

The economic growth in China started when the communist regime allowed capitalistic principles. It was Deng Xiaoping, the leader of China from 1978 to 1989, who introduced what is called the four modernizations: to improve agriculture, industry, defense and science. China was a hopelessly poor, underdeveloped, third world country when Deng Xiaoping became the general secretary of the communist party.

He allowed so called Special Economic Zones, where foreign investments could enter, and they were relatively free of political and bureaucratic regulations. This created an incredible growth, and these regions became the growth-engines for the Chinese economy. 

But we should not get confused about Chinas growth. It is not only because capitalistic principles were introduced, but also because the Chinese economy until now has been driven by state-controlled growth, or what I will call budget-driven growth. The need to build the country was so enormous that the state initiated and paid for large scale projects in infrastructure, constructing new cities, investing in defense and industry. China was simply not a consumer driven economy until very recently where enough people have enough money to be real consumers and drive the economic market demand. At the same time China benefitted from the goodwill and support from the democratic western world, through inexpensive credits and aid. We wanted access to the Chinese market but understood that only a prosperous China would be an interesting market for us. We therefore actively supported China’s progress.

From Deng Xiaoping’s introduction of economic reforms until today is a very short time, and in my opinion, it is far too early to say that China is an example of a non-democratic economic success. In the short run, yes, in the long run, I really doubt it. 

I do personally have ownership in a Chinese company since almost 20 years, and I have seen first-hand how it works from the inside. I would never accept it here in Europe or in Canada where I also have companies, how we have to “please the system” in China. That is however exactly my point about the political freedom and security that democracy provides, together with the economic freedom democratic capitalism give. It is an interesting personal experience, however.

So, I am sure that China will be a short-lived exception from what I say about democracy and economy. China will face serious economic problems if they lose the goodwill from the West, because they don’t respect private property and people’s integrity over their personal, individual assets. Some people have gotten incredible affluent in China, but it is an oligarchic class. If they criticize any aspect of Chinese politics, they are silenced and put away.

In my opinion China can only be successful in the longer run through political reforms that introduce democracy.

Regarding economic growth under dictators like Stalin and Hitler I will say this. In the short run a dictatorship can be very effective. In the long run however, it is a predictable disaster. Here is why. All dictatorship is based on the political idea that political diversity is prohibited, and conflicts of interests are dissolved by “proclamations”. This is why Stalin’s communism and Hitler’s national socialism is one and the same. They are political Siamese twins. Without any opposition and discussion, it is easier to implement any decision, no matter how large-scale it is. However, without any discussion and even disagreements, the dictator will inevitable also make wrong decisions that will be implemented with the same effectiveness. After a while the dictatorship has implemented enough disastrous decisions and will simply run out of resources, both financially, intellectually and materially. That is why dictatorships are short-lived. At least in a historic perspective. They all deterministically end in ruins and enormous sufferings.  

Are there any negative economic aspects of democracy?

Yes, of course. Inequality is one. It is difficult to avoid that someone can become very wealthy, and others remain at the economic bottom. Wealth can be inherited, but the same with poverty. It is very difficult to break free from poverty. The economic structures benefit those that already have enough.

That we have not paid enough attention to ecology is another aspect of economic activity, no matter whether it is in a democratic or non-democratic system. Environmental considerations and the necessity to make sure we have a sustainable ecology are almost completely absent from business education still today. Profit and how to make more out of less is the dominating focus.

A democratic system also makes it possible to move assets away from where they logically should have been taxed to contribute to economic progress, and thereby leaving only environmental and economic expenses where the value is actually created.

There are many aspects also that makes democracy less economic effective, for example that we have to spend considerable time on decision making because many are entitled to be involved and voice their opinion. From the outside, and for people that didn’t grow up with democracy, this can look even chaotic and ineffective. In the short run, it may be, but in the long run – and again, that is what matters here – democracy is by far the most superior and human way to organize our lives. 


Chairman & Founder of University of Fredericton, Canada and Sandermoen School of Business. A Renowned Author and Speaker on Strategic Management Consulting

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