The relation between economic freedom and political freedom is that initial growth in either political freedom or economic freedom tends to promote the other. Milton Friedman in The Wall Street Journal, February 12th, 1997.
This post examines the links between the free market and democracy, especially the causal links. I believe that an increase in the level of one causes an increase in the level of the other. This may be helpful information for those who want to promote democracy around the world without the resort to violence.
I’m sure Karl Marx would have appreciated the irony of finding one of his favorite concepts at the beginning of a post defending the free market: dialectics. There is, in fact, a dialectical relationship between democracy and the free market. They may often contradict each other: the uneven distribution of wealth which one can often find in a free market system tends to falsify democratic political processes because wealth means influence; and democratic decisions often impose restrictions on a free market. However, democracy and the free market often also encourage each other.
Let us first take a look at the way in which a free market can promote democracy. A free market loosens the control of authoritarian states over their societies. If states give up control over the economy, then perhaps they will also give up control in other fields. If a state does not control all economic means, then people will have more freedom to oppose the state because the state cannot as easily take away their jobs or put them out of their houses. A planned and regulated economy usually means a planned and regulated society
A free market also promotes democracy because it requires:
The rule of law
In itself, a free market does not guarantee the rule of law but, in a certain way, it does help to promote it. Private companies like predictability. They want their investments to be protected by the law, they want a state that protects their goods and their personnel, and they want to be able to use the judiciary to enforce their contracts. Companies moreover like to have an international rule of law. They want the same rules applied everywhere. For example, if labor regulations are not the same everywhere, then companies in certain countries have an unfair competitive advantage, because they have to pay their workers less, they have to invest less in safety etc. “[T]he rule of law enforced by an independent judiciary is a condition for modern market economic relations . . . ‘Markets need laws’ claimed a businessman . . . criticizing the pervasive inefficiency and corruption of the judiciary” * . Because the free market requires the rule of law, and because the rule of law is best protected by democracy (this is an empirical fact **), one can conclude that the free market will strive towards democracy.
A limited state and a free society
Both the free market and a democracy require a limited state and a free society. Only a free society can serve as a base for the democratic control and criticism of government, and an unlimited state is the main characteristic of tyranny. The free market promotes a limited state and a free space for society because it limits state regulation and intervention in the economy. The free market is the freedom to produce, to buy and to sell and this kind of freedom promotes freedom in general.
Transparency and free flows of information
Businessmen need free flows of information in order to be able to make the best economic decisions. Hence, a free market promotes democracy, the most transparent form of government and the form of government most dependent on free flows of information.
Means of communication and transportation
A free market economy promotes the development of the means of communication and transportation. It is difficult to image a democracy without means of communication and mobility. Furthermore, increased communication and mobility weaken the power of habit and tradition, which in turn can weaken the grip of traditional authoritarian structures and forms of power.
Traditional authoritarian social structures, and social structures in general, are less stable in a free market, and subject to the free choice of individuals.
The free international circulation of goods can promote the free circulation of ideas. Inter-cultural communication between people who can trade freely with one another can promote democracy because it can allow people to question their habits, customs and traditional power structures. After all, you start to realize that things can be different when you see that they actually are different elsewhere in the world. In cultures that cannot trade freely and therefore do not communicate much with the outside world, most habits are considered to be self-evident and are accepted without questions. Undemocratic habits are then difficult to change. If we eliminate international trade barriers, then we can open up traditionally closed societies.
A democracy also tends to adopt a free market system. A democracy is a limited state because it necessarily (or ideally) adopts the rule of law and hence creates a space for free economic activity, exchange and competition between a variety of groups and persons. A democracy also – ideally – respects human rights and many human rights, such as the right to private property, promote the free market. It is difficult to imagine a free country, a democracy which guarantees all civil liberties, but does not allow the freedom to produce, to buy and to sell goods and services. However, a democracy may find it necessary to limit the free market, or correct for some of its injustices. It may want to redistribute some of the wealth created by the free market to those of us who cannot use their freedom to become economically successful.
There have been numerous studies measuring the degree of political freedom (or democracy) and measuring economic freedom. If you combine these measurements you can see the correlation.
* F. Panizza, in Beetham, D. (ed.), 1995, Politics and Human Rights, Blackwell, Oxford, p. 179.
** There are also many theoretical reasons to defend the link between democracy and the rule of law.