Democratic Capitalism
The prospering of free societies depends on certain moral and cultural practices.

Statue of George Washington in the Capitol Rotunda.


The second act settled the question of whether socialism or capitalism works better for the liberation of the poor from poverty. Once they turned from their separate versions of socialism (Fabian socialism and Communist socialism), India and China between them brought more than a half-billion people out of poverty in just 20 years.

The third act, in which we are now engaged, must answer this question: Which are the most favorable moral and cultural practices for the preservation of all three systems, the economic, the political, and the moral and cultural? Which institutions are successful in inculcating the virtues necessary to the survival and prospering of free societies? The fundamental question, then, is the moral question: What is the most practical moral ecology for the survival and prospering of free societies?

Is democratic capitalism still a model to follow? More than half the nations of the world are still trying, but the task is very demanding morally.

For instance, more than a hundred nations of the world have discovered by experience during the past 60 years that a dynamic economy is better for the poor — for hundreds of millions of the poor, as in China and India — than either of the alternatives. Those alternatives are traditional agrarian economies and socialist economies. And at the dynamic center of the best economy for the poor are habits of the heart and mind and, to give them steady support, new institutions.

The particular habits of the dynamic economy are enterprise, invention, discovery, intelligent organization, and hard intellectual (and physical) work. The institutions that nourish such virtues include: the rule of law, private corporations (especially small ones, which create most of the jobs in the economy), open and competitive markets, rights of association, rights to an inexpensive and easy incorporation in law of new businesses, respect for private property, including patent and copyright laws to protect original ideas and compositions, and tax codes favorable to good habits that bear practical fruits.

These crucial points explain the reason why the dynamic economy that raises up the poor is called capitalism. Why? Because that word derives from the Latin caput (head), the seat of ideas and invention and discovery. Capitalism is the mind-centered system. It assists economic creativity at every turn. Under agrarian systems, wealth is counted by capita – heads of cattle, horses, sheep, goats. Under capitalist systems, it is counted by the royalties accruing from ownership in ideas, discoveries, inventions.

Notably, for example, capitalism depends on laws recognizing patents and copyrights for new inventions and works of the mind. These laws make works of the creative mind more valuable than land. Thus does the agrarian society pass into the capitalist society.

In sum, markets do not make capitalism. Private property does not make capitalism. Both of these features are as old as biblical times. They mark the traditional economy, the economy of stasis, in which the vast majority of the people are poor and have little or no way to better their condition. These are societies in which the poor have for centuries had little upward mobility.

Just as “capitalism” signifies the economic part of democratic capitalism, the word “democratic” signifies the political part. But that word “democratic” is easy to misuse. Often people mean by it “one man, one vote, one time” or, more mildly, unchecked “majority rule.” But that has often paved a highway to tyranny. As Tocqueville warned, a majority is easily seduced into a “new soft tyranny,” the tyranny of being taken care of by their masters, even if that means surrendering personal responsibility, initiative, and drive. Moreover, opponents can reason with an individual tyrant, but hardly ever with a mob.

There is a wiser meaning of “democracy,” which insists on a division of powers, interests, and factions; on the rule of law; on checks and balances; on other republican institutions such as voluntary associations and civil society; and on republican virtues that generate an alert and active citizenry. Such citizens use their own initiative to improve the common good in the areas nearest to them. This form of democracy is the opposite of a tyranny of the majority.

Within it, no one is allowed unchecked power. A system of divisions and separations is installed throughout the polity. Central power is further checked by habits of mutual restraint, peaceable negotiations, a spirit of compromise.

That last word, “compromise,” has two senses. In one sense, it means giving up on moral principle, each side taking what it can get away with. But that is a slightly disguised “rule by the strongest.” In the other sense, compromise means that each side holds fast to the moral principle it is pursuing. However, both parties agree on two guidelines for action. First, steady incremental progress is made by both sides toward a common goal. Second, neither side gets everything it wanted; each side gets some progress toward its own goal.

All sides retain respect for the others, and for the differences between them. All sides agree that, in practical decisions, the course of the future is unknown to any party. All sides also agree that the full consequences of actions are never foreseeable, with the result that each side is likely to be partly right, partly wrong. Genuine compromise means constantly renewed mutual respect, for the sake of incremental forward movement by all.