Monopoly and Democracy

All of you will have noticed (or should have noticed) A Marshall’s word of caution respecting public policy formation in democratic nations:

At all events in a democratic country no great public undertaking is secure of being sustained on consistent lines of policy, unless its advantages can be made clear, not only to the few who have direct experience of high public affairs, but also to the many who have no such experience and have to form their judgment on the materials set before them by others (491).

This word of caution highlights the non-scientific, rhetorical character of policy formation in a democratic country; namely, the fact that policy-makers must rely upon Gorgias’ fine art.

But Marshall’s word of caution also highlights the tension, even conflict, between policy formation among “the few who have direct experience of high public affairs” and “the many who have no such experience”—the ὀλιγαρχία (oligarchia, the few) and οἱ πολλοί (hoi polloi, the many). This tension or conflict was accepted as a fact by all of our writers from Carl Menger to John Maynard Keynes. And, as we shall soon see, it also forms a strong undercurrent in the writings of Gary Becker, Milton Friedman, and Paul Samuelson. Scientific economics and democracy are, at best, uneasy partners. More often than not they are enemies.

So where do we come upon the much more popular notion that free market capitalism and democracy fit together like a hand and glove? We can place to one side the obvious connection that the 18th and early 19th century bourgeoisie (up until the Revolutions of 1848-49) drew between free markets and constitutional forms of government. Clearly it was in the interests of the business class to edge out the aristocracy and nobility and to claim along the way that they represented “the people.” Such romantic notions of representative democracy could not withstand the harsh light cast upon them by more scientifically attuned minds and methods.

Much more difficult for economists to avoid were the implications drawn from the rise of totalitarian and authoritarian forms of rule following the First World War. Yet, it was not until the full force of fascism was felt in Italy, Spain, Germany and eastern Europe that neoclassical economists began the steady drum-beat associating democracy with free markets. The historical evidence today of course is even thinner and more questionable than it was in the late nineteenth century. If anything, it has been robust social democratic systems that have delivered the best informed, most active and engaged citizens. Privatization on the other hand has unilaterally been associated with weak democratic institutions and strong oligarchies.

And, yet, for reasons that we will have to explore in greater detail as the course proceeds, neoclassical and neoliberal economists have been reluctant to press the insights that they willingly owned at the end of the nineteenth and first half of the twentieth century: democracy and free markets are less than fully compatible. An informed oligarchy is best suited to free markets.

A long list of neoclassical and neoliberal economists have openly acknowledge this essential insight. The question therefore may be: why do we embrace it only reluctantly? Or, more to the point, why have we not been more willing to theorize the tension or conflict between republican institutions and democratic procedures, on the one hand, and free markets on the other?