Democracy and Markets, Still, Again

In his Socialist System (1992), J Kornai faults the socialist system for the absence or gross distortion of market mechanisms and democratic process. So, it is at this point that I call attention to G Becker’s 1958 article “Competition and Democracy” written before the world “drank the KoolAid” so to speak. G Becker, of course, along with M Friedman and R Lucas Jr., is one of the fathers of the Chicago School. All stand upon the shoulders of F Knight and J Viner, their professors in the 1930s, 1940s, and 1950s.

51E4mFBrqBL._SY344_BO1,204,203,200_The importance of G Becker’s piece in this context is that in it we learn why markets are far more efficient than democratic process distributing goods and satisfying desires. I say that this article appears before the world “drank the KoolAid” because it will not be too long, 1962, before G Becker’s colleague M Friedman will, by not so subtle slight of hand, use the term democracy and free markets almost interchangeably. M Friedman lays the foundation for this substitution of terms by noting, correctly in my view, that democratic process frequently subverts or undermines free markets, diverting efficiencies from private investors to communities where the public has determined resources are lacking but necessary. The slight of hand consists in moving from this correct observation to the conclusion that, therefore, markets, because they are more responsive to consumer demands and investors’ decisions, are also more democratic.

This was also the conclusion G Becker less subtly introduced in his 1958 article.

What has this to do with J Kornai? Professor Kornai wants it both ways. He is an eastern European, booted from the Party and from government on account of his unorthodox views. He knows what it is like to live and work in a non-democratic society. His criticism of the socialist economic system therefore includes a heavy dose of pro-democratic rhetoric. And, yet, so closely intertwined is this rhetoric with his defense of free market institutions that we can never be certain that he is not advancing something like G Becker’s argument: i.e., Markets=Democracy. That is to say, J Kornai at times seems to be suggesting that actual democratic processes, where citizens vote to tax wealth in order to fund public institutions or projects, are (as Becker shows) inefficient; and at times he seems to suggest that such inefficiencies are a welcomed cost we pay for democracy. And, at times, he seems to completely overlook the inefficiencies entailed by democratic processes. For example:

As far as the allocation of resources for public services is concerned, this is subject to the democratic political process, at least in a parliamentary democracy. The public service sphere cannot be neglected so long as the parties representing the majority of the public are willing to vote the sums for developing such services. By contrast, the allocators under the classical socialist system are not subject to any democratic control. Moreover, they have to make numerous allocational decisions that under capitalism are ultimately in the consumer’s hands (Kornai 172).

Is J Kornai advancing two distinct (though mutually contradictory) arguments here; or is he advancing only one? Favorable mention of “parliamentary democracy” would appear to lean towards two arguments, but his emphasis on decision-making ultimately resting in “consumer’s hands” seems to favor the consistent, but devious, one argument theory. Does parliament override markets? Do private consumers hold primacy over democratic process even when market decisions undermine public institutions? In the 1930s, following the Crash, F Knight said “Yes.”

More to the point, if J Kornai was advancing the one argument theory, then the rise of anti-democratic oligarchic, though free market, economies in Eastern Europe is consistent with his interpretation. If, however, J Kornai was arguing that free markets and parliamentary democratic interventions are mutually reinforcing, then this points up a flaw in his grasp either of parliamentary democracy or of market capitalism, or both.