Capitalism, Freedom, and Democracy

In his seminal 1962 work ‘Capitalism and Freedom’, Milton Friedman proclaimed that free-market competitive capitalism was the only way to ensure economic and political freedom for the citizens of any society. Written at a time when the ideological mainstream stood opposed to Friedman’s philosophy, it would later become a reference point for the New-Right politicians of the late 70s and 80s who sought to reform society in its image. The economic and political crises gripping western countries in the present, however, invite us to re-examine Friedman’s thesis in an effort to understand the illiberal outgrowths of our current ‘liberal’ system.

Understanding our current system of free markets and private enterprise requires a grounding in the theoretical framework that seduced academics and politicians in the latter half of the 20th century. At its core, this was a shift from the belief that the state could and should intervene in the economy, to the belief that it should stay out of market affairs.

This theoretical shift was grounded in assumptions previously exclusive to micro-economic theory, which were then applied to the macro-economy. Neoliberal theorists such as Robert Lucas would take the assumption that economic agents operating on a small scale are perfectly rational and seek to take decisions that maximise their utility, and apply that understanding to agents at the macro level. Thus, neoliberal theorists in the 70s and 80s built an understanding of the macroeconomy predicated on the idea that rational actors would seek to maximise their utility in response to government policy, representing a break from Keynes’ perception of an uncertain economy driven by herd mentality in markets.

Grounded in this new understanding of the national economy, neoliberalism launched a critique of the Keynesian consensus. Under a Keynesian economic model, it is the government’s role to help an economy recover from economic stagnation through government spending, since the economy would otherwise be liable to remain stuck in a poverty trap of falling consumption and production. 

Neoliberals fundamentally disagreed with this approach for achieving economic recovery. For them, given the rational behaviour and expectations of actors in an economy, all government interventions to rescue an economy in crisis would be foreseen by economic agents in ways that would work against the state’s objectives. For example, if the government’s budget deficit grew to counteract a fall in economic demand, neoliberals theorised that rational agents would subsequently reduce their investments. This was seen as the rational response to expected tax hikes designed by the government to recover its expenditure, thus nullifying the government’s objective to raise aggregate demand in the first place. This theory was coined ‘The Time Inconsistency Model’ or the ‘Policy-ineffectiveness Proposition’, and was used by many neoliberal theorists to explain the futility of government intervention in economic affairs generally, as well as the economic crises felt throughout the 70s in countries such as the US and the UK.

The neoliberal policy prescription to economic crises followed logically from its critique of the Keynesian position, in that there was to be no policy prescription, at least not from the state. Neoliberals viewed the state as a mere arbiter in the market, less concerned with telling anyone what to do, and more focused on providing stability. The ideal neoliberal state would leave behind its past of changing the rate of interest and raising public expenditure in times of crises, and instead fix economic rules that would remain unchanged regardless of who was voted into government.

Having now laid out the fundamental theoretical framework of capitalism under neoliberalism, its anti-democratic impulse becomes clear. The legacy of the neoliberal project has been to strip away the power of government, and in turn democratic institutions, to shape the state of affairs. To erode the influence of democratic institutions is to erode the power of those without capital to protect themselves from the ravages of the free market, to use Karl Polanyi’s framing. Moving past the theory and observing the history of neoliberal reform only reaffirms this dynamic.

Most famously under Margaret Thatcher, it was Britain’s rich history of labour unions that had to be trampled before further reforms could be instated. Despite the closed shops and well-documented disruptions to industry caused by militant unions in the post-war era, their role was fundamentally to protect the rights of workers who would be otherwise helpless without a strong union backing. This, of course, could not be accepted under neoliberalism, given unions’ inherent opposition to deregulated market forces, and thus their network of democratic accountability was effectively dismantled by the late 1980s, after over a decade of political tension. It is no surprise therefore that we are currently observing a decoupling of wages and productivity both in the UK and the similarly neoliberal US, as workers have been stripped of the democratic institutions necessary to protect their labour rights.

Although a very important thread in the authoritarian tapestry of neoliberal reforms, union restructuring remained the less egregious of Thatcher’s assault on Britain’s democratic institutions. That place would be reserved for her campaign against local government. 

As Thatcher’s government sought to reduce spending on public services, it had to first contend with local governments around the country who were committed to spending on services within their local community. While the Tory government drew up a list of councils it perceived to be overspending and overcharging on taxes, many Labour-controlled councils simply refused to accept a reduction in their funding. Faced with this opposition from established democratic institutions, the neoliberal response was to simply override them, floating the idea to simply abolish the Greater London Council and other metropolitan councils in a 1983 white paper and finally doing so in 1986, as well as stripping away their rights to raise taxes and control public services such as transport and housing. It had been made clear by the end of the decade that democracy would not serve if it put restraints on the free market.

Today, the legacy of neoliberalism continues to erode the democratic institutions we are told to continue believing in. Currently, western governments are practically rendered subservient to a capital-owning class which holds moment-by-moment referendums on government policy in the form of capital flight. As governments seek to borrow to fund public investment projects, this financier class holds the power to potentially bankrupt the state through mass bond sell-offs, effectively holding the public sector hostage. Without the capital controls present in the post-war consensus, coupled with the privatisation of many public services, the few democratic institutions left in modern society are rendered sclerotic. With the unions and local governments dismantled, and the central government unable to shift the economic tide, those individuals outside of the capital-owning class are left to the mercy of private interests.

This is of course, if western governments even have the political will to countenance the issue they face. As wealth becomes increasingly concentrated, monopoly capitalists escape the economic sphere and extend their reach into the political sphere. As the Labour freebies scandal revealed, and as Nigel Farage and Donald Trump told us directly, modern politics has become the external relations department of the most powerful actors in the private sector. In the face of such blatant cronyism and systemic corruption, it is no wonder the 2024 UK election saw the lowest voter turnout since universal suffrage.

This last point is crucial for understanding capitalism’s natural evolution into the fascism we see forming today across developed western countries. The erosion of democratic institutions and sources of social solidarity over the last half century have stripped away the means of control for ordinary people. No longer do industry employees have the power to collectively bargain for wages amid a cost of living crisis, no longer can their local councils invest in the local community, and no longer do individuals feel like their vote can significantly impact the trajectory of their lives. 

Thus, economic hardship, a failing political establishment, and a feeling of helplessness among the population provides fertile ground for a retelling of the early 20th century on the same stage.

As living standards continue to fall and tensions rise amongst a disenfranchised electorate, the capitalist class is well aware of the threat posed to its position should enough resentment be directed at the source of their influence, namely the market order. Concomitantly, in an effort to preserve their class status, the capitalist class over the past decade has supported those parties and ideologies that divert voters’ attention from the source of their problems (see also). Naturally, these far-right parties repay their wealthy donors by combining their vile, racist rhetoric with staunchly pro-business and pro-market policies.

The historic parallels of this phenomenon are hard to miss. In the early days of their rise to power, both Mussolini’s blackshirts and the Nazi SA came to prominence for their vicious crackdowns on labour unions in the service of industrialists and landowners terrified at the prospect of another October revolution. Italy’s industry leaders, the Federazione Industriale, even helped finance and supported Mussolini’s famous ‘March on Rome’. Even in other parts of Europe and across the Atlantic, businessmen traveled to Berlin and Rome to strike deals with the newly-instated fascist governments, even engaging in business transactions with the Nazis after the US had entered the war.

It is important to understand the history and theory underpinning the system of capitalism as a first step to navigating the crucial political juncture we are currently living through. Milton Freedman’s promise of freedom, as much as it ever existed, seems fantastical to an ordinary person living in the 21st century watching liberal democracy transform into fascism before their very eyes. Realising this fact should not be a reason to despair, however. Knowledge of the system one inhabits rescues them from helplessness and confusion, and grants them a new purpose. Identifying the problem is the first step to solving it. In the words of Gil Scott Heron, ‘the revolution will not be televised’.

Illustrations by Will Allen/Europinion