School of Arts, Humanities and Social Science (SHASS) 50th Anniversary Colloquium, “Asking the Right Questions” (Session 4) 10/7/2000

[MUSIC PLAYING]

JOSHUA COHEN: I think we can get started. I'd like to welcome you all to this last session of this two-day colloquium-- just to make sure you're in the right room-- this is the 50th anniversary celebration session for. And our question for this final session is, is capitalism good for democracy? Or we could put the question more colorlessly as, what is the relationship between capitalism and democracy?

Now I have the-- I guess there's been enough turnover between the two days that I should reintroduce myself. My Josh Cohen, I teach in philosophy, and I'm the head of the Political Science Department. And for this session, I've been given the easy task of introducing a question that requires no explanation and speakers that require no introduction, so I'll be brief. At least-- well, it may not seem like I'm being brief, but it'll be brief for me.

[LAUGHTER]

So writing in the middle of the 19th century, Marx proposed some answers to the questions of today's session. He said, "capitalist democracy is possible only as," in his words, "a spasmodic exceptional state of things. It's impossible," he continues, "as the normal form of society." And the reasoning for this conclusion was straightforward. He said, "the classes whose social slavery the constitution is to perpetuate--" proletariat, peasantry, petty bourgeoisie-- "it--" that is, democracy-- "puts in possession of political power through universal suffrage.

And from the class whose social power it sanctions--" the bourgeoisie-- "it withdraws the political guarantees of this power. It forces the political rule of the bourgeoisie into democratic conditions which at every moment help the hostile classes to victory and jeopardize the very foundations of bourgeois society. From the ones, it demands that they should not go forward from political to social emancipation; from the others, that they should not go back from social to political restoration."

Now Marx was hardly alone in thinking that the political equality ingredient in a democratic state couldn't coexist with the inequality and private power ingredient in a capitalist economy, that either democracy or capitalism would win out. In the mid-19th century, he shared that outlook with conservative opponents of universal suffrage who feared the very thing that Marx hoped for.

When this school was founded in 1950 at MIT, it wasn't uncommon to think that the experience of the previous 30 years-- Depression, fascism, communism, and world war-- had demonstrated the truth of these earlier argument about the irreconcilability of capitalism and democracy. To be sure, there were some who thought that in the United States, at least, the New Deal had saved democratic capitalism, but it's worth recalling that conservative opponents of the New Deal thought that had paved the way to a new serfdom, and that even its proponents, the New Deal and democratic capitalism, may not have been entirely confident of its long-term stability.

Now something has changed in our understanding of the combination of capitalism and democracy. Marx, as well as the conservative critics of democracy, may have been onto something and thinking that there are interesting tensions between capitalism and democracy. Maybe it's an-- maybe it's an awkward marriage, but not every awkward union ends badly.

In any case, the confident thesis that capitalist democracy couldn't last has been overtaken by events. And the aim of our session this afternoon is to explore some of the changes in the world and changes in thinking about the world that have taken place over the past 50 years and led to different conceptions of the relationship between capitalism and democracy.

We have three very distinguished speakers with us who'll each speak for about 15 to 20 minutes on our topic, after which we'll have some open discussion. And I'll introduce them now in the order in which they'll speak. Our first speaker is Robert Solow, who is Institute Professor Emeritus and Professor of Economics Emeritus at MIT, winner of a Nobel Prize in economics and the National Medal of Science. Bob is publicly known for his work on technological change and economic growth, but he's secretly a Luddite who doesn't use email.

[LAUGHTER]

I shouldn't say doesn't, I should say refuses to use email as an act of refusal as I recently rediscovered.

[LAUGHTER]

Kenneth Arrow is the Joan Kenney Professor of Economics Emeritus at Stanford. Also winner of a Nobel Prize in economics and a National Medal of Science. And there are three bodies of work, at least, that are closely associated with his name, one of which precisely specifies the conditions under which Adam Smith's invisible hand hypothesis about markets is true, a second describes the problems in combining the separate values of individuals into a coherent social valuation, and a third on issues about decision-making under uncertainty.

Suzanne Berger, our third speaker, is the Rafael Doorman and Helen Staubach Professor of Political Science and Director of MIT's MISTI program-- that is the MIT Initiative on Science and Technology. She's written on French politics, and more broadly, on the disparate economic impact of different national ways of organizing political life. Suzanne, I can also testify from after 24 years, is the best colleague you could imagine having.

Now I know Bob Solow and Suzanne Berger well, although I should say that Ken Arrow is the only one I ever took courses from-- he doesn't know about-- when I was a graduate student at Harvard. I twice in consecutive years sat through his course on micro theory. I can't say that I--

[LAUGHTER]

--why I sat through it twice. But I did. But I know-- I do know all three of-- the work of all three of them well, and I do want to make a comment that applies to each, which is that they all are known for addressing topics of large significance with attention to the demands of reason and evidence, but also without ever losing sight of the fact that the social sciences are moral sciences in which the final stakes are human lives. Bob.

[APPLAUSE]

ROBERT SOLOW: Is it OK-- can I be heard if I just sit here and-- it's on. OK.

JOSHUA COHEN: Is it OK with the people up there? OK. Good. I don't mean you in the back, I mean them in the booth. It's OK with them. OK, good.

ROBERT SOLOW: Well, there was a famous recent occasion in the history of this country when a question asked of an important person was answered by the reply, it depends on what you mean by "is."

[LAUGHTER]

The question we're supposed to discuss here is capitalism-- is democracy-- which is it? Is capitalism good for democracy? But in this case, I think it depends on what you mean by capitalism, actually. I should start by telling you in an old cliche where I come from, where I'm coming from. My most deeply-held political belief is that power corrupts. I don't know if absolute power corrupts absolutely, these limiting propositions are sometimes hard to work out, but I do think as I look at the political world that power corrupts.

And therefore, for me, the basic problem of democracy is to avoid undue concentrations of power, to avoid the accumulation of too much power almost anywhere, actually, and certainly in the wrong places. The problem is delicate because some concentrations of power are needed in a society because there are economies of scale-- not only economies of scale in production, but economies of scale in the performance of other social functions, and it's very hard to get them done well without some group body institution acquiring a certain amount of power.

It seems to me, and it's always seemed to me since I was a kid, actually, that I hated school. That's probably where I got this notion that power corrupts. But this goes back a long way with me. It always seemed to me that this is the really fundamental argument against socialism as an alternative to capitalism.

It's true that there is no real example of the successful running of a socialist economy. But even if that could be fixed, even if one could find ways of operating a socialist economy efficiently, the fact that it means, it involves giving economic power to the state in a big way-- that is, attaching economic power to the locus of political power strikes me as a recipe for tyranny. To have, from a certain degree of abstraction, only one employer in a society, one source of finance and all that suggests to me that corruption will result.

In my youth, I had friends who thought that Stalinism was a perversion of socialism, and I wondered even then if they were not wrong. I personally would have little or nothing to say against democratic socialism, except the suspicion that it's an oxymoron. All the socialism as we have observed-- not so many, but all the ones we've observed seem to have either originated or finished in tyranny. One of them seems just to have finished the other day.

So coming now to the precise question posed for this meeting, capitalism has going for it that on paper, at least, it separates economic power from political power, and this was thought about explicitly in the philosophical origins of people like Locke I'm thinking of.

On paper, capitalism turns private property into a buffer for the individual against a political power. It defines a sphere in which you are your own-- in which you are your own boss. A person's home is his or her castle to put it that way. But in fact, it's not that simple. It's very far from being that simple.

We know from observation-- and there are some good reasons in principle, in theory for believing it-- that laissez faire capitalism tends to generate vast inequalities of income and even vaster inequalities of wealth. Any capitalist society living its natural life, so to speak, will make these big extremes, and in particular, there will be a group of very rich and very wealthy people.

Leaving aside whether that kind of inequality is intrinsically a good thing or a bad thing, it seems to me that there is an endemic tendency in capitalist democracies for the very wealthy to want to buy political power, to use their wealth to purchase political power. We see that all around us here today, most clearly in campaign financing where the influence of money on the electoral process is, I think, a real danger for democracy.

And this is not true only of the US. Helmut Kohl got himself into a lot of trouble for what, by American standards, would be a mere peccadillo, would be something you would barely report to your accountant. And the same thing is true in other democratic capitalist countries, there is a tendency for wealth to want to buy-- to want to buy power. It's not-- Texas oil tycoons do not play an important role in our political life because of their intellectual or moral quality, particularly.

[LAUGHTER]

During the Reagan and Bush administrations, we had the spectacle-- and I-- I guess still naive enough to have been shocked by it, not so many other people were. We had the spectacle of the representatives of big business sitting with the Republican majorities of congressional committees writing up and marking up legislation.

So the trouble with unregulated capitalism is that political power gets absorbed by economic power to a larger or lesser extent, but sometimes to a very large extent. And so we run the danger of ending up from this point of view where socialism ends up, only by the back door, but with economic power and political power sitting in the same hands.

And this suggests to me that probably the best we can do for democracy is partially regulated capitalism. And I have-- one could go on at length about the kinds of regulation that are required, but I'll just mention two or three. First of all, capitalism which is-- does engage-- in which the government, at least, engages in redistribution of income and wealth to relieve inequality and to limit the extreme accumulation of wealth and therefore of both economic and political power.

Secondly, one wants democratic capitalism in which there is serious public intervention to limit monopoly and exploitation, and to preserve competition-- real competition wherever that is possible. And third, the third thing I want to mention now is the public provision of seriously good education for everybody for the purpose not only of providing a skilled labor force and all that stuff, but to promote economic and social mobility, to promote the circulation of people through the economic system.

One could imagine easily, because we do other forms of intervention in economic life, but it's the-- it seems to me the natural habitat for democracy is not unregulated capitalism, but regulated capitalism, what we used to call the mixed economy. There will surely be imperfect, but it's the best we can do.

I want to make only one more remark now. Some of you will have noticed that the sort of society I'm suggesting as a good idea is exactly what Hayek, Friedrich Hayek in The Road to Serfdom was arguing against. Josh mentioned The Road to Serfdom parenthetically in his introductory remarks.

Hayek thought, I presume seriously, that the first steps toward serfdom, what I was earlier calling tyranny, are precisely the steps that I think are necessary to preserve the compatibility of capitalism and democracy. As a forecast, of course, The Road to Serfdom stands as one of the really great failures, like Marx's forecast of the progressive impoverishment of the working class in capitalist economies. It's 50 or more years since The Road to Serfdom, and during that time, the slippery slope from antitrust policy or regulation of other kinds toward serfdom has not shown itself at all.

I think Hayek could have been seen to be wrong on the day The Road to Serfdom was published because it was perfectly visible that those capitalist countries like Norway, the Netherlands, Sweden, which did more interfering in the economy and ought, according to Hayek, have been further down the road to serfdom than the more laissez faire places like the United States, we're not like that at all. They were both more regulated than the US, and generally more free as more open to unconventional ideas than American society was. That may still be true comparing those countries.

There is no reason to suppose that there is a slippery slope from, again, what used to be called the middle way toward Hayek's notion of serfdom, and I guess the middle way-- not necessarily Sweden-- is what I've been advocating this afternoon. Thank you.

[APPLAUSE]

KENNETH ARROW: First of all, I should explain-- it may be quite obvious to you that I'm not a historical scholar or a political scientist-- perhaps we'll hear from the professional after I speak-- that I'm not-- this is not research of mine that I'm acquainted with. And it's possible to argue, however, this is a subject in which researchers in the real scientific sense is unlikely to cast much light as a general impression-- what we know generally make up most, at least, of what there is to say, though no doubt it would be illumination in studying particular historical incidents in the, say, for example, of changes from democracy to the opposite or dictatorships of one kind or another or vice versa.

I also-- in fact, I must say, having been-- I would have given a simple answer to this question before I was asked-- in fact, I did on one occasion, and I participated in a written symposium on the 25th or 30th anniversary-- I forgot now-- of Joseph Schumpeter's Capitalism, Socialism, and Democracy in which he said capitalism seems to be a necessary condition for democracy, though clearly not a sufficient one since there are plenty of capitalist dictatorships. And there have been-- there have been and even-- and there are today.

But having this question posed, I've been thinking a lot about it, and so really I don't know whether I should continue, but anything I say now is sort of in the middle of development of my thinking. One of the interesting questions-- well, you can ask in the first place what the terms mean-- what is democracy and what is capitalism? Democracy, I think-- I don't think we're-- the working day definitions are good enough for us. I mean, some nominal legal equality of political power along a very broad class of people.

And with-- accompanied, of course, by the political freedom. The freedom of the press, freedom of speech, and freedom of assembly and so forth which are necessary to implement-- the freedom to criticize, some kind of-- and of course, you can get then into very interesting questions-- for example, access to government documents becomes a thing. There's a difference, for example, between Great Britain and the United States in that respect. And there are other differences.

What I found a little more puzzling, and I must say, I don't even know the answer. I'm not prepared to give an answer-- is what is capitalism? The reason that's important is because in a sense, in the modern day world, we think of the alternative is capitalism or socialism. Historically-- of course, there was a pre-capitalist feudal-- at least in the Western Europe-- feudal-- feudalism as an alternative.

And the way we usually tell the history-- I don't know-- I don't know how accurate it is-- of the emergence of the more democratic regimes, say the gradual developments in Great Britain or the more sudden developments, shall I say, in France-- revolutionary in the strict sense-- the-- are-- the idea is usually it's the middle classes, but the emerge-- there was an emerging capitalist system within a feudal framework, and somehow, along good Marxist lines, there was a-- these two were irreconcilable in a democracy. It was a shift of political power away from the king and nobles and all that.

I'm sure that any real historian would tell me this is all-- it's not really right, and of course, we have-- although it does correspond, I believe, to [INAUDIBLE] account, a rather famous account of the development the French Revolution, it was pointed out it was the more progressive regions of France where the revolution was. It was not the hopelessly impoverished regions where the peasants were totally repressed that was the center of revolutionary activity. So you can give that more than one interpretation. One is that the bourgeois--

So there is this association, then, of the emergence of democracy with capitalism. Of course, you go into little details, some of this fuss gets lost. Then why did Germany develop in a very different way of 1914, Germany was a limited democracy. That said, there was a popular election, universal suffrage, but the powers of the Reichstag were just very much less than those of the British parliament. So the emperor and his cabinet still, although they had to deal with the Reichstag, were by no means subservient to it in the way that the British cabinet is or the American president being elected or these different forms of responsibility.

So the capital-- so they-- now one way of looking at it is maybe the capitalist systems were different. I'll come back to this in several forms, but I-- the truth is I've no very definite answer as to what it is. And this is a matter and suddenly a great moment not merely for the analysis of democracy, but even for the analysis of economic growth, as we'll come back to at a later point.

The plus side, of course, why capitalism might be thought of to be a great contributor to the preservation of democracy is the argument that Bob has already given, namely that it avoids concentration of power. At least it spreads power-- economic power is different from political power, it can provide a kind of a shield for the-- for dissidents. For dissidents, it gives a kind of protection.

The more I thought about it, the connection to this, the more-- the less convincing this argument came to me. And there's nothing wrong with it in itself, but the trouble is, if you look at the way political power is-- anti-democratic political power is exercised, or even democratic political power and its populists and majoritarian phases when it becomes-- when the majority oppresses the minority, as has certainly happened in various episodes, but certainly if we consider a dictatorship, the economic power the state is usually one of the least powerful weapons.

I mean, killing people, power, putting them in prison, torturing them-- rather considerably more effective than depriving them of jobs. I think you'll find it in the Soviet Union, for example, dissidents who were not-- who, say, were allowed out of prison. They [INAUDIBLE] They got jobs. They weren't kept out. They might not get the jobs they felt they deserved, but even these dissident intellectuals usually worked as a translator, some kind of motive, and they weren't really starved to death except in a couple of cases. Well, they wanted to go after them. They went after them in much more brutal and effective ways than economics.

So the economic power is instrument of repression. It strikes me as kind of marginal. The additional economic power conveyed by the gulag, the concentration camps for dissidents in Germany is a-- not thinking about death camps now, but the political concentration camps. These are the ways-- well, or to take another example, the beginning of the Chinese-- when the Chinese communists took over, somehow about 30 million former landlords have disappeared. And I think, yeah, now it's pretty clear, they were just-- I mean, the statement was they were being deported to the border provinces, but it's pretty clear now, they were all just killed. They didn't want anything.

So this was not wasting time just taking away their land, for example, which might be an example of economic power. It wasn't even-- I mean, if China-- like all of these regimes, you'll always find exceptions people who were treated perfectly well, old capitalists and landlords would be perfectly well, but there was a fair amount of just plain prison and worse.

Also, if capitalism is good for democracy, one might expect that more capitalism-- I'm saying there may be degrees of capitalism-- should lead to more democracy. Well, of course there's a lot of problems-- what do I mean by more capitalism? Well, one test is the size of the state. For example, what percentage of the national income of a country goes through the state? Roughly, the tax bite.

And as Bob has already pointed out, there are countries like Sweden, which to this day, over 50% of the-- 50% or so of the national income goes through the state. And nobody would allege that they're less democratic-- in fact, some people say the opposite-- than those with much smaller, let's say, like Japan and United States, which have considerably smaller fractions going through them. And most European countries are between Sweden on one hand and the United States on the other

So it doesn't appear the size of-- at least empirically-- this is a very crude empirical statement, but at least on a contemporary-- using cross-section analysis, as we would say, you don't see much evidence of this. Well, another arguing might be, that's the wrong criterion because the state-- when the state just takes money from some people and gives it to the other, it isn't really interfering with freedom. It's not-- it's not a direct kind. So you might take state ownership of industry.

We have a very curious example of this. If you look at the Italy in the post-war period until about 10 years ago or so, 15 years ago, they had a rather large fraction of Italians she was state-owned. This was not a deliberate policy, by the way. In the Depression, the fascist government was bailing out failing industries and wound up sort of just by accident owning a very large fraction-- Olivetti, for example, was a state-owned firm. It's been privatized, but it was a state-owned firm.

As far as I know, this country-- it was never used for political purposes. It was never an instrument of a thing-- so that you had a large fraction of state ownership without any either-- not only did not affect the Italian democracy, but it-- that nobody even realized it was even being used in this way.

So I'm getting more skeptical about the idea of state ownership and things-- or actually instruments by which democracy is undermined. Now, in fact, there seem to be cases-- there seem to be some arguments, some sense-- although it may be a perverse sense-- state ownership may increase democracy.

One of the troubles, of course, one gets, if a democratic power is sufficiently small-- if the power of the state is sufficiently small, people-- and the United States, of course, is a prime example-- may be uninterested in participating. Now we have state ownership, one of things you find every time you have state ownership is that the employees-- and managers, too, for that matter-- start exerting political power. It sort of energizes the democratic system, people get involved. Of course, not-- from an economist point of view, this is a bad thing. But from the point of view of the viability, there is-- it actually creates an interest in the workings of the democracy.

If the democratic power is sort of itself unchallengeable, then if I want higher wages or I want to keep an industry from being closed down-- you see this in Israel, by the way, which is another state that has until recently been a high percentage of public ownership, and where the employees are very vigorously El Al or the telephone monopoly have been very vigorous and effective, by the way, in using the democrat-- using their power as voters to affect government policy. Now, this may be a bad thing, but it's certainly not a threat to democracy, it's a threat to something else.

School teachers in the United States are significant-- sorry, at the local-- this is more at the local level, although it's entered the public campaign also as you see in the promises of one of the candidates. Another possible thing is the role the state not in actually either spending money or in owning things, but in directing resources. Direct government controls of one kind or another, which, as Bob has said, there's a whole continuum of directions.

Now I find very interesting the examples of developing countries where it is certainly the philosophy of many developing countries in the post-war period was, it's hopeless for us to catch up on a laissez faire basis. The only way we can do it is by government direction. This was very common. In fact, one might almost say universal.

Let me take India, Korea, and Taiwan. In all of these countries, the state played a major role. Directed resources, said you can't do this, you can do that, this is through by-- either by control over credit, control over imports, various ways. Now India started out with a democratic constitution, which is that it has on the whole managed to maintain even fending off the Indira Gandhi attempt to destroy it or limit it.

Korea and Taiwan started out as authoritarian regimes. What's really interesting is these state-controlled regimes-- in the case of India, the democracy's preserved; in the case of Korea and Taiwan, authoritarian regimes have become democratic precisely in an era when the state was playing a major role-- they still play major roles, but diminished-- in the economy.

So no matter how you define the capitalism, the correlation between capital is more or less capitalism, more or less democracy, not the same. Let me take an even more striking example-- ah, haven't been watching my time, but I think we're-- and the question, suppose you have a democratic government and it's capitalist. Do you expect this to help fend off a threat to democracy? I've been talking here about democracies. Authoritarian regimes becoming democratic.

Well, we have a very-- at least one very conspicuous case, and that's Germany in 1933. End the '32, beginning of '33. Here we had a pretty well-developed capitalist economy. I don't think anyone would not describe the German economy as capitalist. Eh, there were a few feudal hangovers in the east, but they were not-- they didn't play-- they played some small role in the story, but I don't-- let me not go into details.

We have a squashing of a democratic government by a dictatorship, a very-- one of the most brutal and totalitarian of all dictatorships, certainly. And not only did-- not only did capitalism not prevent it, but I see no evidence that capitalism even provided any kind of a defense. It's not even that they lost the war, somehow. It was-- like the capitalists, the fact that it was a capitalist country seemed to play no role whatever in the transform-- the Hiterite take over.

So it's-- so I say, the idea that capitalism provides any kind of-- that in principle, it provides any kind of protection. Then we can go, the question, can capitalism be a threat to democracy? Well-- and Bob has certainly touched on that question-- essentially the problem may be that democracy-- when you have political power divorced from economic power-- this is going back way to that quotation Marx that Professor Cohen cited.

If capitalism-- the equality-- political power is in the hands of a majority, and it may well be that it will take steps which are anti-capitalist. And when it does, say, against the owners of capital-- against those who have profited by-- those who have most profited most by the capitalist regime. Of course, as Bob says, one thing we have in a capitalist regime is very considerable inequality

I gotta say one thing. I think what happens in every regime is considerable inequality. I'm not sure that capitalism is any particularly distinguished in this respect, but the socialist regimes have in fact considerable income inequality. But whatever it is, you have-- in other words, there is equality, and very considerable inequality in the capitalist-- in a capitalist regime.

And then, of course, you have a divergence between economic power. Economic power is translatable to political power. The United States, we're thinking of buying the power, but there are other ways, like buying military power instead of interfering in democrat-- and that's, of course, we have in Chile. 1973. We had it in Spain in 1936. Very much the same story. A left-wing government comes in with a big so-- not-- wasn't by any means purely socialist. As a matter of fact, it had socialist and communist elements in it.

Immediately there's a counter-revolution. In this case, it's because-- in both those cases because of the fact that there was a strong military power. Why that's-- why the military is kind of a third power, and that's-- why that's a separate power in some countries and not in others is something I don't-- is a fact, but I don't know why. I don't have any explanations for that.

So that's a case-- those are cases, at least, in which-- and of course, Latin America will exemplify that over and over again. Those are cases in which capital-- that which-- in fact, a capitalist interest. Sometimes it's even particular capitalist interest rather than a general capitalist interest. Can produce a subversion of democracy, or capitalism may actually be a danger to democracy.

To be fair about it, I think that almost any power structure in this-- say in a civil society, a non-government-- a non-political-- which differs strongly, which is powerful somehow, and which differs from the political majority can lead to similar situations. In the modern world, probably ethnic considerations have played some of the same role that I'm describing here to capitalism. But capitalism is one of the dangers in this-- in particular contexts.

So since-- it's not very clear as to why capitalism is related to democracy in any permissive way according to these historical accounts. And as-- on the other hand, there does seem to be an association. Of course, I-- our evidences-- I should be careful-- our evidence in some sense is dominated by one or perhaps two cases, namely the Soviet Union and China.

Eastern Europe I don't count, because Eastern Europe is, to a very large-- mainly on the simply the-- Soviet tanks. There's no great mystery as to why East Germany and Poland and Romania and so forth became a communist country-- Yugoslavia is a bit of an exception that way. They've got their-- its own indigenous things and that's a complicated story. In Czechoslovakia, there was, in fact, a strong communist movement, but not true of any other countries.

So Hungary last free election gave the communists 10% of the vote Now we could-- we have-- and the whole-- and even Czechoslovakia was quite-- the communists in Czechoslovakia we know very well moved-- as those in Hungary, too, for that matter-- moved against-- even a dissidence within the communist period could not-- was not tolerated as we know in 1953 and-- 1956 and 1968, or 1953 in Berlin, as a matter of fact.

The-- so I don't really count those as examples of capitalism-- having to do with capitalism or democracy. In the Soviet Union-- but of course, the interesting thing about the Soviet Union and China, since capitalism could hardly have been said to have been a well-developed phenomenon either of those countries-- it was-- I don't know-- there are capitalist elements, all right, but there was-- there was a lot of non-capitalist elements. So that's why I say there's some difficulty finding-- I mean, capitalism-- but I think one would agree that pre-World War I Russia was not a great example of a well-developed capitalist system. There were sectors of the country, and so China even less so.

So that the take-- the communist takeovers there were-- are not much evidence on the question of the relationship. Let's see. So in a sense, our identification of socialism with dictatorship and capitalism with democracy in a way fails, but of course, there are not many examples of the former, and they're rather special. Then on the latter, there are a lot, of course, as I've said over and over again, authoritarian capitalist states, nobody denies that. Not even the most laissez faire economist. Milton Friedman agrees to that statement.

So another point of view-- for whatever association there is is that really, there is a third variable here-- economic growth. Speaking or summarizing a lecture, there is of a theory sometimes called the Aristotle-Lipset hypothesis. I think there's some quote-- Aristotle, of course, interpreting-- Aristotle in modern terms is always at best a tricky business and contentious, because the circumstances were so different, but there are some ideas apparently, Aristotle and then Seymour Martin Lipset put forth some view many years ago that people taking cross-sections and doing statistical analysis claim to find this, that essentially economic growth leads to democracy.

And we have tended to view that economic growth is itself stimulate-- or capitalism is itself-- so you see a major enterprise in the development of economic-- a major cause of economic growth. So this suggests that whatever association-- now, by the way, I mentioned these as hypotheses are advanced and seriously studied. The way they say they approved I think would be nonsense, and of course, one thing is clear-- if you fit statistically the variance around the fitted lines, it's pretty-- it's very, very big.

For example, there was one big cross-section analysis designed-- due to Robert Barrow. And I-- whereas I'm a theorist and I look at the theory of the model. I looked at the-- he actually tabulated the residuals, and China was way off. The economic-- or the democracy in China was-- registered a very low level, well below what would have predicted by the economic growth of China.

So even if there's some vague statistical associations, like a lot of these other associations, like the alleged relationship between intelligence and income, which-- it's there. It's perfectly real. It's just not as big-- as nearly as big as people think. And the evidence-- statistical evidence there, unlike a country-- comparing countries is really dubious. In the case of the intelligence, I think that we really-- we have much better data, and the evidence is very striking.

Now we're not likely to get-- so the hypothesis we're discussing today, in a way, it's not likely to get a test because everybody says they're capitalists today. We got to-- I mean, we can discuss, as Bob and-- not surprised, those who know us will not be surprised that my political opinions are not very-- are hardly different from those of Bob. We sign a lot of statements together.

So I don't want to repeat his points, but of course, I think it's quite clear, and I won't-- that the-- from the point of view of economic growth, which is at least helpful in democracy-- I don't know that we know any more than that-- is that the capitalism itself doesn't work very well when it's not well-regulated and not proper-- when there isn't the checks and balances which can only supplied by a democracy, a democratic-- powerful democratic state with-- and access to free information by all citizens. Thank you.

[APPLAUSE]

SUZANNE BERGER: Well, our topic today is, is capitalism good for democracy? But as a political scientist, I guess I think the great surprise in human history is how good democracy has been for capitalism. And the great surprise has been that even in societies in which capitalism has generated enormous inequalities of property, wealth, wages, and opportunities, the majority does not vote to confiscate the riches of the super rich. The majority does not vote to flatten income inequalities through the tax system, let alone to overturn property rights or the market economy.

And what I'd like to talk about with you this afternoon is why capitalism and democracy have been compatible, and whether this compatibility can survive the globalization of capitalism. As we see waves of cross-border flows of capital, goods, and services transforming our economies, what's going to happen to the fit between capitalism and democracy?

Over the past 200 years, more and more countries have come to have both liberal democratic governments in which they choose leaders in competitive elections, and at the same time, free market economies with private property rights. These two systems have coexisted with remarkable stability despite the inequalities that capitalism generates.

No electorate anywhere that I know of has ever voted in free elections to overturn capitalism. There have been very strong anti-capitalist political movements of both left and right in Europe and in Asia and in the United States, indeed, but where political change has taken place through free and democratic elections, anti-capitalism has never won the day.

Now this result that democracy and capitalism can co-exist was not always taken for granted. I don't think you need to have been a Marxist or Marx to have had a great doubt about the potential compatibility of democracy and capitalism. In fact, it was the great anxiety of the Founders of the American republic that democratic politics might trample the rights of the propertied.

To take the formulation of one of the Founding Fathers, James Madison, he writes in the Federalist Papers, the great danger in a democracy is that citizens might organize, they might mobilize, they might form a faction to push their economic interests against property-holders. And here-- I'm quoting Madison now-- "Democracies have ever been spectacles of turbulence and contention. They have ever been found incompatible with personal security or the rights of property. In general, democracies have been as short in their lives as they have been violent in their deaths."

So I think the question we might start with is why these dire predictions about democratic government and an economic system based on individual property rights and on a free market economy have proved wrong, and I think there are basically two reasons. First, the constitutional engineering of Madison and the founders of other liberal democratic societies did, in fact, work to protect the rights of individuals and the functioning of a market economy. Institutions like the Bill of Rights, the Supreme Court, federalism, and much else did in fact build dikes that protect property and protect markets against democratic majorities.

And secondly, and this is the point I want to focus on this afternoon, democracy and capitalism have been compatible all these years, I think, because until recently, capitalism had been largely contained within national boundaries. Governments still stood on the frontiers of their national economies, and they regulated the flow of labor, capital goods, and services between their own societies and the international economy.

Within domestic societies, governments acted to cushion the most disruptive features of capitalism. Business cycles, unemployment, inflation, depression, environmental degradation. Now of course, some liberal democratic governments buffered and regulated capitalism more than others, and in some times more than others. But what strikes me is that in the United States, both Republicans and Democrats, like Social Democrats and Scandinavia, like the Tories in Britain, all acknowledge some measure of government's responsibility and government's capability for regulating capitalism to mitigate its negative effects.

To put it another way, the potential clash between democracy and capitalism was averted by constitutions that made our democracies something other than pure democracies, and by politics that made our capitalism something different than the textbook models of capitalism. Now today, I think globalization threatens to undermine this historic compromise.

And by globalization, I mean simply the emergence of a single world market and a single set of prices for goods, services, capital, and labor. And of course, there are many changes that are driving this forward, new technologies, the fall of the Berlin Wall, the worldwide liberalization of financial markets, the rise of big new consumer markets, the rise of big new producers outside the old developed world.

Globalization means that more of the population everywhere becomes more vulnerable to economic forces outside their own country. It means a widening of the inequalities that we've already seen grow in our own society. And at the same time, globalization apparently reduces government's capabilities for shielding citizens against markets.

In fact, far from shielding citizens against the harshest blows of globalization, today, governments' credibility with international investors seems to depend on governments' willingness to subject citizens to the full force of market pressures. So for example, in the Asian financial crisis, South Korea, Thailand, Hong Kong, they virtually competed in making commitments to impose the burdens of adjustment on their own citizens without regard to their relative ability or their relative willingness to absorb the pain.

Now I think the result in our own country and abroad has been the growing fear of globalization. The protesters in Seattle and Prague may look like marginal and violent individuals, but it's a fact that their slogans make a lot of sense to many ordinary mainstream citizens. It's a stunning fact to me that even after years of economic growth and prosperity in the United States, that surveys find that over 50% of people say that free trade is bad for the United States.

Now what this reflects is undoubtedly not economic sophistication, but it is a measure of the growing disease, the sense of a loss of control over the basic foundations of societal well-being. And I think many people fear that there's no one who can be held accountable for basic choices about society's use of resources and society's allocations of reward and risk.

When citizens ceased to believe that they together with others can shape their own future, then liberal democracies are in trouble. And I think that's the fundamental challenge we face today. It's not only an issue of how to protect weak groups in our society, even though that is very important, but I think that even more difficult question in a world with an international economy but no international government is how to bring globalization into the domain of human choice and human decision? How to bring globalization into the domain of liberal democratic process? How can we make the globalization, how can we make capitalism in a global economy compatible with liberal democracy?

Now I think one solution to this dilemma could be to provide individuals with resources that would allow each person to protect himself in the new economy, and that way, we would reduce the burden of expectations on what governments need to do. What kind of resources would we want people to have? Well, the kind of education and training that would allow a person to reinvent herself in her job over the course of a lifetime.

We'd want people to be able to diversify their assets so as to spread family risks, so that for example, an average family's life savings and wealth would not be so heavily concentrated in the ownership of a house, a home, whose value depends on many factors outside an individual or the family's control. And I think such policies would be major gains in our society, and they're policies on which most of us can agree.

But even if we were to imagine the best of education systems, even if we were to add a kind of minimum safety net for those people who are not intelligent enough or not agile enough to take advantage of these opportunities, I think there still remains a big question, and the big question is, are citizens in a democracy willing to accept that the basic social distributions of risk, resources, and uncertainties move so far beyond their reach, move so far beyond democratic accountability?

And on this question, diagnoses and prescriptions obviously diverge widely. Some people think there's nothing that government can do with the national or international level to regulate globalization. Thomas Friedman, who writes on the op-ed page of The New York Times, put it in a very striking way. He describes a globalized economy as a race of Formula 1 cars. And he says, if you're worried about drivers smashing into the walls, what you can do is give them better driving lessons and improve the skills of the ambulance technicians to clean up after the wrecks.

But, says Friedman, you can't put bales of straw all around the walls of the racetrack to buffer the accidents, or else you're going to ruin the race. If you don't want to be a Formula 1 driver, then walk or bicycle, but watch out-- you're going to be run over by a Formula 1 driver.

Now as a professor at MIT for many years, I've devoted all my professional life to educating Formula 1 drivers.

[LAUGHTER]

I know how much they contribute to the giant leaps forward in science, technology, and human organization that are transforming human well-being around the world. And yet, I believe-- and I know from discussions with my students-- that most of them believe that we want to live in societies in which the basic rules about the game, the basic rules about the race are decided not just by and for the fastest drivers, but by all that people.