By Strict Empirical Tests, Democratic Capitalism is the Best Hope for Economic Growth with Human Rights
History, as we have all learned in school, is about “important events.” Upon closer scrutiny, these events, most of them bloody and senseless, were undertaken by very few individuals. Even fewer individuals wrote about these events, interpreted them, preserved the record for posterity. Most people in the world were not deemed “important.” Most people remained silent. The drama of our time, in its most human aspects, is that large numbers of people, previously relegated to the status of unimportance, have become active participants in the historical process, have found a voice, and have come to insist that their needs and aspirations must be taken into account by those who instigate “important events.” This is the inner meaning of what is commonly called “development.” It is full of human significance and it poses a breathtaking moral challenge. We must not forget it even as we think about the frequently prosaic and complex issues of economic analysis.
In the 1950s the term “development” (desarrollo) enjoyed almost universal approbation. It signified the hope, and at the time the empirical expectation, that modern economic growth would inexorably and with reasonable swiftness lift from poverty to affluence those countries which (also about the same time) came to be called the Third World. The high expectations of this period were disappointed in many places, very much so in Latin America. Partly because of this, new and generally Marxist-influenced ways of thinking about the Third World came into prominence in the 1960s and 1970s, and the very term “development” was sharply criticized and the earlier way of thinking about it disparaged as desarrolismo (or “growthmanship” in English).
This is not the place to go into the political and intellectual history of these changes. Suffice it to say that today, again for a variety of reasons, this post-desarrolismo mode of thinking (as, for example, embodied in so-called dependencia theory) has also disappointed many who once gave credence to it and has been subjected to sharp criticisms in its turn. It seems to me that a more balanced view is now possible. This is why, in the title of my remarks here, the word “development” is qualified by the adjective “human,” signifying that economic growth by itself is meaningless unless its results enhance human well-being, human dignity, and human rights.
In wide circles, Catholic and non-Catholic, in Latin America and elsewhere, the phrase “the preferential option for the poor” has gained credence as a criterion for the human worth of socio-economic change. Let me say at the outset that this phrase, which of course has a particular connection with CELAM (the Latin American bishops’ conference) ever since the final document of the 1979 Puebla conference, is one that I myself find morally persuasive. Both as a Christian and as a human being with moral concerns, I find it altogether plausible that any society and changes in society should be judged by the effect on the condition of the poor. I mean the poor in the sense of those who are economically deprived — but more generally all those who are at the bottom or on the margins of society because of exploitation, oppression, and humiliation and who are a standing reproach to conscience. And I further agree with those who like to speak about “the preferential option for the poor” that it is not enough to respond to this reproach by acts of private, personal caritas (though, needless to say, no Christian should disparage such acts). It is necessary to look at the structures — economic, social, political — by which poverty is either perpetuated or diminished. As soon as one uses the word “structures,” however, one moves from the realm of moral principles to that of empirical analysis.
I can claim no authority whatever in my moral positions. I can assert, not authority, but a certain competence when it comes to the structural realities of modern societies. I have spent the longer part of my professional career as a social scientist studying problems of modernization and development, and for most of what follows I will speak in my capacity as social scientist. For this very reason it is important that I make my moral presuppositions very clear from the outset. They all point to the simple proposition that socio-economic transformations are morally empty, or worse, unless they enhance human values and the concrete lives of human beings. This proposition, in turn, can be translated into a set of empirically testable criteria. I would suggest three. We may speak of human development, as against sheer economic growth or modernization: (1) if this process leads to sustained and self-generated economic growth; (2) if it succeeds to move large numbers of people from misery to a decent standard of material life; and (3) if these achievements are not bought at the cost of gross violations of human rights. Let me emphasize: The motive for suggesting these three criteria is moral; but it is a matter of empirical assessment whether the criteria are met, or fail to be met, by any specific structures.
Economic growth.: Here is where the early development theorists were quite right. Without economic growth there is no way out of poverty. Without economic growth, there can only be enduring and deepening poverty, more or less equitably shared. Put differently it is impossible to redistribute wealth without producing wealth, and there is no country on earth where even the total expropriation of the rich would greatly or even marginally improve the condition of the poor.
Moving people from misery. Here is where the critics of desarrolismo were correct. There are situations in which the benefits of economic growth are enjoyed by very few people, while the majority continues to live in humanly degrading circumstances. It is odious to call such situations “development.”
Human rights. It is just as odious to designate as “development,” or otherwise applaud, situations in which human beings do indeed enjoy a better material standard of living, but in which they are terrorized, deprived of elementary liberties, enslaved, or even killed in large numbers. Man requires bread, but he does not live by bread alone.
So much for my own moral presuppositions. Allow me now to speak empirically about the structures, specifically the economic structures, that may help or hinder such human development.
In pre-modern subsistence or archaic economies there were in all likelihood many different alternatives. In the modern world, I believe, the realistic alternatives are relatively few. In the end, the decisive choice is between the two competing systems of capitalism and socialism. It is very important that these terms be clearly defined. By capitalism I mean a system in which market forces and the private ownership of the means of production determine the major economic processes. By socialism I mean a system in which at least the “commanding heights of the economy” (a useful Marxist term) are publicly owned.
Now, it is quite clear that there is no empirically consistent economy that represents either system in a pure form. Political forces are very much involved in the economies of even the most capitalist countries such as the United States, and even the Soviet Union allows, if only grudgingly, the operation of some market forces and some private enterprise. Thus capitalism and socialism present themselves empirically on a continuum, the extreme poles of which do not exist. All the same, keeping this in mind, it is quite appropriate to describe the United States as capitalist and the Soviet Union as socialist, as one can say that Switzerland is more capitalist than Austria, or that Rumania is more socialist than Hungary. Possibly doubtful cases in the middle, such as perhaps Yugoslavia, are rather few and need not preoccupy us at the moment.
There are two points of considerable importance before I proceed. First, there has been a lot of talk about possible “third ways” between capitalism and socialism; indeed such notions were particularly present at the inception of the idea of a Third World and they have been common in versions of “Third Worldism” (tercermundismo) ever since. I believe that this is a very unhelpful way of thinking. To be sure, both capitalist and socialist models can be modified in different ways; they are not monolithic entities, and one can even incorporate features of one model in the other (such as in the experiments with so-called “market socialism” and in strongly statist versions of capitalism). But, at the end of the day, there is a hard choice to be made as to whether an economy is basically determined by private, market-oriented enterprise or by political planning and command processes. The talk about “third ways” is typically an attempt to avoid these hard choices.
Second, in the discussion of these matters there is often a confusion between socialism and the “social democratic” welfare state. Once again, Marxist terminology is useful here: Capitalism and socialism are modes of production. The welfare state, as developed in the European social democracies and elsewhere, is a mechanism of redistribution. Thus it makes little sense to present, say, Sweden as a case of socialism; it is not.
The question of the scope and character of the modern welfare state is a very important one, and it typically divides parties of the “left” and the “right” in Western-style democracies. But it is a different question from that of capitalism versus socialism. While the various projects for a “third way” between capitalism and socialism are, in my opinion, mainly utopian, there is another quite different “in-between” possibility that does have empirical availability. This consists of those cases in which a modern economic system, be it capitalist or socialist, is superficially super-imposed on pre-modern structures of a feudal, patrimonial, or mercantilist character. As I will argue later, that is an especially important consideration with regard to Latin America.
Given these clarifications, what, then, is the empirical record of different economic structures and systems in the light of the three above-suggested criteria?
The power of modern technology is such that, once it is introduced into an economy there will be growth almost regardless of the political or social context. The question, though, that must be asked here is what kind of economic system is most likely to push a society from poverty into a condition of affluence. In the contemporary world there are two regions in which this has occurred. One is Eastern Asia, the other is in the oil countries of the Arabian Peninsula. It seems to me that little is to be learned, at least for our purposes here, from the latter case. It is clear that a place will change dramatically if huge quantities of gold are rained down on a very small population, and I don’t think that one can usefully speak of an Arabian model of development.
Eastern Asia is an altogether different matter. Here we have the first non-Western societies, beginning with Japan and now extending in a huge crescent of prosperity down into Southeast Asia, which have successfully and rapidly moved from underdevelopment into the status of industrialized countries. There is an East Asian development model and, I believe, it holds very important lessons. The major lessons can be stated quite simply: Eastern Asia has achieved its economic miracle through the dynamism of capitalist systems, and this economic miracle rather decisively falsifies the various theories (including dependencia theory) that have denied such a possibility.
No other economic system in history has matched the productive power of capitalism. There is no particular mystery as to why this is so. The superior productive power of capitalism is caused by the market, with its infinitely nuanced mechanism of price signals, and the energy and imagination of private entrepreneurship. When the forces of the market and enterprise are linked with modern technology a dynamism of unprecedented and unmatched potential is released. Socialist economies in the contemporary world have, of course, also made good use of technology, but the suppression of the market and of private enterprise have inevitably made these economies more sluggish and inefficient. Now there are a good many theorists of socialism, even Marxist theorists, who are quite willing to admit this. Their argument in favor of socialism is not that it is more productive or efficient economically, but that it provides greater equality of justice. What does the empirical record say about that?
Equality is a shadowy notion. The closest one can come to assess it empirically is to look at the distribution of wealth and income. Comparison between capitalist and socialist societies in terms of wealth is very difficult, since, in the absence of private owner-ship, wealth translates itself into control over resources, and that is very hard to measure. Income distribution is somewhat easier to assess (at least they surprised me when I first came upon them). As the South American economist Simon Kuznets has shown to the satisfaction of not all but most of his colleagues, income distribution under modern conditions falls into a curve. As modern economic growth takes off, there is an increase in inequality; after a period, inequality decreases, after which a fairly steady level is maintained. In mature industrial societies income distribution appears to change rather little, even in countries where the government tries to interfere by various redistribution policies (as in the North European welfare states).
Most importantly, if one compares capitalist and socialist societies at comparable stages of modern economic growth, the income distribution appears to be very familiar (although absolute incomes are higher in the capitalist societies at most levels of the labor force). Very probably, this “tyranny of the Kuznets curve” can be explained by the interaction of two factors, one demographic (as modernization proceeds, birth rates fall) and the other rooted in the demands of the labor market (as modernization proceeds, more skilled labor is in demand). Be this as it may, there is no reason to believe that socialism brings about greater equality; and if one wants to blame anything for the inequalities now existing, one should blame not capitalism but modernity. As to the crass inequality existing in so many Third World societies, their root cause is not capitalism but an immature capitalism (or, in many cases, a capitalist sector superimposed on what is, in effect, a slightly modernized patrimonial system).
Here too the capitalist societies of Eastern Asia are very instructive. Some of them (most notably Taiwan) have very egalitarian income distributions as compared with cross-national scales. But the second criterion I have suggested is not concerned with the mirage of equality, but rather with the actual standard of living enjoyed by people, and especially by the poor. Of course there are poor people in these countries; poverty, after all, is a relative concept, and, short of an empirically unavailable state of perfect equality, some people will be poorer than others. What the capitalist countries of Eastern Asia have achieved, however, is the eradication within one generation of all the dehumanizing traits we know as Third World misery. This can be measured by all the standard indicators: income per capita, life expectancy, infant mortality, nutritional levels, access to decent housing and household machinery, prevalence of epidemic diseases, and (last not least) literacy and levels of education. Japan, of course, is today a fully industrialized modern society, but it is important to recall that it accomplished an economic miracle twice—after World War II, in the wake of utter defeat and devastation (and, dependencia theorists please note, while under foreign occupation) but, more important, during the incredible period from 1868 to 1912 when the Meiji regime in one generation transformed a poor, backward and feudal country into a prosperous modern power.
If the so-called Four Little Dragons — South Korea, Taiwan, Hong Kong, and Singapore — achieved their economic miracles in one generation, or even less, beginning in the 1950s. Today this capitalist dynamism is quite rapidly pushing into Southeast Asia beyond Singapore, notably in Malaysia, Indonesia, and Thailand. The sharp contrast between the capitalist and socialist countries of that region, not least in the condition of the poor, is a very instructive one indeed.
My colleague Gustav Papanek, an economist at Boston University, has spent many years studying the economies of developing countries. He has concluded (against his own inclinations, I might add, since his sympathies are broadly on the “left”) that policies favoring economic growth tend to improve the condition of the poor more effectively than policies favoring redistribution. It should be stressed that this is not a prescription for an untrammeled laissez-faire capitalism; there are, many ways, even in an underdeveloped society, in which government can and should intervene on behalf of the poor — most promisingly in expenditures for health and education. But the most effective force for improving the condition of the poor, in most places, appears to be the dynamism of modern capitalist growth.
One additional observation: Discussion of capitalist development in Third World countries has heavily focused on multinational corporations. This is quite proper to the extent that the multinationals are indeed important economic actors. If one is concerned for the condition of the poor, however, it is more important to focus on the prospects for small-scale enterprise. It is in this sector, rather than in that of the large companies, that one must look for solutions to the massive problems of unemployment and stunted social mobility. An irony here is that many regimes, which give lip-service to capitalism and free enterprise, do everything imaginable to frustrate the economic success, or even the very possibility, of small-scale business activity.
Let me try to sum up what I think are the empirical lessons to be learned in all of this. If one is concerned with the condition of the poor, it is plausible to opt for capitalist models of development. There are no iron laws of development; there are greater or lesser probabilities. Eastern Asia provides the most important case of successful capitalist development in this century. Not for one moment am I suggesting that every other developing country should mechanically try to copy the East Asian model; this is not plausible for many reasons — economic, political and, in all likelihood, cultural. But a useful procedure, let me suggest, is to look at different parts of the world and ask what factors might hinder an Asian-type development. It seems to me that such a procedure would bear fruit in the Latin American case. One thing, I believe, is crystal-clear: The notion that a “preferential option for the poor” leads to the choice for socialism has no foundation in empirical evidence. It is an act of faith, not so much meta-empirical (all acts of faith are that) but counter-empirical. For the moment I will leave it to the theologians and philosophers to speculate why someone may want to perform such an act of faith.
I now come to my third criterion: How do the different economic systems come out empirically in terms of human rights? It is necessary here to introduce an intermediate issue, namely, that of democracy. I don’t see on what basis one would argue that this or that economic system relates to human rights in some direct and inevitable way; rather the relation between economic systems and human rights must be assessed via the question of democracy. Why? For a simple reason: In the modern world there is a very high correlation between democratic forms of government and respect for human rights. Again, I believe that there is no mystery about this. Democracy (defined not as an abstract ideal but empirically, in terms of free elections and institutionalized liberties) is essentially a systematic limitation on the powers of government. It has always been that, even in ancient Greece. But this becomes especially important under modern conditions, when the technological resources available to government are staggering in their capacity for overwhelming control, and when for this reason the temptation to government to exercise this control in a tyrannical fashion is very great indeed. Not all violations of human rights in the contemporary world are committed by governments; the most terrible ones are. Democracy, by limiting the arbitrary power of government, is in itself one of the strongest guarantors of human rights.
In theory, of course, both capitalist and socialist economies could be presided over by democratic regimes. Empirically, quite a different picture emerges. The empirical evidence can be summed up very easily indeed. Every existing democracy in the world is capitalist. There are many capitalist non-democratic countries. There is not a single case of a socialist democracy.
As our Marxist friends like to say, “it is no accident” that this is so. It is not, as some advocates of capitalism argue, because the market is ipso facto democratizing. The empirical evidence, I believe, conclusively falsifies this proposition. Rather, the structures of a socialist economy make it very unlikely that democratic government can survive. Here the orthodox Marxists are quite right: Socialism can only be imposed by force. But one must add: Socialism can only be maintained by force. The reason is that the establishment of socialism entails a gigantic act of expropriation, which cannot occur voluntarily; but this act of expropriation must be reiterated, given the human propensity to seek advantage. To paraphrase Trotsky, socialism is permanent expropriation. Therefore, socialism requires dictatorship —not, of course, of the proletariat, which does not exist in the shape envisaged by Marxist theory — but dictatorship by whatever elite has placed itself in charge of the socialist project (typically, the party as the “vanguard”). Modern government, because of modern technology, has immense capabilities for tyranny; when in addition modern government commands the economy (which command is the essence of socialism) the likelihood of tyranny becomes vastly greater. No empirical social scientist can say that a democratic socialism is impossible. He can say that it has never happened, for very convincing reasons, and that it is unlikely to happen in the future.
By contrast, capitalism opens up room for democracy. It definitely does not automatically bring democracy with it; it allows democracy. To put this more elegantly, one may say that capitalism is the necessary but not sufficient condition for democracy. Conversely, it is absolutely not true that capitalist development requires dictatorship at any of its stages.
Political scientists have been concerned with determining all the conditions that make for or impede the establishment of democracy as a form of government. This discussion cannot be pursued here. But I would stress that there is a kind of syllogism that emerges from an empirical assessment of these matters. If one is concerned for human rights, one will opt for democracy. And if one is concerned for democracy, one will have to take seriously the economic structures most likely to allow democracy; these are structures of capitalism.
It is for these reasons that Michael Novak, in The Spirit of Democratic Capitalism, and others have insisted on the linkage of these two entities, one economic and one political, and have made constant use of the phrase “democratic capitalism.” In other words, they have not been advocating capitalism tout court, but, precisely, democratic capitalism. The empirical evidence, as I understand it, is on their side. (I may add that I have argued this more fully in my recent book, The Capitalist Revolution.)
Exigencies of time have compelled me to express exceedingly complicated matters into a very brief presentation. I can only make a few concluding observations, some on the Latin American situation and some on the role of the Catholic Church.
One of the most cheering developments of recent years has been the wave of democratization that has swept across Latin America. I fervently hope that this will not be reversed, but that stable and enduring democratic regimes will prevail throughout this wonderful continent. Obviously, this hope must be linked to another hope, that of massive and enduring economic progress. At the moment attention is focused on the debt crisis (a problem, I’m afraid, on which I have no great insights). But even if this crisis is successfully put behind, the economic problems of the region will remain formidable.
I have been persuaded by Claudio Veliz, Hernando de Soto, and others that it is dangerously distortive to perceive the existing economic structures of Latin America as “capitalism.” They do, of course, have capitalist features, and most of the region is closely linked to the international capitalist system. But the economic arrangements in Latin America are full of features that long antedate modern capitalism, features rooted in patrimonialism and mercantilism. I remain convinced that the indicated economic course for Latin America (the details of which I must leave to others, especially to economists) is not the “overthrow of capitalism,” let alone the “building of socialism,” but rather the establishment of a viable capitalism structurally linked to democratic forms of government. If I may, I will quote here, but with an opposite intent, what Bishop Mendez Arceo said when he returned to Mexico from Allende’s Chile: No hay otra salidal!
Another very cheering development in recent decades has been the deepening commitment to democracy by leading Catholic thinkers. It is hardly thinkable any more that the Church would legitimate dictatorial regimes of the “right” in the manner in which it did not so long ago, and it seems happily unwilling to so legitimate dictatorships of the “left” either. I trust that I do not offend if I observe that Catholic thought (and indeed Christian thought in general) has been much less sophisticated in economic matters. The paradigms through which it approaches economics have tended to be static, concerned with “distributive justice” rather than with the productivity that makes distribution possible in the first place, strangely pre-modern. Christian thought has tended to view capitalism in terms of materialism and greed. This constitutes a great distortion, since, it seems to me, these vices are to found throughout history and under any economic system.
I will put it more strongly: Christian thought has yet to discover capitalism. I would suggest, not least because of a “preferential option for the poor,” that this is a very important item for the ecumenical Christian agenda.