Are the rich compatible with democracy?

The rich stand in the way of democracy and often intentionally thwart it

Great wealth and democracy are incompatible for many reasons. To begin with, the rich use their money to buy political influence and thereby subvert the democratic process. As democracy weakens, the rule of law is increasingly flouted, and the income gap between rich and poor widens further. George Garrett, writer, official poet laureate of the state of Virginia, and University of Virginia professor, described the process:

“White collar and corporate crime . . . and the gap between rich and poor . . . [are] seriously compromising the plausibility of a democratic government. Our votes do not count very much, yours and mine.”

George Garrett¹⁸

Your vote

1. Once every two or four years
2. One of millions
3. No follow-up meeting

A large donation

1. Any day of the year
2. A phone call that gets returned
3. A seat at the table when the bill is drafted

Both are legal. The claim on this side is that the second one is worth a great deal more than the first, and that this is what hollows out the vote.

We need complete democracy

The problem in a nutshell is that one cannot have political democracy without economic democracy. The two go hand in hand, together represent complete democracy, and complete democracy is exactly what we need. As economist Paul McCulley has said, “Democracy starts with the socialist notion of one person, one vote. Yes, socialist notion!”¹⁹

Yet capitalism proceeds on the contrary notion of one dollar (or euro or yen), one vote, which means that rich people have a vastly disproportionate say. One person, one vote and one dollar, one vote are obviously incompatible notions. Incompatibility breeds tension, and the tension can only be relieved by abandoning democracy or by making wealth more equal, so that people have a more equivalent number of dollars.

One person, one vote

1. Everybody gets exactly one
2. A billionaire and a bus driver are equal
3. This is the political system

One dollar, one vote

1. You get as many as you have dollars
2. Some people hold millions of votes
3. This is the economic system

Both are true at once, in the same country, about the same people. The argument on this side is that they cannot both keep running.

On close inspection, free-market arrangements are more democratic than they at first appear

For example, take the assertion that the one dollar, one vote free-market system gives the rich a disproportionate voice as consumers. Is this actually true? In the first place, when the rich save and invest, they are not consuming, so they bring fewer dollars into the consumer market than might be supposed. In the second place, the non-rich vastly outnumber the rich. Consequently, the dollars of non-rich consumers outnumber the dollars of rich consumers. Under these circumstances, it is the non-rich “voters” who actually control the direction of production.

Once we understand that non-rich, average consumers actually control the direction of production, we will then have to reconsider the respective roles of employers and employees. If employees, acting as consumers, are in fact the real bosses, then employers must be the real employees.

This idea, that workers in a fully competitive market economy are really working for themselves, is not a new one. British economist Edwin Cannan observed in 1928 that “[Some] try to convince the wage-earners that they are working not for the public and not for the consumers of the things or services which they produce, but for the capitalist employer, [but this is just] . . . sour propaganda.”²⁰

Cannan’s thesis may be disputed at a number of levels. It certainly looks as if the producer is the boss—after all, whose signature is on the paycheck? Beatrice Potter, who along with her husband Sidney Webb led early-twentieth-century British socialism, wrote in her memoirs that “In the business of my father everybody had to obey the orders issued by my father, the boss. He alone had to give orders, but to him nobody gave any orders.”²¹

In response, economist Ludwig von Mises pointed out that “This is a very short-sighted view. Orders were given to her father by the consumers, by the buyers. Unfortunately [Potter] could not see these orders. . . .”²² Von Mises continued:

“Descriptive terms which people use are often quite misleading. In talking about modern captains of industry and leaders of big business, for instance, they call a man a “chocolate king” or a “cotton king” or an “automobile king.” . . . But the difference is in fact very great, for a chocolate king does not rule at all, he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.”

Ludwig von Mises²³

The notion of consumer sovereignty has been disputed on other grounds. One point of view holds that most consumers are too ignorant, even about their own needs, too easily led and manipulated by propaganda and advertising, to be described as bosses. Is it not an outright deception to refer to consumers as bosses when they are being dragged onto a treadmill of relentless work and endless debts to satisfy appetites that are often unhealthy and have been viciously inflamed to fatten the coffers of the rich? Ludwig von Mises again offered a rejoinder: “The moralists’ and sermonizers’ critique . . . misses the point. It is not the fault of the entrepreneurs that the consumers—the people . . . —prefer liquor to Bibles and detective stories to serious books. . . . The entrepreneur does not make greater profits in selling ‘bad’ things than in selling ‘good’ things. His profits are the greater the better he . . . provid[es] the consumers with those things they ask for most intensely.”²⁴

The rich

Everyone else

Two things at once: the rich are few, and much of what they have is saved rather than spent. Both push the same way. An illustration of the claim rather than a measurement.

Rich people should not be described as “bosses,” but rather as “trustees”

If we accept the argument that average consumers direct the economy, that they are the ultimate bosses, we are then left with the question of how best to define the role of the nominal bosses, the rich business owners and company chief executives. Von Mises has admonished us that we should not call them kings, barons, titans, and such like, but then what should we call them? Surely they cannot really be described as employees. Economist Abba Lerner suggests the term “social agents”:

“People who earn millions of dollars . . . are, in fact, acting as agents for society. It is as if the wealth belonged to society at large, and they were merely looking after it on behalf of the rest of us.”

Abba Lerner²⁵

Wilhelm Röpke provided the terms “public servant” and “trustee”: “[Business owners] really fulfill the function of social officials, who are selected on the strict principle of performance, who are responsible for the good management of the means of production. . . . Looked at in this light, people like Henry Ford are really public servants who administer our productive resources after the manner of trustees and who, if their trusteeship is bad, undergo the immediate and heavy punishment of financial loss.”²⁷

Terms such as social agent, public servant, and trustee may seem fanciful when applied to the rich. The rich themselves would surely be puzzled by such claims. Yet von Mises argued strongly that Lerner and Röpke are right: “In the market society the proprietors of capital and land . . . must serve the consumers in order to have any advantage from what is their own.”²⁸

Chocolate kingVon Mises: a king rules. This one serves.

Social agentLerner

Public servantRöpke

TrusteeRöpke

The word you choose decides the argument before it starts, which is why three economists spent so long trying to find the right one.

The acid test is that there must be downward as well as upward mobility for the rich

As Röpke, von Mises, and Hazlitt have emphasized, the consumer must be able to give, but also to take away. If this condition does not exist, then rich people hold their wealth illegitimately, and do not deserve the support of democrats.

The evidence of downward mobility for companies clearly exists, but what about for rich people? Various IRS and US Government Treasury reports support this idea that many people fall from very high-income levels to lower ones. Forbes magazine also reported that over a twenty-two-year period since it began compiling a list of the 400 richest Americans (assets, not income), only 50 individuals or 13% have managed to stay on the list for the full period.²⁹

Four hundred of the richest Americans. Fifty of them, thirteen per cent, were still on the list at the end. The rest came off it.

A free-market economy is run by average consumers who can hire and fire the rich at will. But this is not the end of the story

The free-market democratic system of one dollar, one vote is actually superior to the political democratic system of one person, one vote. Indeed, it is, in the final analysis, more democratic.

This argument runs as follows. In a consumer democracy, if I vote for product X, I get product X. If you vote for product Y, you get product Y. This is in sharp contrast to a political democracy, where only one candidate can win, and no one vote counts for much in the final result.

There is even a question whether political elections actually reflect the will of the people. Let us assume a hypothetical election in which 60% of the eligible voters vote, eligible voters represent half the population of the country, state, or city, and the successful candidate carries 60% of the vote. In that case, only 18% of the people have chosen the successful candidate (even fewer presumably agree with all the candidate’s positions), yet this decision must be accepted by all under force of law.

By contrast, a free-market economic democracy counts votes proportionally, not winner-take-all. We get exactly as much of candidate (product) A as the voters want, exactly as much of candidate (product) B as the voters want, and so forth, with both majority and minority will fully expressed, and no one overruled.

1. Everybody100%
2. Eligible to vote50%
3. Actually voted30%
4. Chose the winner18%

And everybody is bound by the result. Buy a product and you get the product; vote for a candidate and you may well get the other one.