Capitalism and democracy – an introduction

Democracy in its original sense of “rule by the people or government in accordance with the will of the bulk of the people” was not a popular notion until the advent of the First World War. Prior to this, democracy was rejected by the ruling elite as a bad thing that gave too much power to the common people, making it “fatal to individual freedom and to all the graces of civilized living.”

Canadian economist C. B. Macpherson, in his book The Real World of Democracy, illustrates how our present-day liberal democracies began as liberal societies that later adopted democracy. The predemocratic liberal society of the Western world operated with competition and freedom of the market. Both government and society as a whole were organized on the basis of freedom of choice, freedom of religion, freedom of employment. People were free to offer their services and labor on the open market, free to spend their earnings and to invest based on current prices – and in doing so they determined what would be produced and at what price. In this way the resources of the society, its “capital,” were allocated as efficiently and effectively as possible. This was the basis of Adam Smith’s “invisible hand,” which kept the market free from interference and allowed for the most efficient distribution of resources throughout the economy.