Democratic capitalism facts for kids

Democratic capitalism, also known as market democracy, is a way a country can organize its political and economic system. It mixes free market ideas, where businesses compete freely, with policies that help people and share resources fairly. These policies are usually put in place by democratic governments, meaning the people have a say.

This system became very popular in the 20th century, especially in Europe and the Western world after World War II. Countries found that capitalism and democracy could work together, often by creating modern welfare states. A welfare state is when the government provides services like healthcare, education, and support for those in need. Democratic capitalism often involves expanding these welfare programs, strengthening the rights of workers to collective bargaining (negotiating together), and making sure businesses compete fairly through competition laws. All of this happens within a capitalist economy where people can own private property.

Catholic social teaching also supports a version of democratic capitalism. It focuses on community and making sure everyone's dignity is respected.

What is Democratic Capitalism?

Democratic capitalism is a political and economic system. It decides how resources are shared in two ways: through how productive people are (like in a free market) and through what society needs. These decisions are made by democratic governments.

This system includes elections, freedom, and the rule of law. These are all things we usually connect with democracy. It also keeps a free-market economic system, which means there's a strong focus on private businesses.

Professor Elias G. Carayannis and Economics Professor Arisitidis Kaloudis say democratic capitalism is an economic system. It combines strong competition with sustainable entrepreneurship. The goal is to encourage innovation and create chances for everyone to succeed financially.

Edward Younkins, a professor at Wheeling University, described democratic capitalism as a "dynamic mix of economic, political, moral-cultural, ideological, and institutional forces." He said it works to make society as well-off as possible within a free market. Younkins also noted that the individual freedom in democratic capitalism helps create voluntary groups, like worker unions.

Writer Michael Novak saw democratic capitalism as a blend of three things: a free-market economy, a limited democratic government, and a moral-cultural system that values personal freedom. Novak believed that capitalism is needed for democracy, but it's not enough on its own. He also thought that a society's religious beliefs greatly influence how much democratic capitalism thrives there.

How Democratic Capitalism Developed

Early to Mid-20th Century

Many things in history helped democratic capitalism grow. These included fast economic growth after World War I, the Great Depression (a huge economic downturn), and the effects of World War II. People also started to question pure free-market capitalism more. The idea of social justice (fairness for everyone) became more important in political talks. This led to countries adopting democratic capitalist policies.

At the Bretton Woods Conference in 1944, leaders from the United States, the United Kingdom, and 42 other countries agreed to open trade. But they also wanted each country to be able to respond to its own citizens' economic and social needs. They asked for international rules that would let governments manage their economies. This was to help achieve full employment and economic growth. The General Agreement on Tariffs and Trade (GATT) supported free trade. However, it also let national governments have the final say on trade policy. These changes showed how democratic needs were being included in capitalist economic plans.

Democratic capitalism was first widely used after World War II. This was mainly in North America and Western Europe. After the war's severe economic impact, working people in the West were more open to capitalist markets. But they wanted this combined with political democracy. This combination offered them social security and better living standards. In the decades after the war, democratic capitalist policies led to less economic inequality. This happened as welfare states grew, and financial and labor markets became more regulated. Worker unions also gained more political power. Political scientist Wolfgang Merkel said that democracy and capitalism worked together better then than at any other time.

Leaders in Europe and Asia adopted democratic capitalist policies. They wanted to meet the social needs of their voters and respond to the challenge of communism. The policies they put in place helped provide medical care, better public housing, care for the elderly, and more accessible education. Governments also made it a priority to guarantee full employment and support private research and innovation. These policies were based on a new idea: free markets needed some government help to work well, provide structure, and fix social problems they caused. Governments around the world regulated markets to make them fairer and more effective. Leaders in Britain, France, Italy, Germany, Scandinavia, and Japan changed how they saw the government's role. They wanted to stabilize the business cycle (ups and downs of the economy). They focused on supporting economic growth, promoting innovation, and improving living standards. This led to more educational opportunities and public insurance for basic health and elderly benefits.

The United States

As automated production grew in the United States, there was more demand for semi-skilled workers. Along with more secondary education, this led to a large working class. The strong economic growth and better income equality that followed brought more social peace and universal suffrage (everyone being able to vote). Capitalism was seen as a way to create wealth that kept political freedom. A democratic government made sure political systems were accountable and that workers were educated and had their basic rights met.

Europe

After the war, free market economic systems were set up in France and Germany. These systems included political democracy and welfare states. This happened under the leadership of the Popular Republican Movement in France and the Christian Democratic Union in Germany.

Late 20th Century

After the oil shocks of the 1970s and a slowdown in productivity in the United States in the 1980s, politicians and voters still strongly supported democratic capitalist policies and free markets. Globalisation (countries becoming more connected) and free trade were promoted to boost economic growth. This led to agreements like the North American Free Trade Agreement (NAFTA) and the creation of the European Union. Rules for labor markets and competition were made less strict in free-market economies, especially in Anglo-America (like the US and UK).

Fast technological changes and globalization brought big international economic shifts. Governments used publicly funded democratic capitalist policies to help people negatively affected by these changes. These policies, which started during the Cold War, included unemployment benefits, universal healthcare (or partially universal), and pensions for the elderly. After the 1970s, the number of public sector jobs grew. Aging populations in Europe, Japan, and North America led to large increases in public spending on pensions and healthcare. In the 1980s, Organisation for Economic Co-operation and Development countries started lowering corporate taxes. However, personal income taxes and public spending on social security programs generally stayed the same.

Big innovations in production technology throughout the 20th century brought widespread economic benefits to many capitalist economies. These benefits helped democracy and free markets work together. They also led to voters widely accepting democratic capitalist policies.

From the late 20th century, the ideas of democratic capitalism spread beyond North America and Western Europe.

The United States

When Ronald Reagan became president in 1981, he wanted the government to have a smaller role in the economy. But he also responded to voters who were unsure about liberal capitalism by keeping public sector spending strong. Many voters doubted if free market capitalism could always provide peace, security, and opportunity. They wanted better living standards, care for the elderly, and educational chances for young people. The Reagan administration kept government spending on Social Security and Medicare stable as a percentage of gross domestic product (GDP). Total government spending as a percentage of GDP also stayed stable under the Reagan administration.

Europe

From the mid-1980s, European leaders started to support neoliberal ideas. These were similar to those linked with Reaganomics and Thatcherism. They were based on the idea that economic and social policies are connected. In this context, European competition law developed. It was a way to control the excesses of capitalism while making the European Union's economy fit with European society's democratic ideals. This helped democratic capitalism advance across Europe.

South Africa

The South African Competition Act of 1998 focused on stopping unfair business practices and letting all citizens participate freely in the economy. At the same time, it kept a pro-free-market economy.

Early 21st Century

India

India passed the Competition Act, 2002 to promote and maintain fair competition. It also aimed to protect the welfare of people in the market. These goals are very similar to those of democratic capitalism.

How Democratic Capitalism Works

After World War II, democratic capitalism led to more welfare states and stronger rights for employees to negotiate their pay and conditions. It also included market policies designed to ensure everyone who wanted a job could find one.

In democratic capitalism, a democratic government creates policies that find a balance between the rich and the working classes. These policies still work with free-market capitalism. For example, setting up or expanding a welfare state helps to reduce social class conflict and meet the demands of workers.

The system also involves setting up cooperative economic institutions. These include groups that help governments, businesses, and worker organizations (like unions) bargain with each other. They also regulate the relationships between employees and managers in private companies. Developing these institutions helps public and private economic groups work together. This recognizes the benefits of market competition but also tries to solve social problems caused by uncontrolled capitalism.

Concerns about people's Economic security are addressed through policies that redistribute wealth. These policies include income transfers, like welfare payments and pensions, to help the elderly and the poor financially. Other policies that promote economic security include social insurance and government funding for education and job training programs to create jobs.

The right to private ownership of productive property is a key idea in democratic capitalism. It's seen as a basic freedom for all democratic citizens, just like in a regular free-market capitalist economy. According to political philosopher John Tomasi, democratic capitalism deals with social fairness by protecting citizens' private property rights. This allows citizens to be "free, equal, and self-governing."

The strong competition and sustainable entrepreneurship in democratic capitalism involve both top-down policies and bottom-up initiatives. Top-down policies are planned by leaders, while bottom-up policies involve changes started by people at lower levels of organizations. These policies are designed to encourage innovation in both public and private sectors. Examples include strong funding for research and development and policies that protect intellectual property rights (like patents and copyrights).

Competition Law

A key feature of democratic capitalist economies is that democratic governments create laws and regulations to support competition. These laws include United States antitrust laws. Competition laws are made to regulate what private sector businesses do. This includes actions by owners and managers of capital assets. The goal is to prevent outcomes that the democratic majority sees as socially undesirable.

The purpose of competition law is to stop unfair business practices that harm consumers. At the same time, it aims to keep a free market economy. It was found that antitrust laws are a specific characteristic of democratic capitalism, not just regular free-market capitalism.

Conflicts in Resource Allocation

Economic sociologist Wolfgang Streeck believes that the capitalist markets and democratic policies in democratic capitalism naturally conflict. Streeck suggests that governments in this system might sometimes ignore policies that focus on productivity. Instead, they might favor policies that focus on social needs, or vice versa. He points out that the rising inflation in the Western world in the 1970s could be due to stronger wage demands from worker unions and the political goal of full employment. Both of these are common in democratic capitalism.

In Catholic Social Teaching

Catholic writings support a form of democratic capitalism that is socially regulated. The papal encyclical Centesimus annus, written by Pope John Paul II, describes a vision of a community-focused democratic capitalism. This system promotes respect for individual rights and basic workers’ rights. It also emphasizes a good community and a limited role for the government and the market. According to the encyclical, these features should be combined with efforts to build institutions that help individuals develop good character. The encyclical stressed to leaders the importance of human dignity and caring for the poor. It also recognized the need to balance economic efficiency with social fairness.

The US Bishops’ 1986 Pastoral Letter Economic Justice for All suggested specific ways to support this type of democratic capitalism. These included systems that make sure all stakeholders (like employees, customers, local communities, and wider society) are involved in company decisions, not just stockholders. The letter accepted the market economy, but only if the government stepped in when needed to protect human dignity.

See also

• Democratic communism
• Democratic socialism
• Georgism
• Libertarian paternalism
• Mixed economy
• Neoclassical liberalism
• Post-war consensus
• Regulatory capitalism
• Social democracy
• Social market economy
• State capitalism
• Welfare capitalism