Business and democracy

31-07-2022 | News

Free markets need free politics.

by Rebecca Henderson

In many countries, democracy is in trouble. The Democracy Index, which evaluates the state of democracy in 167 countries on the basis of electoral processes, government functioning, political participation, democratic political culture and civil liberties, currently gives the world an overall score of 5.4 out of 10, the score lower since the poll began in 2006. According to a recent poll, the 55% of Americans say their democracy is "weak" and the 68% fears it is becoming weaker. About half agree that America is in "real danger of becoming an undemocratic and authoritarian country." Furthermore, many believe the system is rigged: about 70% of Americans say that "the political system seems to work only for those in it with money and power." But it is not just an American phenomenon: dissatisfaction with democracy has increased around the world and only 45% of people say they are "satisfied with the way democracy works in their country".

These concerns are particularly strong among young people. Nearly two-thirds of Americans between 18 and 29 have "more fear than hope for the future of democracy." And it worries that in many advanced countries only about 30% of younger voters believe it is "essential" to live in a democracy, compared to more than three-quarters of voters born before World War II.

These attitudes are in line with what has happened around the world over the past decade. Populist and authoritarian leaders have taken control of many countries, including the Philippines, Hungary, Turkey, Poland and Venezuela - and in recent years the United States, Great Britain and India. 

We must ask ourselves how we could survive this uncertain moment in history and what is at stake for the business world if they were to do something to reverse these trends. All things being equal, companies are unlikely to rush to the rescue of democracy. Regardless of the current difficulties related to the coronavirus pandemic, climate change and the Russian-Ukrainian war, the business world is going through a phase of great expansion and, according to multiple indicators, the world has never been so prosperous. World GDP - adjusted for inflation - has increased sixfold in the past 60 years and per capita GDP has nearly tripled. Furthermore, entrepreneurs and managers tend not to worry too much about what their government does, of which they see above all the side associated with burdensome regulations, excessive taxes, bureaucratic inertia and incompetence. So, instead of working to strengthen it, businesses have essentially protected their interests by running campaigns versus governments, often undermining the institutions that support democracy. In the United States, for example, entrepreneurs in the past fought fiercely against the New Deal and against programs such as social security and health care. Big corporations boycotted unions, clashed with the free press, and flooded the political system with money in an attempt to control politics.

But the result was not free market triumph, as business leaders hoped. On the contrary, we have been left with a system that it favors the rich and well-to-do at the expense of the general population. Inequalities have skyrocketed and environmental degradation has accelerated at an unprecedented rate. Without democratically accountable governments that ensure that markets remain free and fair, that "externalities" such as pollution are adequately controlled and that opportunities are available to all, societies risk falling into populism. In many countries, left-wing populists are experimenting with forms of state control, and right-wing populist governments are degenerating into convenient (or worse) capitalism. Neither is good for the business world and both will have significant effects on our society and the planet.

Democratic guarantee

If government is the counterweight to the free market, democracy is the force that ensures that governments do not turn into tyranny, taking control of the markets in the process. I believe that strengthening democracy is the only way to ensure the widespread survival of free market capitalism, and with it the prosperity and life-changing opportunities of billions of people. It is also the only way to addressing the world's biggest threats, from global warming to inequality

Businesses have the resources, political power, incentives and responsibility to make significant progress in this endeavor. Indeed, they enjoy widespread support. Surveys tell us that people today trust their employer more than the government or the media, and a recent global poll found that 71% of respondents believe that 'it is critically important that my CEO gives adequate answers to these difficult times ».

The business community played a important role in strengthening democracy and in the rebuilding of society in many countries that had lost it, such as Chile, South Africa and Germany. It can happen again, but only if business leaders show that they understand the extent to which free markets depend on democratic governments - and only if they are willing to stop working to destroy them.

Political freedoms and market freedoms

The free market is one of the great achievements of mankind. Was a engine of innovation, opportunity and wealth worldwide. But it needs free political systems to be successful. Democratic government protects and strengthens the freedom of markets by providing (at least!) Four of the essential pillars of a truly free and fair capitalism: an impartial judicial system; prices that reflect real costs; real competition; opportunities open to all.

Markets are only truly free when everyone can participate in them. When the economy is controlled by the state or a political elite, the opposite happens: access to jobs and economic opportunities is strictly controlled. The rich and powerful can start businesses, but for many others it is not possible. Finding a job is a matter of relationships and access - of going hat in hand to whoever controls the levers of power. 

In a free market, anyone can participate. Immigrant entrepreneurs can set up their own businesses and thrive. Women can become CEOs, doctors and sports icons. Governments are vital in upholding the freedom of opportunity, acting as a control of elite power and providing the public goods, such as education and health care, which lay the foundation for the success of all citizens, regardless of the income of the their parents, their race or their sex.

Some believe the market can oversee itself and provide essential public goods - and sometimes it can. For example, the International Chamber of Commerce, which facilitates international trade by setting rules, arbitrating disputes and engaging in the defense of trade policies, is an entirely voluntary and self-regulated body. But my research and that of many others suggest that such examples are relatively rare. In practice, market power is more reliably balanced by public power - and governments are more effectively kept in check in the context of a burgeoning democracy.

The risks of not changing

One of the first signs that a nation is becoming less democratic is the occurrence of one growing political and social polarization. We see this happening in the United States, but also in many European countries. It is certainly unlikely that revolutionary hordes will go after the rich, and I don't think the United States is headed for another civil war. But I fear that the United States and the world will become increasingly polarized, increasingly unfair and increasingly uncomfortable contexts. In this unstable environment, countries are more likely to fall prey to populism. And as I said, populism is often not a friend of the free market. I know of few businessmen who support the political and economic platform of the British Labor Party, for example, and left-wing populism has caused enormous economic (not to mention social) damage in South America and Africa. Right-wing populism has an equally troubled history, if not more so. Right-wing populists have regularly become authoritarian dictators. Perón shocked the Argentine economy, and Hitler and Stalin - both classic right-wing populists - completely destroyed their societies.

Business and democracy

Today's challenges are wrist-shaking and enormously complex. While there are proactive steps individual business leaders can take, things are unlikely to improve until businesses as a whole recognize that they are central to the continuing erosion of democracy. And that it is up to businesses and the government to work together to save it. Let's now look at what businesses could do to contribute to positive change.

Business must give up its political power and exert strong pressure against the influx of money into politics. It must act to strengthen those same institutions that can oppose the interests of companies. Businesses can make a valuable contribution to the political debate, but only when consumers, experts, trade unions and grassroots organizations all play a strong role as well. Otherwise, thecorporate engagement in politics is dangerously destabilizing. Businesses must become a partner in the construction of society, not a dominator.

The key distinction businesses need to make is between civics and politics. Rather than taking a biased position (or spending money) on specific policies, companies should instead focus on policy making process, actively supporting a healthy and functioning democracy. 

A sign of hope is that this crisis is starting to arouse the interest of top management. A recent survey by public relations firm Edelman, which carries out a worldwide survey called Trust Barometer every year, found that nearly 70% of executives are concerned about the state of democracy and more than half believe business leaders have the responsibility to resolve it.

Ultimately, therefore, perhaps businesses alone cannot decide the fate of a democracy, but certainly without them saving it will be much more difficult.

Rebecca Henderson she is Professor at Harvard University and Harvard Business School where she teaches general management and strategy. She is the author of the book, Reimaging Capitalism in a World on Fire.

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