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Are Capitalism And Democracy Incompatible?

John C. Goodman
This article is more than 4 years old.

Did you know that the two countries in the world that rank the highest on an index of economic freedom are not democracies? Hong Kong and Singapore began the modern era as British colonies – with no natural resources and third world living standards. Yet today both are among the world’s economic success stories.

The recent death of Singapore's Lee Kuan Yew reminds us all that if any national leader can claim to have worked an economic miracle, he can. As Clive Crook wrote at Bloomberg:

“During his time as prime minister, from 1959 to 1990, the gross domestic product of this tiny country grew more than tenfold -- from $8 billion (in 2010 inflation-adjusted dollars) to $98 billion. Today the number is pushing $400 billion. When Lee took office, Singapore was poor; in 2015, it's one of the richest countries in the world.”

Hong Kong also enjoyed meteoric economic success in the space of a few decades. Ironically, while the mother country was stifled by socialism and the welfare state (before Margaret Thatcher, at any rate), the colony soared from Third World to First World status by adopting capitalism instead. By the time Hong Kong was turned over to China, its per-capita income rivaled Britain’s.

If we look around the world we can find other examples of non-democratic countries doing quite well. China’s economic miracle has taken place without any presidential elections. And under a rather harsh dictatorship, Chile emerged as the richest country in Latin America.

Of course, having a dictatorship doesn’t guaranteed economic success. In most cases dictatorship creates economic basket cases. Just look at the continent of Africa or the Middle East. Or Cuba or North Korea or Russia.

But the right dictator – one who appreciates the power of free markets to lift all boats – seems to outperform democratic government in what we might consider the most enlightened parts of the world. Why is that?

Democratic voting gives people license to plunder other people. Special interest groups find they can achieve at the ballot box what they cannot achieve in the marketplace. And generations of retirees can plunder the generations that follow them by means of government-sponsored Ponzi schemes. Most important of all, the ability of government to redistribute income in arbitrary ways as a way of appealing to disparate voters is inherently potentially destabilizing.

In a previous Forbes post I demonstrated why democracies are potentially unstable with the following table. It shows two candidates competing by taking a position on how to split $100 among three voters. Candidate A begins with an egalitarian stance: equal shares for all three. Then Candidate B trumps that by promising $50 to each of two voters and nothing for the third. If voters vote in their self-interest, Candidate B should win two to one. However, Candidate A responds by promising $40 to the voter B was willing to stiff and $60 to one of the other two – and now A has the two-to-one advantage.

Readers should have no difficulty convincing themselves that there is no distribution that cannot be defeated by some other distribution. In fact, defeating an opponent in this game is easy, until the opponent gets to move again.

What does it take to produce such instability? A voting public that is willing to vote for candidates that arbitrarily redistribute income. Unfortunately, the willingness to voters to do that seems to cut across al cultures.

When the British turned Hong Kong over to China in 1997, the great fear was that China would try to turn it into a Communist state. As part of an effort to forestall that outcome, the British left the country with institutions that would move in the direction of true democracy with universal suffrage. In retrospect, the fear was completely misplaced. Capitalism in Hong Kong is in far greater danger from its own citizens than it is from anyone in Beijing.

Several years ago I visited Hong Kong as a guest of the government. Here is what I discovered:

The people of Hong Kong are just like us! They don’t understand free enterprise any more than Americans understand it. They are no more dedicated to it than we are. They do not think of free-market capitalism as a moral and ethical ideal any more than Americans or Europeans think of it that way.

True enough, people in Hong Kong are aware that theirs has been named the freest economy in the world, and they are proud of that fact — even though capitalism was handed to them by a colonial government that no one in Hong Kong ever voted for. But from what I can tell, they would be perfectly willing to let it die a death of a thousand cuts — just as the rest of the developed world has done.

Here is my fear: If the citizens of Hong Kong get an unrestricted right to vote, within two decades Hong Kong will look like a typical European welfare state.

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