By Manuel Cereijo

There is little argument today about whether or not there is a relationship between capitalism and democracy. Two great economists of the last generation, Max Weber and Joseph Schumpeter, detailed the linkage. Weber contended that democracy in its clearest form can occur only under capitalist industrialization, and that it had its greatest opportunity in a society which emphasizes individual responsibility. He stated flatly that history clearly confirms that modern democracy rose along with capitalism and in a casual connection with it.

Schumpeter was even more emphatic. He stated that modern democracy is a product of the capitalist process, and the two were mutually supportive parts of a rising modern civilization. Schumpeter was careful to point out, however, the tension between capitalism and democracy. He cautioned that the means at the disposal of private interests were often used to interfere with the mechanism of competitive leadership. The Friedmans say that despite the advantages which flow from capitalism, the relationship between political and economic freedom is complex and by no means unilateral.

The essential nature of capitalism is social harmony through the pursuit of self-interest. Under capitalism, the individual's pursuit of his own economic self-interest benefits the economic self-interests of all others. The system means the complete separation of economy and state, just like the separation of church and state.

Capitalism is the social system based upon private ownership of the means of production. However, the primary premise of capitalism, the one that I consider most important, is that is based on individual rights. It is the only politico-economic system based on the doctrine of individual rights. This means that capitalism recognizes that each person is the owner of his own life, and has the right to live his life in any manner he chooses as long as he does not violate the rights of others.

Contrary to widely held beliefs, capitalism is not a system which exploits a large portion of society for the sake of a small minority of wealthy capitalists. Ironically, it is actually socialism that causes the systematic exploitation of labor. Exploitation is inherent to the nature of socialism because individuals cannot live for their own sake, rather they exist merely as means to whatever ends the socialist rulers may have in mind.

Most critics of capitalism now accept the crucial role of entrepreneurs and businessmen in the earlier stages of the system. The source of the gifts of capitalism is the supply side of the economy. In the capitalist economies of the West, this simple recognition is the core of all successful economic policy. Karl Marx erroneously located the means of production in the material arrangements of the society rather than in the metaphysical capital of human freedom and creativity. However, supply can create its own demand, even in the political realm.

By analogy, leadership is supply and public opinion is demand. In a democracy, a reversal of the appropriate direction of influence allows impressionable figments of mass sentiment to dictate to the powerful and permanent mechanisms of representative leadership. The result is a restive and alienated electorate, a failure of political authority, a sluggish and uncreative government, and a tendency toward national decline. That supply creates its own demand is a principle of capitalism called Say's law. Capitalism consists of providing first and getting later.

All political systems are ultimately the expression of some underlying philosophy. For example, Marxian socialism upholds that man is a collective entity shaped by economic forces beyond his control whose greatest good is to serve the ends of "society". Capitalism is morally good for each person to strive for his own happiness, and that the proper social arrangement for men to live under is one in which the initiation of physical force is banished. This is the ideological basis upon which the United States was implicitly founded.

Capitalism is the only political system that is based upon man's true nature as a being who possesses the faculty of reason-capitalism is the only system that recognizes that human beings can think. Indeed, individual rights and capitalism not only protect the individual person and property of each human being, but most importantly, they protect the individual mind of every human being.

The only purpose of government in a democratic capitalistic society would be to protect its citizens from force or fraud. The protection from force, that is, the protection of individual rights, would be achieved through the use of a police force to protect the rights of citizens at home; a military, to protect the rights of citizens from foreign aggression; and a court system to enforce contracts and settle disputes between citizens.

The greatest aggressor against man has been the various governments that man has adopted throughout history. This is why it is crucial that governments be limited in their ability to use force by a constitution based upon individual rights.

Capitalism is the only system in which freedom and liberty can exist. An individual is free when force is not being initiated against him. A man's freedom can only be infringed upon when another person or group of persons initiates the use of physical force against him. The fact that an individual cannot start his own company is a violation of his freedom. In a free society all men may act as they choose as so long as they do not infringe on the freedom of others.

An absolute democracy, which means unlimited majority rule, is incompatible with capitalism and freedom. This is so because capitalism rests on the principle of individual rights. In an absolute democracy, rights would really have no legitimate meaning because they could always be voted away in the next election. When most people think of democracy, they usually mean a constitutionally limited democracy. The function of a limited democracy is to decide who held political power and how that power is specifically exercised, but what that power is should be strictly defined and limited in the constitution. Individual rights would not be subject to vote.

What is the relationship between capitalism and democracy? It is a question of great moment. The dramatic political upheavals, demands for democratic governments, and free market economy in Eastern Europe and Russia have moved the question to the forefront. Modern democracy is a product of the capitalist process, and the two are mutually supportive parts of a rising modern civilization. Economic and political freedom are necessarily linked because both are expressions of one and the same impulse of individual autonomy against the coercive power of the states.

Freedom is one whole, and anything that reduces freedom on one part of our lives is likely to affect freedom in the other parts. Democracy and capitalism have very different beliefs about the proper distribution of power. One believes in a completely equal distribution of political power,"one man, one vote', while the other believes that is the duty of the economically fit to lead the development of society. However, in democratic-capitalistic societies power comes from two sources-wealth and political position. It has been possible to convert economic power into political power or, conversely, political power into economic power.

Few hold one without quickly gaining the other. The conversion creates a dynamic equilibrium that holds democracy and capitalism functioning properly.

Economic freedom is an indispensable means toward the achievement of political freedom. The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom, because it separates economic power from political power and in this way enables the one to offset the other. The relationship between political and economic freedom is complex and by no means unilateral. History suggests only that capitalism is a necessary condition for political freedom. Clearly, it is not a sufficient condition.

Obviously, extended discussion of the economic values and assumptions inherent in the Constitution of the United States, and how they intersect with its political values and assumptions is impossible here. But I will try to simplify some. Implicit in the spare, matter of fact prose of the Constitution are embedded three specific economic values deserving of comment.

The first of these is the right to private property. It is assumed, in the Lockean tradition, to flow from the law of nature itself. It is not a concession by those governing to the governed. Along with the right to life and to liberty, the right to property is natural, unalienable and essential to meaningful existence. Government's responsibility, its very purpose, therefore, is to protect individuals in the enjoyment of their natural rights and to secure their persons and property against infringement or violence.

A second economic value implicit in the Constitution is support for private entrepreneurial activity. The Constitution provides for defining the national economic interest in relations with other nations, regulating interstate trade, creating a reliable money supply, securing copyright and patent rights, granting corporate charts, and protecting the sanctity of private contracts. Increased trade and commerce always improve the life for both workers and proprietors.

A third value of special significance is the rule of law. No power can be exercised except in accordance with the procedures, principles and constraints contained in the law. The vibrant economic growth which the Constitution was intended to promote are to be controlled by law. The inherent limitations of the legal order are understood to be fundamental.

The basic values and the fundamental assumptions inherent in the Constitution continue to serve the nation's guideposts. There also appears to be a growing concensus that a high level of education is a necessary condition also for democracy. A high level of education presupposes that all citizens in democratic societies need more than minimal education. They need to develop an understanding of the essential concepts and the actual functioning of constitutional governments and of market economies.

The decisions which citizens in free societies are called upon to make in both their personal and political lives are replete with the ideas-and choices-of economics. A basic grounding in economics is essential, if they are to make sense of policies in print and on the airwaves and if they are to make intelligent choices in polling booths. Ignorance in today's world forms a prison from which citizens must be given the tools to escape.

Schools, to be sure, do have significant, if not sole, responsibility for providing students with a core of basic knowledge about social, political, and economic issues and for teaching them to think critically, listen with discernment and communicate honestly and effectively. Schools also bear responsibility for helping to provide students with the skills they need to function as citizens in democratic communities and in a market economy.

In this modern technological world, skills, education, and knowledge can be called human capital. Human capital differs from physical capital in three important ways. (1) Human capital can not be owned; (2) Human capital investments require a long time horizon;(3) Human capital generate the man-made brainpower industries. These are another basic reasons linking education, capitalism, and democracy. However, a college education is very expensive. Approximately from Kindergarten to a University degree a family expends some $160,000

While it may be true that not everyone needs sophisticated high-tech training, the technology is affecting many job categories not normally associated with high technology. For the foreseeable future, the economy will be driven at the leading edge by the strengths or weaknesses of the nation's high technology industries and by the ability of other industries to absorb new technologies. Both situations require a sustained infusion of resources into education of the young and reeducation of the work force.

Engineering education has become one of the main sources of long run sustainable competitive advantage for the United States. If one looks at the breakthrough firms of the 1990s, it is clear that there is a lot of productivity to be gotten tearing down traditional functional walls between areas such as R&D, design, manufacturing, or sales and by pushing decision making much farther down into the organization to cut layers of management hierarchy. But all of those actions, vital for democracy and capitalism, require a much better educated and skilled engineering and technical workforce.

Within the engineering profession, one of the most critical job categories are electrical and computer engineering. There are presently about 600,000 electrical engineers working in the United States. Projections for 2005 are 700,000.

Today, the ascendant nations are masters not of land and material resources but of ideas and technologies. Electronics is the world's fastest-growing major industry. Computer software, a pure product of mind, is the chief source of added value in world commerce. The global network of telecommunications carries more valuable goods than all the world's supertankers. Today, wealth comes not to the conquerors of land but to the emancipators of mind.

The infrastructure that is really going to count in the future is not so much the physical infrastructure but the knowledge infrastructure, and as mentioned above, the engineering infrastructure. The government should be making the necessary investments in engineering education. Public technology, and public engineering education are vital for capitalism, democracy, freedom. The successful interplay of corporations and engineering education is critical to American industries.

A country's wealth is a more slippery sum than the spending power of its citizens or the reservoir of its resources. Wealth consists in assets that promise a future stream of income. This is a very important concept that unfortunately most Latin American nations do not practice. The flows of oil money, for example, do not become an enduring asset of a nation until they can be converted into a sock of remunerative capital-industries, ports, roads, airports, schools, and working skills-that can offer a future. A wealthy nation must be able to save as well as to consume. This is not a world anymore inwhich the gain of one nation can only come at the expense of another.

All the world will benefit from the increase impotence of statism and socialism. This is the age of democracy, freedom, capitalism, dignity, safety, individual and family.


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