Lane Kenworthy, The Good Society
January 2023

Does a capitalist economy permit truly democratic politics? There are quite a few skeptics¹:

“The high concentrations of wealth and economic power generated by capitalist dynamics subvert principles of democratic political equality. Political equality means that there are no morally irrelevant attributes — such as race, gender, religious affiliation, wealth, income, and so on — generating inequalities in the opportunity of people to participate effectively in democratic politics and influence political decisions…. Capitalism violates this condition…. The wealthy and those who occupy powerful positions in the economy invariably have a disproportionate influence on political outcomes in all capitalist societies. There are many mechanisms in play here. Wealthy people have a much greater ability to contribute to political campaigns. Powerful people in corporations are embedded in social networks which give them access to policy makers in government, and are in a position to fund lobbyists to influence both politicians and bureaucratic officials.” -Erik Olin Wright

“We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.” -Louis Brandeis

“Basically there are two solutions: the extension of the democratic principle from politics to economics, or the abolition of the democratic ‘political sphere’ altogether.” -Karl Polanyi

“Any government official who understands the requirements of his position and the responsibilities that market-oriented systems throw on businessmen will grant them a privileged position. He does not have to be bribed, duped, or pressured to do so. Nor does he have to be an uncritical admirer of businessmen to do so. He simply understands, as is plain to see, that public affairs in market-oriented systems are in the hands of two groups of leaders, government and business, who must collaborate and that to make the system work government leadership must often defer to business leadership.” -Charles Lindblom

“Why has capitalism succeeded while democracy has steadily weakened? Democracy has become enfeebled largely because companies, in intensifying competition for global consumers and investors, have invested ever greater sums in lobbying, public relations, and even bribes and kickbacks, seeking laws that give them a competitive advantage over their rivals. The result is an arms race for political influence that is drowning out the voices of average citizens.” -Robert Reich

“Democracy itself is under siege…. The fundamental driver of these trends is the resurrection of heedless, globalized capitalism that serves the few, damages the many, and breeds antisystem politics…. Capitalism, as it has evolved in recent decades, has been corrupted into plutocracy.” -Robert Kuttner

What does the evidence say?

Skip to:

• Economic restrictions and economic frustration
• Economic inequality and plutocracy
• Capital flight and structural dependence
• Summary

ECONOMIC RESTRICTIONS AND ECONOMIC FRUSTRATION

Eventually, according to one view, capitalists’ desire to escape from regulations, taxes, and other hindrances imposed by a popularly elected government will turn them against democracy. Or capitalism’s tendency to generate economic insecurity, inequality, and exclusion might foster frustration with democracy among a broad swath of the populace.

The historical record isn’t consistent with this prediction. As capitalism has emerged and spread, so too has democracy. In Figure 1, we see that two centuries ago the average country had a political system that was the near antithesis of democratic. Since then, democracy has been on the rise, interrupted only briefly in the 1930s and the 1960s.

Moreover, in countries with a GDP per capita above $10,000, democracy, once established, has hardly ever been overturned.²

In recent years pundits and journalists have issued a stream of warnings that citizens in Europe and the United States are turning away from democracy and that authoritarian parties and politicians are on the verge of eviscerating democratic institutions. But careful assessment of the evidence suggests there is no crisis of democracy in these countries. Public support for democracy and for democratic institutions hasn’t declined. While far-right parties have increased their vote share, they haven’t done so by swaying voters to embrace antidemocratic views but rather by tapping into already existing conservative sentiments. And these parties’ vote shares remain relatively small.³

ECONOMIC INEQUALITY AND PLUTOCRACY

A different concern is that democracy is warped by the economic inequality capitalism generates.

Democracy is a system of decision making in which participants have approximately equal opportunity to influence policy choices.⁴ This entails, first, that each person has the same number of votes in electing policy makers (representative democracy) and in direct policy making (direct democracy). Second, each person has roughly the same opportunity to influence policy makers’ views and actions via organization, lobbying, monetary donations, protest, and other activities. Third, individuals have access to adequate information in order to develop informed preferences. Fourth, decisions are made according to majority rule (though the majority can’t abridge the other conditions).

Under capitalism the distribution of income and wealth will inevitably be unequal. Since those with more money will be able to exert disproportionate influence over policy making, the political system in a nation with a capitalist economy is unlikely to be perfectly democratic. The question is: Can the political system be democratic enough?⁵

The inequality-plutocracy hypothesis

Let’s consider the United States, which is a good candidate for the worst-case scenario among the rich capitalist nations. Economic inequality between the rich and the nonrich is greater in America than in other countries, and it has increased sharply since the late 1970s.⁶ As top-end economic inequality grows, a country like the United States may increasingly get government by the wealthy.

There are five main ways that the rich, along with companies they own or control, can deploy money to increase their influence over policy makers’ decisions. First, they can donate to politicians and political parties. Election campaigns are expensive, and private donations account for most of the money that campaigns spend. Expenditures in the 2020 US election totaled nearly $14 billion, up from $5 billion in 2000.⁷ The share of campaign contributions that come from the highest-income Americans has been rising steadily in recent decades; according to one estimate, around 40% of the total now comes from those in the top 0.01% of incomes.⁸ It wouldn’t be surprising to find that candidates and elected officials listen most attentively to the policy preferences of their most generous donors.

Second, rich Americans can run for office themselves. In 2020, more than half of the 535 members of the Senate and the House of Representatives had a net worth of more than $1 million.⁹ A billionaire, Donald Trump, succeeded in getting elected president in 2016, and fellow billionaires Michael Bloomberg and Tom Steyer ran for the Democratic nomination in 2020, albeit unsuccessfully.

Third, the rich and their companies can spend money to lobby elected policy makers. Lobbying expenditures in the United States total about $3.5 billion each year, and they increased sharply in the 2000s before leveling off in the 2010s.¹⁰

Fourth, those with money can fund organizations and movements that pressure policy makers in other ways — calling their office, showing up at town hall meetings, generating online petitions, canvassing voters, marching in the streets.

Fifth, affluent Americans can use their money to influence ideas. They can finance research. They can establish and fund think tanks. They can create or buy
media outlets. They can sponsor and promote like-minded opinion leaders.

The result of these efforts, according to a growing chorus of voices, has been an erosion of democracy in America due to rising inequality of income and wealth. According to Paul Krugman, “Extreme concentration of income is incompatible with real democracy. Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?” Jacob Hacker and Paul Pierson put it as follows: “Runaway inequality has remade American politics, reorienting power and policy toward corporations and the superrich…. The rise of plutocracy is the story of post-1980 American politics.”¹¹

And it could be that this is self-perpetuating. If it’s true that an increase in economic inequality gives the rich even greater influence over policy decisions, the United States might now be stuck in a plutocratic “doom loop” — economic inequality rises, causing an increase political inequality, which leads to policies that further increase economic inequality — from which there is no escape.

Yet money in politics likely is subject to diminishing returns. There was considerable economic inequality in the United States in the late 1970s. In all likelihood,
America’s affluent had a good bit more political influence than the rest of the citizenry at that point in time, and it’s conceivable that their advantage had already reached its maximum. If so, then even though the rich have gotten a rising share of the country’s income and wealth during the ensuing four decades, this might not have widened their advantage in influencing policy outcomes.

What kinds of things would we expect to observe if the inequality-plutocracy hypothesis is correct? Do we observe them?

Do the rich have disproportionate political influence?

Scholars have been actively researching the political influence of economic elites since the middle of the twentieth century. Studies have tended to focus on individual policies, or sometimes a handful of related policies. This is helpful, but to really answer the question we need a more comprehensive analysis. Surprisingly, we have very little. There are a number of quantitative analyses of the determinants of social policy and some other types of programs, but these too give us an incomplete picture, and most of them don’t consider the impact of America’s rich.

In one of the few attempts at a comprehensive study, Larry Bartels uses public opinion survey data to identify the policy preferences of Americans in three income groups: low, middle, and high.¹² He then examines the degree to which these opinions correlate with votes by people’s elected representatives in the House and the Senate in the early 1990s and early 2010s. Bartels concludes that policy makers’ voting tends to correspond much more closely to the desires of people with high incomes. This kind of study is a big advance, in that it gives us evidence on the influence of different income groups across an array of policies and issues. But legislators’ voting may or may not translate into actual policy outcomes.

In his book Affluence and Influence, Martin Gilens takes this next step.¹³ He begins by measuring the policy preferences of high-income, middle-income, and low-income Americans in public opinion surveys from 1981 through 2002. Where the preferences of people at these various income levels differed, Gilens looks to see whether policy changed over the ensuing four years, and if so in what direction. The data include a total of 1,779 policy outcomes. Gilens finds that when policy did change, the change was more likely to conform to the expressed preferences of high-income Americans than of middle-income or low-income Americans.

So yes, Americans with more income do seem to have more political influence than those with less income, as the inequality-plutocracy hypothesis predicts.

However, there are limits to how confident we should be about this conclusion. For one thing, research has uncovered very little evidence that campaign contributions and lobbying influence policy outcomes.¹⁴ There are, as I noted earlier, other pathways through which money can affect policy decisions, but it’s surprising that researchers haven’t identified a connection via the campaign donation and lobbying routes.

Perhaps more important, despite the heroic efforts of Gilens and some others, social scientists don’t yet have the evidence we really would want for testing the inequality-plutocracy hypothesis. Most of the attention in discussions of plutocracy focuses on the top 1% of incomes, but the sample sizes in public opinion surveys are too small to get an accurate reading of the views of this group. Thus, “high income” in Gilens’s analysis refers to roughly the 90th percentile of the income distribution rather than the top.

Also, the policy outcomes in Gilens’s data are limited to those that public opinion surveys have asked about. This leaves out a lot of policy. An alternative strategy is to begin with the full array of potential policy changes and study a random sample of them. Paul Burstein uses this approach in a recent study.¹⁵ He begins with all of the policy proposals considered by Congress during the 1989-90 legislative session, draws a sample of 60 (manifested in a total of 417 bills), and then tracks their fate. Unfortunately, he, like Gilens, is unable to identify the views of rich Americans, so his analysis doesn’t speak to the inequality-plutocracy hypothesis. And his data cover only two years.

It probably doesn’t make sense to weight all potential policy changes equally, since both affluent and ordinary Americans likely care much more about some than others. In a statistical analysis this can be handled by differentially weighting the cases.

An ideal database probably would be something like Burstein’s. However, it would cover not just legislation but also executive branch actions such as implementation of laws and regulations and issuance of executive orders. And it would cover many more years. How to address the lack of hard data on the policy preferences of the rich? Here we would need researchers to make educated guesses, based the type of information that scholars studying individual policy changes typically have drawn upon, about when and to what degree the policy desires of the wealthy differed from those of ordinary citizens.

In the absence of this ideal database, I agree with Larry Bartels that “Gilens’s work provides the best evidence we have regarding the responsiveness of the American political system to the preferences of its citizens.”¹⁶ Gilens’s findings suggest, consistent with the inequality-plutocracy hypothesis, that higher-income Americans very likely do have disproportionate influence on policy decisions.

Has the gap in political influence between the rich and the rest increased over time?

Income and wealth inequality in the United States have increased sharply since the late 1970s.¹⁷ If the inequality-plutocracy hypothesis is correct, this rise in economic inequality should have led to a rise in inequality of political influence during these past four decades.

But in a study tracing policy wins by rich Americans and by business in recent decades, Jacob Hacker and Paul Pierson don’t find a rise in the frequency of such wins.¹⁸ Nor do Gilens’s Affluence and Influence data suggest an increase in inequality of political influence. In addition to his core period of 1981 to 2002, Gilens examines the correlation between income and influence on policy for a selection of earlier and later years. He finds that the gap in influence between high- income Americans and those with middle or low incomes was small during the Johnson presidency in the 1960s, larger during the presidencies of Reagan and Clinton in the 1980s and 1990s, but then smaller during George W. Bush’s presidency in the 2000s.¹⁹ Christopher Wlezien and Stuart Soroka conduct an analysis similar to Gilens’s and covering the years 1972 to 2008, though for a relatively small set of policies. They find no indication of a rise in policy makers’ responsiveness to Americans with higher incomes.²⁰

This isn’t the final word. It’s possible that when someone updates Gilens’s analyses through the 2010s, or when researchers compile something like the ideal database I outlined in the previous section, the data will reveal that the rich-versus-the-rest gap in political influence has indeed increased in concert with economic inequality. But that isn’t what’s suggested by the best research we have at the moment.

Is the gap in political influence between the rich and the rest larger in the United States than in other affluent democratic nations?

The income and wealth gaps between the rich and the nonrich are larger in the United States than in any other affluent democratic country.²¹ If the inequality-plutocracy hypothesis is correct, we would therefore expect more inequality of political influence in America than abroad.

There are single-country studies of the link between preferences of people at different income levels and policy outcomes in Germany, the Netherlands, Norway, Sweden, and Switzerland.²² With the exception of Norway, these analyses conclude that, as in the United States, when the views of higher-income persons differ from the views of those with lower incomes, policy changes are more likely to reflect the desires of people with more income.

The best comparative analysis I’m aware of is a recent paper by Larry Bartels, which looks at the degree to which policy changes tend to correspond to the expressed preferences of people at different income levels in an array of affluent democratic nations.²³ Bartels focuses on just one type of government policy: social programs. Contrary to what the inequality-plutocracy hypothesis predicts, he finds no difference in the magnitude of the rich-poor disparity in policy responsiveness across countries that have very different levels of income inequality. Instead, it turns out that inequality in policy responsiveness is “rampant in contemporary affluent democracies, not limited to the United States.”

Bartels’s finding is consistent with the large research literature attempting to explain why the United States has one of the least expansive and generous welfare states among the rich democratic nations. That literature emphasizes culprits other than America’s high level of economic inequality, such as our winner-take-all elections and consequent two-party political system, our large number of government veto points, our weak labor unions, our lack of corporatist concertation, our racial and ethnic diversity, and our absence of a feudal history.²⁴

Have top-end tax rates, financial regulation, and unionization decreased more in the United States than in other rich democratic countries?

Top-end income and wealth inequality have increased more in the United States than elsewhere. So according to the inequality-plutocracy hypothesis, we should expect greater movement toward policy outcomes desired by the well-to-do in America than in other rich democratic nations.

Begin with taxes. The top statutory federal income tax rate was indeed reduced more sharply in the United States than in most other affluent democracies. Yet some other countries where income inequality barely increased at all, such as Japan and Norway, made similar changes to their top statutory tax rates.²⁵ Just as puzzling, nearly all of the change in the United States occurred at the beginning of the rise in income inequality, in the 1980s, rather than toward the end. Moreover, the top statutory rate is of limited relevance if there are numerous loopholes and deductions that allow the rich to shield a sizable portion of their income from taxation. What really matters to taxpayers is the “effective” tax rate — taxes paid divided by pretax income. Estimates of the top effective tax rate in the United States suggest that while it has fluctuated — decreasing under Reagan, increasing under the first Bush and Clinton, decreasing again under the second Bush, and increasing again under Obama — it was about the same in 2017 as when Reagan entered office.²⁶ The 2018 Trump tax cut reduced it, but it remains higher than it was after the 1981 Reagan tax cuts.

What about financial regulation? The United States did reduce regulations on the financial sector, but here too the most significant change occurred at the beginning of the era of rising economic inequality, around 1980. And most of the other rich democratic countries for which data are available have made bigger deregulatory reforms in finance than America did.²⁷

Unionization has dropped sharply in the United States. But that decline began in the 1950s, long before income and wealth inequality started to rise. And since the late 1970s, unionization rates have been falling in most affluent nations, at about the same pace as in America.²⁸

None of these patterns is consistent with what the inequality-plutocracy hypothesis predicts.

Do Republicans receive more campaign money than Democrats and consequently win more elections?

Let’s return to the US story. Most of the money spent in political campaigns comes from private donations. Although we have limited direct information about the policy preferences of America’s rich, a 2011 survey suggests that they have views on core economic policy issues, such as taxes and government spending, that are much closer to those favored by Republicans than to those of Democrats.²⁹ It’s no surprise, therefore, that the affluent tend to give more money to Republicans and conservative groups than to Democrats and progressive groups.³⁰

If the well-to-do favor Republicans, the inequality-plutocracy hypothesis would expect Republican candidates to have enjoyed a steadily rising advantage in campaign spending in recent decades. But they haven’t. Since the late 1990s, when comprehensive and reliable data on campaign expenditures begin, Democrats and their supporters have kept pace with Republicans.³¹ That’s continued even after the Supreme Court’s 2010 Citizens United ruling, which made it easier for donors to hide their contributions. And in the most recent election, in 2020, Democrats enjoyed a huge spending advantage.

Nor has money led to Republican electoral dominance. Democratic candidates have won the popular vote in seven of the last eight presidential elections. It’s true that Republicans have fared better in House and Senate elections than they did in the middle of the twentieth century. But in that earlier era Democrats had a big advantage because of their perceived success in dealing with the Great Depression and World War II and because the legacy of the Civil War and Reconstruction gave them a virtual monopoly in the south. By the 1990s, both of those advantages had evaporated. And in recent decades Democrats have been hurt in House elections by the fact that their voters are highly concentrated in urban areas, in Senate elections by the fact that low-population conservative states such as Wyoming get the same number of seats as high-population liberal states such as California, and in presidential elections by the Electoral College.³²

Maybe America’s plutocrats haven’t needed Republicans in order to get their desired policies enacted. If the rich have become much more politically powerful, presumably they’re able to sway Democrats as well. The Clinton administration’s embrace of financial deregulation seems to fit with this view. But the fact that center-left parties in other far-less-economically-unequal countries did the same thing suggests reason for skepticism. And trends in top income tax rates aren’t consistent with the notion that America’s rich have been effective at getting Democrats to do their bidding. As noted earlier, the Clinton and Obama administrations increased top tax rates, offsetting the reductions under Reagan and George W. Bush.

Have policy trends over the long run of American history corresponded to trends in economic inequality?

In a recent book, Democracy in America?, Benjamin Page and Martin Gilens attempt a rough tracing of trends in economic inequality and inequality of political influence over the long arc of American history. They conclude that there is substantial correspondence: “Economic inequality — the concentration of wealth and income in a few hands, with a big gap between rich and poor — has risen and fallen at various times. And democracy — popular control of government — has tended to move in the opposite direction. When citizens are relatively equal, politics has tended to be fairly democratic. When a few individuals hold enormous amounts of wealth, democracy suffers.”³³ Specifically, Page and Gilens say the federal government’s responsiveness to the policy wishes of ordinary Americans was low in the 1790s, higher in the Jacksonian era, lower in the second half of the 1800s, and higher in the 1950s.

It’s worth treating this conclusion with skepticism. Consider the period for which the story seems, on the surface, most clearcut: the second half of the 1800s. This was the era of industrialization and the Gilded Age. Inequality of income and wealth increased significantly.³⁴ According to Page and Gilens, this led to a shift in government attentiveness away from commoners and in favor of the affluent. But did key policy choices during the second half of the 1800s really go against what ordinary Americans wanted, or at least what was good for most? Slavery was outlawed. Real living standards doubled each generation.³⁵ As government created and expanded a nationwide public education system, average years of schooling rose steadily from four in 1870 to six in 1900 to eight in 1930. With advances in medical knowledge and public health systems, life expectancy jumped from 39 in 1880 to 50 in 1900 to 60 in 1930.

Does policy in states with greater economic inequality conform more to the preferences of the rich?

Social scientists have compiled data on top-end income inequality not only for countries but also for the US states.³⁶ As of the mid-to-late 2010s, the 12 states in which the top 1%’s income share is largest include eight — New York, Connecticut, Massachusetts, California, Washington DC, Illinois, New Jersey, and Washington state — where Republican vote shares tend to be lowest, state tax systems are least regressive, and state public social programs are most expansive and generous.³⁷ That isn’t what the inequality-plutocracy hypothesis would predict.

California is a particularly striking case. Between 1979 and 2015, the share of income going to the top 1% of Californians soared from 10% to 24%. If the United States is on the road to plutocracy, California ought to be leading the charge. Yet California currently has the least regressive tax system of any state in the country, in part due to new taxes on high incomes added in recent years. Since 1999 California has enacted paid sick leave, paid parental leave, an automatic-enrollment pension system for people whose employer doesn’t offer a plan, a large Medicaid expansion (it now covers one in three Californians), an expansion of Temporary Assistance for Needy Families (TANF) eligibility, a phased-in $15 per hour minimum wage indexed to inflation, a state Earned Income Tax Credit, increased money for K-12 schooling funded by two tax increases on high-income households, an array of services for residents with severe mental illnesses, low-cost public auto insurance for persons with low income, new funds for roads and high-speed rail, a significant reduction in incarceration, and more. In 2018 California passed a law requiring an end to the use of fossil-fuel-based electricity by 2045, and the governor issued an executive order committing the state to full carbon neutrality by that same year.

The inequality-plutocracy hypothesis: What should we conclude?

The available evidence suggests two conclusions. First, economic inequality has an impact on inequality of political influence. America’s rich very likely have more influence on policy decisions than the nonrich do. Second, because there is a tipping point beyond which this effect diminishes, wealthy Americans may have roughly the same degree of political advantage nowadays that they did in the late 1970s or early 1980s.

CAPITAL FLIGHT AND STRUCTURAL DEPENDENCE

An influential adage, often attributed to Karl Marx, holds that the government in a capitalist society is structurally dependent on capital.³⁸ Policy makers need the economy to perform well, in part because this is good for people and in part because it boosts politicians’ likelihood of getting reelected. This dependence enables businesses to exert significant influence on policy choices by withholding investment or threatening to move to another country.

That there is some degree of structural dependence is not in dispute. There are plenty of examples, from France’s Mitterrand government feeling compelled to retreat from its nationalization and government spending plans in the early 1980s to pressure on the governments of all rich democracies to reduce tax rates to particular policies that have been blocked or abandoned due to worry about capital flight.³⁹

Countries can reduce the threat of capital flight by adopting capital controls, and governments in most of the rich democratic nations did so in the 1950s, 1960s, and 1970s.⁴⁰ Since then, they have tended to judge that the benefits of access to international financial markets outweigh the damage incurred from capital flight.

How big a problem is the threat of capital flight in the typical affluent democratic nation? Some analysts contend that it is fairly minimal. Most firms stay put because they can make money by utilizing the employee skills, network ties, and high-quality infrastructure in these countries. Torben Iversen and David Soskice put the point as follows: “Advanced capital is geographically embedded in the advanced nation-state rather than footloose…. The value added of advanced companies is geographically embedded in their skilled workforces, via skill clusters, social networks, the need for colocation of workforces, and skills cospecific across workers and the implicit nature of a large proportion of skills. The nature and pattern of industrial organization has changed substantially through the century but the insight of economic geographers that competences are geographically embedded has not. Thus, while advanced companies may be powerful in the marketplace, advanced capitalism has little structural power.”⁴¹

SUMMARY

Nations with capitalist economies don’t tend to abandon democracy. Private money tends to increase political influence in a democracy, but as best we can tell the sharp rise in income and wealth inequality in the United States in recent decades hasn’t widened the influence gap between the rich and the rest. Capital flight is a genuine threat facing democratic governments and thus a potential source of excessive political power for business, but in the rich democratic countries the threat is a muted one, because many firms reap significant benefits from being located in those countries.

This suggests grounds for optimism that capitalism is compatible with a reasonable degree of political democracy. To ensure a well-enough functioning democracy, we may not need to abandon capitalism or return to 1970s levels of economic inequality or reinstate capital controls. Instead, we should perhaps focus on reforms such as improving education, expanding economic opportunity, revitalizing civic organizations, increasing access to voting, expanding public campaign financing, and making use of deliberative citizen assemblies.