Democracy and Economic Inequality

Why does economic inequality rise in democracies?

Economic inequality is rising, and the United Nations reports that economic inequality impacts 70 percent of the world, even when we include democracies such as the US, UK, France, and Germany.

Why does democracy not reduce economic inequality? According to democratic theories, giving everyone the vote and allowing them to participate in democracy through protest should make policy-makers responsive to the public and reduce harm to them. Yet, this does not happen. Inequality rises in democracies.

Inequality may be the undoing of democracy.

This post explains why democracy has not reduced economic inequality. I rely on the innovative arguments of Dena Freeman in her seminal work, “De-Democratisation and Rising Inequality: The Underlying Cause of a Worrying Trend.”

Rising Inequality in Democracy: Elite Distribution and Voting Suffrage

Why has economic inequality increased alongside the rise in democratization? This is an old problem. Elites in the 19th century feared that the “universal suffrage” part of democracy would lead to the redistribution of wealth.

How would this redistribution happen? The democracy-reduces-inequality argument is the following:

In theory, the disadvantaged have greater voice in democracy, and therefore have greater impact on government response. This is an electoral politics argument about an agreement between the elite and the masses, otherwise known as “the class compromise of the post-war period.” It’s an exchange: The elite agree to redistribute economic resources through social welfare spending to the disadvantaged because the elite need the votes of the disadvantaged. The sheer size of the voting citizenry ensures that political parties operating within democracies must listen to a large and heterogeneous population. Thus, spending should be more universal than merely targeted to particular groups.

This is based, in part, on the median voter theory. This theory says that people are rational actors seeking to maximize benefits: parties want to win elections and thus end up proposing economic redistribution policies that benefit the median voter.

Democracies allow substantial bargaining power of labor — unions— that they can use to extract wages and other resources that reduce economic inequality.

DALL-E: “Photograph of Vote and Money”

Economic Redistribution Stopped Reducing Economic Inequality in the 1970s

Inequality did fall during the initial period of universal suffrage. But things changed dramatically during the 20th Century. As Piketty’s U-shaped graphs of economic inequality show, inequality declined, and then, in the 1970s, it rose.

Why the U turn? Unionization had helped to reduce economic inequality in the US, until the 1970s, when there was a great shift and a strong downturn in unionization. Some argue that the early 20th Century reduction in inequality was due to unusual circumstances. Once those circumstances ended, inequality resumed its normal upward path.

What were those circumstances? After the 1970s, there were major technological and economic changes:

Freeman’s Thesis: Vox Populi Lost Control over the Economy

Dena Freeman offers a different argument. She argues that the vox populi, the people in democracy, have lost control over the economic process. “Decisions regarding the organisation and functioning of economic matters,” Freeman writes, “have become less subject to democratic influence.”

In essence, democracy itself has changed, and not for the better.

Within the democratic process, people ceded control over the economy to private interests and the market, and thus lost political control over how the economy functions. This loss of control limits the policies that elected representatives can create and get through the legislative system.

The result, Freeman argues, is that “economic policies have increasingly been made in the interests of capital and the class compromise of the post-war period has been undermined.”

Neoliberalism and Democracy

Freeman blames neoliberalism. The economic crises of the 1970s introduced a change in economic ideology toward what would be called, “neoliberalism.” In neoliberalism, the economy is self-regulating, and thus the state should leave it alone. According to Freeman, Hayek’s “ideas about constitutional limits to democracy were effectively ways to ensure that the economic sphere would be carefully insulated from the demos and thus that democracy’s redistributive threat would be neutralized.” The economy should be lightly managed by experts and technocrats whose prime directive is to let the market dictate its own future.

Neoliberalism demands free markets that spread across the world. The free movement of capital around the world accelerated after the 1970s. The rich got richer and hid their wealth in tax havens.

Monetary Policy, Trade Agreements, and Democracy

Independent central banks that set monetary policy are out of the control of vox populi.  “Monetary policy is instead increasingly governed by the financial markets and the interests of financial capital,” writes Freeman. Policy is a tug of war between the interests of capital and the interests of labor, and capital is winning.

International trade agreements can create enduring and hard-to-revoke rights of capital in terms of strengthening property rights; these rights are designed to outlast the government that signed on to them, to endure as democratic elections produce new governments. Trade agreements can impose harsh penalties on governments that try to reverse the policy.

International Financial Institutions and Democracy

International Financial Institutions (IFIs) – G7 and G20, World Economic Forum, etc. – are global organizations that are not representative of all of the countries that they impact. Membership is based on invitation only, and the wealthy elite are the ones who control the invitations. These institutions define the space in which policies are discussed and decisions are made.

This restricts the policy options available to individual nations for a few reasons: The elite nations:

  • are deeply committed to neoliberalism and the global trade agreements that restrict national policies that could deal with within-nation income inequality;
  • promote international competition for international corporations to locate their businesses there (e.g. low corporate tax rates);
  • favor policies that promote economic growth instead of social welfare.

“In the post-1970s” Freeman writes, “firms and their interest associations have lobbied governments for rollbacks and efficiency-oriented reforms in national systems of social protection. They have argued that social programmes negatively affect profits, investment, and job creation and they have also used the threat of relocation to more favourable environments in order to put pressure on domestic policymakers.”

Rich countries have tools to resist these changes. Poor countries do not. As a result, the developing poor countries reduce public spending and take loans from the IMF and others to pay for what public spending they do.

The consequence is a spiral of debt and loans and more debt that reduces what little political leverage these countries have to change the policies of global finance. In addition, this debt is increasingly financialized, “packaged and repackaged in different forms of securities and traded on the bond market.” Thus, poor developing countries have a difficult time renegotiating and managing their debt with the rich countries.

In the mid-1970s, rich democracies decided to limit vox populi on their democratic control over the economic system and the distribution of economic resources, especially over social welfare.

“Two new approaches were developed at this time – New Public Management Theory (NPM) and Governance theory. Both promoted their changes in the name of costcutting and efficiency. NPM can be seen as an extension of neoliberal theory as applied to the public sector. It calls for governments to embrace private sector management strategies.”

While the de-centralization of decision making within governments over economic matters can be seen as, on paper, more democratic, it ignores the basic problem of political inequality:

“While some have argued that this new form of policy-making is in fact more democratic than top-down government – because a wider range of stakeholders are involved, including also NGOs, consumer groups and other elements of civil society – it must be remembered that the resources available to large companies, TNCs and business associations to engage in these processes is far, far greater than that available to civil society groups, many of which are poorly funded and under-resourced. As one commentator noted, it is like lining up rowing boats against battle ships. Rather the shift to decision-making in multi-stakeholder policy networks has led to an increased representation of the private sector, and thus of capital, in the policy making process.”

Summary and Conclusion

Democracy was supposed to reduce economic inequality through economic redistribution to the masses. As the masses allow the elite to become representatives, the representatives were supposed to allow political control over the economic policies that make sure redistribution works.

This worked, until the 1970s. After then, there were large scale changes to the economy. There was a technological change that rewarded a small group of workers. Growing automation will only accelerate this trend. CEO compensation went through the roof. And the rules of global finance, accelerated through neoliberalism, made it easier to move money around the world, incentivizing the wealthy to hide their wealth (Panama Papers) and create tax havens (Pandora Papers).

Freeman argues that the people mentioned in “We the people” — vox populi — have lost political control over the economy. Democracy outsourced knowledge on financialization to the market and to political appointees who believe in the power of markets.

The result is the inequality grows, and democracy does little to stop it.

Further Reading

Acemoglu, Daron and James Robinson. 2008. Persistence of Power, Elites and Institutions. American Economic Review, 98: 267-291.

Boix, Carles. 2003. Democracy and Redistribution. Cambridge: Cambridge University Press.

Brady, David, Beckfield, Jason & Wei Zhao. 2007. The Consequences of Economic Globalization for Affluent Democracies. Annual Review of Sociology, 33: 313-334.

Freeman, John, and Dennis Quinn. 2012. The Economic Origins of Democracy Reconsidered. American Political Science Review, 106: 58–80

Gradstein, Mark and Milanovic Branko. 2004. Does Liberte = Egalite? A Survey of the Empirical Links between Democracy and Inequality with some evidence on the Transition Economies. Journal of Economic Surveys, 18,4: 515-537

Piketty, Thomas. 2014. Capital in the Twenty First Century. Cambridge: Harvard University Press. (trans: Arthur Goldhammer)

Timmons, Jeffrey. 2010. Does Democracy Reduce Economic Inequality? British Journal of Political Science, 40, 4: 741-757.

Copyright Joshua Dubrow Politicalinequality.org 2022

  1. Why does economic inequality rise in democracies?
    1. Rising Inequality in Democracy: Elite Distribution and Voting Suffrage
    2. Economic Redistribution Stopped Reducing Economic Inequality in the 1970s
    3. Freeman’s Thesis: Vox Populi Lost Control over the Economy
      1. Neoliberalism and Democracy
      2. Monetary Policy, Trade Agreements, and Democracy
      3. International Financial Institutions and Democracy
    4. Summary and Conclusion

How Do Digital Technologies Impact Political Inequality?

A robot drawing with a pen on a piece of paper, signifying the connection between robots and human technology, i.e. digital technology

This post discusses the relationship between digital technologies — the internet and its hardware — and political inequality. This is part of the POLINQ project. In this project, we have understood that political inequality has many definitions.

Thesis: Digital technologies have enabled a dystopic political inequality where politics is possible for the few and impossible for the many.

Read also:

Table of Contents

  1. Thesis: Digital technologies have enabled a dystopic political inequality where politics is possible for the few and impossible for the many.
  2. Let’s First define politics as both political voice and political response
  3. Next, let’s understand that we are politically unequal
  4. Our Digital Dawn Is Our Political Dusk
  5. Politics Exists in an Era of Endless Information
  6. Big Data is a Big Part of Political Inequality and Endless Information
  7. Intersectionality and Inequality in Politics is a Reflection of Endless Segmentation
  8. Political Inequality is a Consequence of Digital Technologies
  9. The Way Forward

Let’s First define politics as both political voice and political response

Politics is a tool used to gain power over important decisions that impact our lives. This tool has two parts: Voice and Response.

Political voice is how we express our political complaints, desires, demands, and interests to our fellow human beings across nations, to our fellow citizens within nations, and to government. Voice activates directly through what social scientists call “political participation,” such as public marches, writing letters to our representatives or to the media, boycotting products, and voluntarily organizing the political interests of particular groups, to name a few.

We also activate our political voice through representation, that is, indirectly via people and organizations that claim to carry our voice into government, such as parliamentarians, political parties, non-governmental organizations in civil society, and special independent arms of the government (the ombudsperson or special envoy, for example).

Response via representation is what the decision-makers do with our voice. They can respond with mere symbols, such as declaring Black History Month to address institutional racism. They can respond with formal and informal policy initiatives.

Next, let’s understand that we are politically unequal

Political inequality characterizes modern societies. Political equality is the assumed foundation of modern democracy. Yet, everywhere there is democracy – indeed, everywhere there is politics – there is political inequality. Political inequality is structured differences in influence over government decisions and the outcomes of those decisions. It is inequality of voice and it is inequality of response.

Inequality always emerges, and will use all available tools to do so. In hunter gatherer societies, even with communal ownership of the means of production (weapons and other tools) that lowered economic inequality, the best hunters were awarded greater status (much more than the gatherers, whose contribution to daily caloric intake is greater and more stable than that of the hunters).

When Communism in Eastern Europe tried to reduce economic inequality by the government lowering everyone’s incomes and controlling the labor market, political connections to the regime became the new currency, and a special and pernicious form of political inequality was born.

Inequality is an ever-adapting cockroach.

Our Digital Dawn Is Our Political Dusk

Digital technologies are tools for the storing and sharing of information. Since the dawn of the digital age (ca. 1950s), these technologies are of two main parts: computers (software and hardware) as the storage bin and the internet as the sharer-in-chief. To understand the interaction chains that bind us to computers, there are three possible: human-to-human, human-to-computer, and computer-to-computer.

Only human-to-human is without computer intrusion. Digital technology can allow humans to talk more efficiently to other humans, or computers to talk to one another: “Take the professor in the back and plug him into the hyperdrive,” Han Solo snarled.

Digital technologies enabled globalization by being the most efficient way to store and share information; it moves money and makes people money; it transfers knowledge and culture (Tweets are worthless, in and of themselves; but tweets from the right persona can cause havoc).

The ubiquitous and portable availability of digital hardware make strong the bonds between human-to-computer, and computer-to-computer interaction, at the expense of human-to-human interaction.

Spying with computers – that humans are unaware that a computer intervenes into the relationship – robs humans of genuine human-to-human interaction. Bots are everywhere.

The unnatural environment that gave rise to digital technologies unleashed two infinite forces that brought out humanity’s worst: endless information and endless segmentation.

Politics Exists in an Era of Endless Information

Our desire for information is rooted in our desire to reduce choice complexity. We prefer simple: when faced with a too-large array, we aggregate and categorize; we segment. When faced with new information, we look for how it fits into old segmentation. Then, we look for ways to house this information.

When faced with accumulating important knowledge too big for any one person to remember, we created libraries to house the information and we created schools to pass the information on to the next generation.

Big Data is a Big Part of Political Inequality and Endless Information

Big Data is an unusually large dataset drawn from diverse sources of information. Some Big Data contain customer data, based on where they are, what internet portal they opened, what they clicked in that portal, when they clicked on it, and where they went afterwards. The Big Data sets can be millions of cases long. They can be few cases and millions of variables wide.

Big Data is built on you, and it uses you to get more people inside it, and will follow you wherever you go.

Photo by Voice + Video on Unsplash Digital Technology and Political Inequality
Who is recording you?

Intersectionality and Inequality in Politics is a Reflection of Endless Segmentation

Endless segmentation is the logical conclusion of endless information.

This is how the chain begins and ends: The new internet companies – Google, Facebook, Twitter — depend on advertisers, and advertisers need data on their potential customers, and advertising agencies need data on the potential customers. Digital technology corporations that specialize in such data sell data to media-buying and advertising agencies. Let’s call all of them, “the marketeers.” The marketeers harness the power of endless information they collect on customers to create Big Data on those customers. To make sense of this endless information, they segment.

Within Big Data, endless information became endless segmentation.

Intersections of race, class, and gender are not enough; the marketeers need what they like.

Endless segmentation feeds the algorithms. Algorithms are ways of making sense via clarifying & simplifying of data. It does so by creating a series of rules:

If, Then.

The algorithms deliver what advertisers want and what they think customers want: they think customers want more of the same things they clicked, tapped, pressed, and swiped on. Liked Fox News on Facebook? You’ll like Gun Shows in Your Area. Liked Cannabis? You’ll like a t-shirt with a pot-leaf on it. Like both? You’ll get ads for Napoleon Dynamite.

Political Inequality is a Consequence of Digital Technologies

Digital technologies have led us to the uncanny valley of politics: there is the recognizable outline of the political process, but the details are disturbingly off.

The new digital political divide is not a gap in access or skills; there is inequality whether you opt in or opt out of our digital dystopia.

The divide is because there is universal access and skills to a digital world that is run by Silicon Valley corporations whose promote efficiency of computer-to-computer interaction and information sharing and demote human-to-human interaction and emotion sharing.

Autocrats take advantage of digital technologies to spread misinformation, hack opponents and share secrets online, find and eliminate protest and protesters, sow discord. It’s what Morozov called, The Net Delusion.

The Way Forward

The way out is a variant on Timothy Leary’s life advice with a Luddite twist: Turn off the machines, tune out the information noise, and drop in to the homes of family and friends. The way forward is to pop the information bubble, re-connect with human beings, boycott the segmenters, and dare to be brave.

This work was funded in part by the National Science Centre, Poland (2016/23/B/HS6/03916).

Copyright Joshua Dubrow 2017

The dawn of digital inequality