Democracy, Capitalism, and Equality: The Importance of Impersonal Rules

We usually consider it progress when a country begins to shift from an autocratic to a democratic form of government. However, the introduction of elections and other early trappings of democracy often has the perverse effect of exacerbating political instability. It also increases the incentives for those in power to manipulate the economy for political ends and thus often negatively affects economic growth. We argue that the key to getting beyond these pernicious effects—to reconciling democracy and capitalism—is to move to a governance structure based on impersonal rules that apply in the same way to everyone (or at least to broad categories of everyone). We lay out the theoretical basis for this argument and illustrate it with evidence about how the transformation worked (or not) in the case of the United States, United Kingdom, and Germany.