5 Economic Institutions and
Democratic Government
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The connection between democratic political institutions and capitalist economic
institutions is troubling and complex, and has generated both a huge literature and
complex policy change. In the space available here we can only examine three
issues: how far democratic government can or should try to constrain the
operations of economic institutions; conversely, how far economic institutions
can and should try to constrain democratic politics; andWnally, how far democratic
government can and should model its operations on business institutions.
TheWrst of these issues is central to something we have already discussed: the
process of economic regulation. But there are wider questions and they go to the
heart of the connection between democracy and the market order. Two very
diVerent sets of problems can illustrate the point: the control of trade unions
and the control of business. The control of trade unions emerged as apolicyissue in
the era of full employment of the ‘‘thirty glorious years.’’ But why would unionsas
institutions be thought to constitute a problem for democratic government?
A converging stream of work oVered a variety of answers: because their position
in the division of labor allowed them to exploit organized social complexity to
disrupt economic and social processes; because they were institutions of coercion
incompatible with democratic liberties; and/or because they were veto groups
that obstructed the functioning of democratic government (for instance, Brittan
1975 ). One of the most inXuential syntheses was contained in Olson ( 1982 )
where the institutional power of unions was assimilated to a wider theory of
collective action—one where the incentives for organization favored the
development of sectional groups intent on protecting interests, against policies
that ensured economic eYciency. Long-term democratic stability obstructed
economic eYciency by fostering the spread of these groups, who in turn hobbled
the policy performance of democratic governments. One way out of this impasse
was catastrophe—such as military defeat—which destroyed the institutions of
sectionalism. 5
There is an air of fatalism about these accounts, which sits uneasily with the
policy practice, notably in the Anglo-Saxon democracies, where the 1980 s and
1990 s saw full frontal, and often successful, attacks on the power of sectional groups
like trade unions. Something of the same fatalism attaches to those accounts
which see a sharp contradiction between democratic politics and business
institutions. Alongside the well known Marxist versions of this account can be
5 But though Olson’s was a theory of sectionalism generally his instances are strikingly biased in the
direction of unions: see 1982 , 77 – 9.
economic institutions 155