Chapter 2 Outline

Political Systems

The economic and legal systems of a country are often shaped by its political system.2 As such, it is important that we understand the nature of different political systems before discussing the nature of economic and legal systems. By political system we mean the system of government in a nation. Political systems can be assessed according to two related dimensions. The first is the degree to which they emphasize collectivism as opposed to individualism. The second dimension is the degree to which they are democratic or totalitarian. These dimensions are interrelated; systems that emphasize collectivism tend to be totalitarian, while systems that place a high value on individualism tend to be democratic. However, there is a gray area in

Collectivism and Individualism

The term collectivism refers to a system that stresses the primacy of collective goals over individual goals.3 When collectivism is emphasized, the needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individual's right to do something may be restricted on the grounds that it runs counter to "the good of society" or to "the common good." Advocacy of collectivism can be traced to the ancient Greek philosopher Plato (427 - 347 bc), who in the Republic argued that individual rights should be sacrificed for the good of the majority and that property should be owned in common. In modern times the collectivist mantle has been picked up by socialists.

Socialism

Socialists trace their intellectual roots back to Karl Marx (1818 - 1883). Marx argued that the few benefit at the expense of the many in a capitalist society where individual freedoms are not restricted. While successful capitalists accumulate considerable wealth, Marx postulated that the wages earned by the majority of workers in a capitalist society would be forced down to subsistence levels. Marx argued that capitalists expropriate for their own use the value created by workers, while paying workers only subsistence wages in return. Put another way, according to Marx, the pay of workers does not reflect the full value of their labor. To correct this perceived wrong, Marx advocated state ownership of the basic means of production, distribution, and exchange (i.e., businesses). His logic was that if the state owned the means of production, the state could ensure that workers were fully compensated for their labor. Thus, the idea is to manage state-owned enterprise to benefit society as a whole, rather than individual capitalists.4

In the early 20th century, the socialist ideology split into two broad camps. The communists believed that socialism could be achieved only through violent revolution and totalitarian dictatorship, while the social democrats committed themselves to achieving socialism by democratic means and turned their backs on violent revolution and dictatorship. Both versions of socialism have waxed and waned during the 20th century.

The communist version of socialism reached its high point in the late 1970s, when the majority of the world's population lived in communist states. The countries under Communist rule at that time included the former Soviet Union; its Eastern European client nations (e.g., Poland, Czechoslovakia, Hungary); China, the Southeast Asian nations of Cambodia, Laos, and Vietnam; various African nations (e.g., Angola, Mozambique); and the Latin American nations of Cuba and Nicaragua. By the mid-1990s, however, communism was in retreat worldwide. The Soviet Union had collapsed and had been replaced with a collection of 15 republics, most of which were at least nominally structured as democracies. Communism was swept out of Eastern Europe by the largely bloodless revolutions of 1989. Many believe it is now only a matter of time before communism collapses in China, the last major Communist power left. Although China is still nominally a communist state with substantial limits to individual political freedom, in the economic sphere the country has recently moved away from strict adherence to communist ideology.5

Social democracy also seems to have passed its high-water mark, although the ideology may prove to be more enduring than communism. Social democracy has had perhaps its greatest influence in a number of democratic Western nations including Australia, Britain, France, Germany, Norway, Spain, and Sweden, where social democratic parties have from time to time held political power. Other countries where social democracy has had an important influence include India and Brazil. Consistent with their Marxists roots, many social democratic governments nationalized private companies in certain industries, transforming them into state-owned enterprises to be run for the "public good rather than private profit." In Britain, for example, by the end of the 1970s, state-owned companies had a monopoly in the telecommunications, electricity, gas, coal, railway, and shipbuilding industries, as well as having substantial interests in the oil, airline, auto, and steel industries.

However, experience has demonstrated that far from being in the public interest, state ownership of the means of production often runs counter to the public interest. In many countries, state-owned companies have performed poorly (see the opening case on Brazil). Protected from significant competition by their monopoly position and guaranteed government financial support, many state-owned companies became increasingly inefficient. In the end, individuals found themselves paying for the luxury of state ownership through higher prices and higher taxes. As a consequence, a number of Western democracies voted many social democratic parties out of office in the late 1970s and early 1980s. They were succeeded by political parties, such as Britain's Conservative Party and Germany's Christian Democratic Party, that were more committed to free market economics. These parties devoted considerable effort to selling state-owned enterprises to private investors (a process referred to as privatization). Thus, in Britain the Conservative government sold the state's interests in telecommunications, electricity, gas, shipbuilding, oil, airlines, autos, and steel to private investors. Moreover, even when social democratic parties have regained the levers of power, as in Britain in 1997 when the left-leaning Labor party won control of the government, they now seem to be committed to greater private ownership.

Individualism

Individualism is the opposite of collectivism. In a political sense, individualism refers to a philosophy that an individual should have freedom in his or her economic and political pursuits. In contrast to collectivism, individualism stresses that the interests of the individual should take precedence over the interests of the state. Like collectivism, however, individualism can be traced back to an ancient Greek philosopher, in this case Plato's disciple Aristotle (384 - 322 bc). In contrast to Plato, Aristotle argued that individual diversity and private ownership are desirable. In a passage that might have been taken from a speech by Margaret Thatcher or Ronald Reagan, he argued that private property is more highly productive than communal property and will thus stimulate progress. According to Aristotle, communal property receives little care, whereas property that is owned by an individual will receive the greatest care and therefore be most productive.

After sinking into oblivion for the best part of two millennia, individualism was re-born as an influential political philosophy in the Protestant trading nations of England and the Netherlands during the 16th century. The philosophy was refined in the work of a number of British philosophers including David Hume (1711 - 1776), Adam Smith (1723 - 1790), and John Stuart Mill (1806 - 1873). The philosophy of individualism exercised a profound influence on those in the American colonies who sought independence from Britain. Individualism underlies the ideas expressed in the Declaration of Independence. In more recent years, the philosophy has been championed by several Nobel prize-winning economists, including Milton Friedman, Friedrich von Hayek, and James Buchanan.

Individualism is built on two central tenets. The first is an emphasis on the importance of guaranteeing individual freedom and self-expression. As John Stuart Mill put it,

The sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection . . . The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. . . .

The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.⁶

The second tenet of individualism is that the welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (such as government) dictating what is in society's best interest. Or as Adam Smith put it in a famous passage from the Wealth of Nations, an individual who intends his own gain is

led by an invisible hand to promote an end which was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who effect to trade for the public good.⁷

The central message of individualism, therefore, is that individual economic and political freedoms are the ground rules on which a society should be based. This puts individualism in direct conflict with collectivism. Collectivism asserts the primacy of the collective over the individual, while individualism asserts just the opposite. This underlying ideological conflict has shaped much of the recent history of the world. The Cold War, for example, was essentially a war between collectivism, championed by the now-defunct Soviet Union, and individualism, championed by the United States.

In practical terms, individualism translates into an advocacy for democratic political systems and free market economics. Viewed this way, we can see that since the late 1980s the waning of collectivism has been matched by the ascendancy of individualism. A wave of democratic ideals and free market economics is sweeping away socialism and communism worldwide. The changes of the past few years go beyond the revolutions in Eastern Europe and the former Soviet Union to include a move toward greater individualism in Latin America and in some of the social democratic states of the West (e.g., Britain and Sweden). This is not to claim that individualism has finally won a long battle with collectivism--it has not--but as a guiding political philosophy, individualism is on the ascendancy. This represents good news for international business, since in direct contrast to collectivism, the pro-business and pro-free trade values of individualism create a favorable environment within which international business can thrive.

Democracy and Totalitarianism

Democracy and totalitarianism are at different ends of a political dimension. Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives. Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited. The democratic - totalitarian dimension is not independent of the collectivism - individualism dimension. Democracy and individualism go hand in hand, as do the communist version of collectivism and totalitarianism. However, gray areas exist; it is possible to have a democratic state where collective values predominate, and it is possible to have a totalitarian state that is hostile to collectivism and in which some degree of individualism-particularly in the economic sphere-is encouraged. For example, Chile in the 1980s was ruled by a totalitarian military dictatorship that encouraged economic freedom but not political freedom.

Democracy

The pure form of democracy, as originally practiced by several city-states in ancient Greece, is based on a belief that citizens should be directly involved in decision making. In complex, advanced societies with populations in the tens or hundreds of millions this is impractical. Most modern democratic states practice what is commonly referred to as representative democracy. In a representative democracy, citizens periodically elect individuals to represent them. These elected representatives then form a government, whose function is to make decisions on behalf of the electorate. A representative democracy rests on the assumption that if elected representatives fail to perform this job adequately, they will be voted down at the next election.

To guarantee that elected representatives can be held accountable for their actions by the electorate, an ideal representative democracy has a number of safeguards that are typically enshrined in constitutional law. These include (1) an individual's right to freedom of expression, opinion, and organization; (2) a free media; (3) regular elections in which all eligible citizens are allowed to vote; (4) universal adult suffrage; (5) limited terms for elected representatives; (6) a fair court system that is independent from the political system; (7) a nonpolitical state bureaucracy; (8) a nonpolitical police force and armed service; and (9) relatively free access to state information.⁸

Totalitarianism

In a totalitarian country, all the constitutional guarantees on which representative democracies are built--such as an individual's right to freedom of expression and organization, a free media, and regular elections--are denied to the citizens. In most totalitarian states, political repression is widespread and those who question the right of the rulers to rule find themselves imprisoned, or worse.

Four major forms of totalitarianism exist in the world today. Until recently the most widespread was communist totalitarianism. As discussed earlier, communism is a version of collectivism that advocates that socialism can be achieved only through totalitarian dictatorship. Communism, however, is in decline worldwide and many of the old Communist dictatorships have collapsed since 1989. The major exceptions to this trend (so far) are China, Vietnam, Laos, North Korea, and Cuba, although all of these states exhibit clear signs that the Communist Party's monopoly on political power is under attack.

A second form of totalitarianism might be labeled theocratic totalitarianism. Theocratic totalitarianism is found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. The most common form of theocratic totalitarianism is based on Islam and is exemplified by states such as Iran and Saudi Arabia. These states restrict not only freedom of political expression but also freedom of religious expression, while the laws of the state are based on Islamic principles.

A third form of totalitarianism might be referred to as tribal totalitarianism. Tribal totalitarianism is found principally in African countries such as Zimbabwe, Tanzania, Uganda, and Kenya. The borders of most African states reflect the administrative boundaries drawn by the old European colonial powers, rather than tribal realities. Consequently, the typical African country contains a number of different tribes. Tribal totalitarianism occurs when a political party that represents the interests of a particular tribe (and not always the majority tribe) monopolizes power. Such one-party states still exist in Africa.

A fourth major form of totalitarianism might be described as right-wing totalitarianism. Right-wing totalitarianism generally permits individual economic freedom but restricts individual political freedom on the grounds that it would lead to the rise of communism. One common feature of most right-wing dictatorships is an overt hostility to socialist or communist ideas. Many right-wing totalitarian governments are backed by the military, and in some cases the government may be made up of military officers. Until the early 1980s, right-wing dictatorships, many of which were military dictatorships, were common throughout Latin America. They were also found in several Asian countries, particularly South Korea, Taiwan, Singapore, Indonesia, and the Philippines. Since the early 1980s, however, this form of government has been in retreat. The majority of Latin American countries are now genuine multiparty democracies, while significant political freedoms have been granted to the political opposition in countries such as South Korea, Taiwan, and the Philippines.