Is a free-market economy necessary to democracy? This is a complex question to which there is no unequivocal answer. On one side a system of production is distribution based upon the principal of free exchange can be seen as conductive to democracy.
Like democracy, the market treats individuals non-paternalistic-ally, as the best judges their own interested and as responsible of their own choices.
It makes the consumer sovereign in much the same way as the voter is sovereign in a democracy, with the success of firms depending upon the degree of electro support them, much as political parties depends upon the degree of electoral support they obtain. Moreover, the market sets limits to the power of the state by decentralizing economic decisions and by dispersing opportunity, information and resource within civil society.
It prevents people from being beholden to the state for their economies destinies or for the financing of any in independent political and cultural activity. In all these ways the market can be seen as supportive of democracy.
Disadvantage of The Market
On the other side, however, the market, if left to itself, generate and booms and slums in production which cause enormous economic hardship and dislocation. It makes a country vulnerable to international fluctuation in prices and trade that deprive it of self determination in its economic policy.
Domestically, the market intensifies the difference of capacity and resources that various economic agents bring to it, in a way that compromises the political equality demanded by democracy. And its treat the labour of worker at just another commodity subject to the laws of supply and demand, to be dispensed with if unwanted, in a manner in that is inconsistent with the value which the status of citizenship confers of the individual.
It is hardly surprising, therefore, that the early industrializing countries of Western Europe found that the free market was incompatible with a democratic suffrage, which they resisted throughout most of the nineteenth century; or that many subsequent attempts to run a laissez-faire economy have required authoritarian governments to contain popular discontent. Since the Second World War Western government have sought to reconcile democracy with a market economy by substantial market regulation and intervention, by economic redistribution and by creating a system of welfare rights to protect the most vulnerable from the market’s vicissitudes.
Ambiguous Relationship
Those attracted by the simplicities of laissez-faire would do well to note these ambiguities in the relation between democracy and the market. At the same time, the centrally planned economies of socialism required and uncontrollable bureaucratic apparatus to administer them, allowed the state of absorb all society’s energy and initiative and created hug political inequalities and privileges, none of which were compatible with democracy.
Whether a decentralized system of socially owned enterprises with a market economy could prove either economically workable or consistent with a multi-party democracy remains an unsolved questions, The only form of democratic socialism that has so far proved able in practice has been the social democracy of the West and North European countries since 1945. And that has been more a modification of capitalism that its outright replacement.