Democracy has flourished only in countries with some form of market economy, an economic system based on rights to private property and free enterprise. Conversely, democracy has never existed in countries with a state-centric or command economy, in which the government controls most of the property and industries.
A market economy is a dynamic and flexible system for producing and distributing the goods and services that the people of a country need and want. For example, there are ongoing transactions at multiple marketplaces, where individuals may freely interact to make decisions about what to buy and sell. These free-flowing exchanges between buyers and sellers affect the prices of goods and the profits of producers and sellers, as well as the supply of and demand for goods and services.
A market economy involves competition among producers and sellers of goods and services, who strive to outdo one another in attracting buyers or consumers of their products. Consumers also compete with one another to buy scarce goods or services.
The right to own and use private property and other resources for personal and public benefit is an essential characteristic of a market economy. Producers and sellers of goods and services, for example, use their property, money, time, skill, and other resources to make and sell products that consumers want to buy.
Freedom of exchange at the market, like other social interactions in a constitutional and representative democracy, is regulated by the rule of law. Thus, individual rights to own and use private property and to make economic choices are protected by the constitutional government of a democracy. The government regulates economic activity within limits framed by the constitution, thereby maintaining the order, security, enterprise, and competition needed for the market economy to work as it should. Thus, a market economy exemplifies liberty under the rule of law.
In every democracy, the constitutional government regulates economic activity in response to the interests of the people. The range of regulation in various democracies extends from the highly regulated markets of the social democracy model to the less regulated markets of the liberal model. However, democracy—and the liberty associated with it—is not possible under a state-centric system, where the economy is controlled by the government and government officials with virtually unlimited power direct a state-controlled, or command, economy, the antithesis of the market system.
A prime example of the command economy was the Union of Soviet Socialist Republics (USSR), which existed from 1917 until 1991. Through their total control of the production and distribution of goods and services, government officials had the power to dominate the inhabitants of their realm. And there were no effective limits on their power to abuse individuals at odds with the government or to deprive unpopular persons of their rights to liberty, equality of opportunity, and even life.
The ultimate deficiency of the command economy, however, was its lack of productivity. Thus, the standard of living for most people in the Soviet Union was very low.
In contrast, the market economy, with its private property rights and relatively free choices, forms a material foundation for constitutional democracy, liberty, and prosperity. The people of such constitutional democracies such as the United States of America, Japan, and the countries of the European Union have the highest standards of living in the world.
By John Patrick, Understanding Democracy, A Hip Pocket Guide (Oxford University Press)