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What is a democratic economy

Democratic economy is based on the understanding that the economy is a social creation. Unlike the cosmos, nature and people themselves, which are created by the Creator, the economy, politics and culture are created by mankind. This means that these areas are governed not by absolute laws, but by rules and customs that people have established in society. 


The rules governing these areas have been constantly changing throughout history. They are changing also now. The main question is who decides what these rules should be. We believe that all citizens should have an influence on the formation of laws that govern our economy.     


The foundation of a democratic economy is the understanding of the state not as a bunch of apparatchiks, but as a community of active citizens. That is, the state is all of us, as citizens with equal rights. In this case, the question of the correct "size" of the state disappears. The boundaries between the state and citizens become blurred. The main criterion for success becomes the efficiency of the state.


State and business


In a democratic economy, the opposition between the state and the market/business also becomes irrelevant. Currently, the concept of "experimental governance", when state institutions implement projects in close cooperation with business, using the methods of experimentation and iteration, typical for business, is gaining momentum in the world. Dani Rodrik spoke beautifully on this topic in his recent article:


“From the experimental-governance perspective, the “state vs. market” dichotomy is simply irrelevant. States and markets are complementary, not dichotomous."


Market and democracy


Mainstream economic thought equates democracy with the market. Representatives of this school usually represent the market as a "voting machine", where participants vote for one or another product with their own money, similar to how voters cast their vote for their favourite politician in a democratic election. However, despite all the attractiveness of such an analogy, it is extremely dangerous for democracy itself. Here is why:

"Market Failure". Market fundamentalists recognize that public goods such as national security, justice, and law and order cannot be marketable because they are not subject to market pricing principles. Therefore, the state should be "minimal", like a night watchman. The rest of the goods and services that society needs for development are created and redistributed exclusively according to market principles.


At first glance, the night watchman state corresponds to democratic principles because it does not interfere in areas where market logic reigns. However, the market itself, unlike democracy, does not guarantee broad and inclusive access to decision-making. Those market participants who do not have enough money are not accepted by the market. In other words, their "voice" will not be heard. Therefore, market principles of pricing may contradict the main principle of democracy - inclusiveness.


Inclusiveness of democratic government. Socially important goods such as health and education services, pensions, housing and transport can be provided either by the private sector under market conditions or by democratic governance. However, unlike the market, democratic governance cannot exclude the broad masses of the population from consuming these goods through the price mechanism. Therefore, the government intervenes in the market in order to increase inclusiveness - the access of the entire society to socially significant goods at an "acceptable", government-subsidized (in other words, non-market) price.


Why does a democratic government do this? Because society cannot be governed only in the interests of those market participants with the greatest purchasing power. This goes against the basis of democratic governance - equal, direct and universal access of society to decision-making. Thanks to democracy, the government is able to compensate for "market failures" - situations where market pricing has the effect of strengthening exclusive tendencies.


"Failures" of democratic government. Where are the limits of government intervention? Corruption, bureaucracy and inefficient management are the main threats to the government´s implementation of its mission. On the one hand, intervention in market processes must be justified from the point of view of expanding inclusiveness - equal access of citizens to socially important goods; on the other hand, to be transparent and accountable to society, clearly highlighting the goals and limits of such intervention.  


Efficiency or inclusiveness? Another argument in favour of the "minimal state" concept is that intervention in the market will result in inefficiency. However, from this point of view, the market can achieve efficiency at the expense of socially unacceptable measures, for example, the closing of enterprises, which will have the effect of increasing the level of unemployment, and, therefore, narrowing the access to the market of the unemployed. Therefore, the task of a democratic government is to adjust market processes in order to bring social choice (the consequences of the democratic decision-making process) closer to economic efficiency (for example, economic optimality according to Pareto criteria). The compatibility of economic efficiency with inclusive decision-making in a democratic society is the best way of economic development (development economics). In this case, market freedom and democratic equality complement each other.


Combating unemployment as one of the main mechanisms of inclusion and democratization of the economy


One of the most significant consequences of "market failure" is structural and hidden unemployment. Adepts of the market economy believe that the market itself balances supply and demand in the labour market. That unemployment in one form or another is the problem of the unemployed, a consequence of their laziness and inability to adapt to market trends and requirements, that "a person can always find a job if he wants".

The consequences of such an approach could be observed for almost the entire period of Ukrainian independence: millions of people lost their jobs at enterprises that were closed "due to inefficiency", hundreds of thousands converted from engineers of high-energy physics to traders on local markets, with the state´s complete indifference. An obvious alternative to such "market" processes would be state intervention and support of strategically important branches of the economy, including those critical to the state defence capability.

The right to work and a decent existence is an inalienable right of a citizen of a democratic state that cares for its citizens. The development and step-by-step technological transformation of economic sectors, in the direction of increasing efficiency and competitiveness, is the main task of a democratic economy, which focuses on the long-term, and not only on instant profit and "market efficiency".

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