The article has been written by Ishani Samajpati, pursuing B.A. LL.B. (Hons) under the University of Calcutta. This article offers a detailed discussion on the concept of economic democracy, its origin, principles and implementation. There is also a brief discussion regarding how economic democracy is being promoted in India through decentralisation.
It has been published by Rachit Garg.
The word ‘democracy’ has originated from two Greek words, namely “demos” meaning the citizens living in any of the particular city-states in Greece and “kratos” meaning rule or power. In modern times, democracy has emerged as one of the most popular systems of government across the world, formed on the mandates of the common people.
As the most popular form of government, democracy has also evolved a lot and has resulted in different types of democracy, mostly based on methods of governance. Economic democracy, which focuses on the economic well-being of every citizen living in the state, is also a form of democracy that seeks to provide economic equality to all.
While political democracy, the most popular form of democracy, deals with the democratic state and government and attempts to control power in the public sectors, the concept of economic democracy, on the other hand, focuses on economic power. A welfare state protecting and promoting the economic and social welfare of its citizens by providing equal opportunities, fair distribution of wealth and social equality, which form the backbone of economic democracy.
In this article, the definition and origin of economic democracy, the purposes behind it, how economic democracy is beneficial for the general public and how it can be implemented are discussed. It also offers a brief discussion regarding how economic democracy is promoted in India through decentralisation.
Definition of economic democracy
Economic democracy is a system which balances the economic power of the state and supports and encourages the right of the active participation of the common citizens in the economy irrespective of social class, category, race, gender etc and ensures that the economic power is not controlled by the few selected individuals.
Economic democracy is a socio-economic philosophy that seeks to shift economic power to the public stakeholders, including workers, suppliers, consumers, and the public at large, instead of large corporate shareholders and managers, to provide autonomy in the workplace. Such a business model recognises the autonomy and the responsibility of the individual employee, forming the basis of forming the democratic rights of information, influence and participation. As a result, an employee is more likely to understand both the business and his or her role in that business. In this way, there is less inequality and more focus on the economic well-being of the employees.
In an economic democracy, each person has the right to participate in decision-making which provides the opportunity to think about ways to improve businesses. This increases the rate of innovation. Moreover, each person equally shares the profits or losses of the business. There is less economic inequality. However, the effect of the losses in the business may be adjusted by the use of a collective reserve of funds.
- The theory of economic democracy originated in Marxist and socialist ideologies.
- Economic democracy focuses on economic inequality.
- Everybody who contributes to the production is entitled to have a fair share of the profits or wages.
There is hardly any standard definition of economic democracy. The proponents claim that economic democracy addresses both the moral and practical concerns of businesses. The moral concerns addressed by economic democracy are an externality, or external cost, which arises to an uninvolved party due to the activities of the other parties, subordination of general well-being, extremely large private profit by depriving others, and the denial of democratic voices in decision making of various economic policy decisions. One of the practical concerns addressed by economic democracy is the compensation for the inherent effective demand gap in a capitalist economy.
In simple words, the term ‘economic democracy’ means absolute freedom from all types of economic exploitation. For example, the workers are not exploited by the owners and are ensured proper wages in proportion to their labour.
Origin of economic democracy
Supporters of the theories of economic democracy generally state the following reasons that resulted in the introduction of economic democracy:
- The modern capitalist system periodically results in economic crises, which leads to a huge deficiency of effective demand, i.e., the demand for a product or any service and the willingness and ability of consumers to purchase them at different prices. Any deficiency in effective demand happens when consumers do not have enough income to purchase the output production or the final product from the market.
- The creation of artificial scarcity of common resources in the market by corporate monopolies results in socio-economic imbalances. It restricts consumers’ access to economic opportunities and diminishes their purchasing power.
- Economic democracy addresses concerns regarding economic imbalances. In fact, the concept of economic democracy was proposed as one of the socio-economic ideologies. Later, it turned into a stand-alone theory that addresses economic inequalities.
- Economic democracy proposes a variety of reform agendas to address the issues of economic imbalances.
- Economic democracy, as a way to secure equal economic rights, opens a path to full political rights too.
- There are both market and non-market theories of economic democracy.
- Economic democracy, as a reform agenda, supports theories and real-world examples ranging from the decentralisation of corporate monopolies and economic liberalisation to democratic cooperatives, public banking, fair trade, and the regionalization of food production and currency.
- The importance of economic democracy increased, particularly after the global financial crisis of 2007-2008. At that time, people around the world started seeking an alternative to hierarchical corporate capitalism. A market economy, where the firms are owned and controlled by the workers, can be a great alternative to capitalism.
Purpose of economic democracy
- The concept of economic democracy seeks to eliminate all the economic inequalities in society and provide economic justice. To achieve economic democracy, equal wages should be provided for equal work. No differentiation should be made based on any race, colour, caste, creed, or even gender. The existence of economic democracy will become meaningless if the fair distribution of wealth in society does not exist. If there is a concentration of wealth and economic power in the hands of a few influential people, there can be no economic justice.
- Economic democracy is often compared with business models based on cooperation and co-creation. Such business models include businesses where wealth is widely shared by workers and sometimes even by the public, like producer-owned companies comprising farmers and artisans, and international companies such as Lays or Legos, where consumers suggest ideas for new products.
- Ownership and control over the ways of production mostly belong to private corporations. However, they can only be sustained because of the daily choices of the consumers in the marketplace. Although critics of this opinion point out that consumers only vote based on the value of the product after purchasing, they do not participate in the management or how the profits should be used.
Essentials of economic democracy
Economic democracy has turned out to be the unexplored foundation for a free market economy. The free market is the most democratic instrument ever devised by human beings rather than its political counterpart.
In order to achieve economic democracy, all four economic rights must be guaranteed:
- Guarantee to everyone the availability of minimum requirements, including food, clothing, housing, health and education.
- To steadily increase people’s purchasing power by redistributing wealth. Develop the use of local resources and support the production of essential goods to meet the consumption of the entire population.
- Economic democracy supports and promotes forms of work organisation as much as possible, managed by systems based on coordinated cooperation, which allows every worker to be an entrepreneur of the company for which he/ she works. It gives the general public the right to decide how the local economy will run. Some of the responsibilities of the workers include making decisions, sharing profits and risks etc.
- Right to control territorial resources and economic planning by the population. The sovereignty of the economy and resources is the responsibility of the people living in that area. Economic democracy safeguards from speculative external financial economic interference.
Apart from that, there are three key elements to economic democracy:
- The rights to information about the company.
- The right to take part in decisions about the business and the ability to vote out leaders
- The right to a share in the wealth generated by everyone in the company.
Importance of economic democracy for the general public
Economic democracy is immensely crucial for the general public. It helps to take back control of the economy and helps to decide how the economy should run. Economic democracy can provide a just and fair economic system that is also sustainable.
Economic democracy can be achieved:
- By providing the general public with individual economic rights;
- Giving collective ownership of the business companies; and
- Making possible public participation in cases of economic decision-making.
Economic democracy gained importance after the 2007-08 global financial crisis, which made the common people feel alienated and lose control of the economy. It can be important to the general public in the following ways:
According to the Nobel laureate economist Amartya Sen, individual economic freedom can only be achieved when every common man is provided with individual rights to control the economy. This can be achieved by providing everyone with a basic income to provide for the essentials of life, such as food, shelter, and clothing.
This approach would also change the inhuman conditions of the labour market where employers would be forced to make the jobs more suitable for the general public rather than exploiting their labours.
Collective ownership of business companies
The basic idea behind economic democracy is to provide collective ownership of business companies. Economic democracy provides the general public with control in decision-making capacities also.
Public participation in economic decision making
Economic democracy also provides the common public with the right to engage in economic decision-making. It helps them to decide how the financial resources should be used at a macro level. It will result in a progressive economic choice and will make the economy stable.
Principles of economic democracy
Economic democracy is a concept that allows a good life for all. It is an economy for, of, and by the common people. Economic democracy is based on the following principles:
- Principle of community: Common goods of human beings comes first. It provides an opportunity for all.
- Principle of inclusion: Economic democracy creates an opportunity for all, irrespective of any biases such as race, class, colour, creed etc. Hence, it follows the principle of inclusion.
- Principle of local place: Economic democracy ensures that the wealth of the community always stays local.
- Principle of good work: It means labour must come before capital.
- Principle of democratised ownership: Economic democracy creates an enterprise design for a new era where the workers directly contribute to the business and in decision-making capacities while also simultaneously sharing profits and risks.
- Principle of sustainability: Economic democracy focuses on the sustainable ecosystem and protects it.
- Principle of ethical finance: It follows and focuses on investing and lending for people and places.
- Principle of eradication of corruption: Economic democracy employs ways to ensure that no individual gains an unfair advantage over others and confirms equal participation for all.
- Principle of transparency: Economic democracy helps to achieve transparency and accountability for both the functioning of government and industry.
- Principle of protection of rights: Economic democracy emphasises legal structures to recognise and protect property rights.
- Principle of abolishing hierarchy: Economic democracy abolishes all hierarchical relations such as master-servant or employer-employee relationships. It only consists of public-private partnerships in sectors like financial services, health care, education and energy for all.
However, the practical implementation of all these principles of economic democracy is a gruelling job. While there is a common agreement on ‘opportunity for all’ in reality, it may create bitter conflict. But these issues can be solved by fostering a wider societal engagement.
Implementation of economic democracy
The possible ways to implement economic democracy for a sustainable and equitable society are as follows:
- Controlling unethical corporate activities and artificial market mechanisms:
Regulation of fraudulent corporate activities such as lobbying and market mechanisms like the creation of artificial demand or shortages and artificial price rise is one of the most effective ways to curb economic inequalities. Hence, the creation of a free market will be ensured.
- Supporting social enterprises: Social enterprises such as co-operatives and businesses based on co-creation help to provide opportunities to improve the economic conditions for all.
- Creation of money in democratic processes: It includes pluralist community currencies and public banking to counter economic imbalances.
- Redistribution of income and capital assets is one of the important approaches to achieving economic democracy.
- A wider view of economic democracy involves the diversity of production scales and modes. This includes small-scale production and self-employment.
Human effects of economic democracy
- Economic democracy helps the members strongly identify with any particular business. Each individual is more committed to contributing than those in normal employment. Since they are directly involved in the business, they are in a better position to do so.
- Employees in the business are thus respected, active and acknowledged adults. They are not servants but responsible participants.
- Economic democracy helps businesses perform well. The people involved can exercise their autonomy and are treated as genuine participants.
- Being recognised as an equal is also good for the mental well-being of the employees. It also contributes to the formation of healthy family relationships.
Consumer activism and economic democracy
The term ‘consumer activism’ refers to the social movement where the activists seek to influence the consumption habits of the consumers through various activities such as providing information, boycotting and picketing products and services and getting involved in litigation suits in order to force the large corporations and business companies to act in accordance with the interests of the consumers rather than their own self-interests.
Consumer activism is mainly of two types, which fundamentally differ in their approaches. They are organised buying or group purchasing and ethical consumption of goods and services, also known as ethical consumerism.
Whether this type of consumer activism projects the need for economic democracy and helps in gaining social control of the economy is still debatable. However, it is perceived that consumer activism may be able to democratise the economy to some extent.
Organised buying or group purchasing refers to the purchase of goods and services by one or more individuals on behalf of an organisation. The collective buying power of a group of businesses helps in getting the products at a cheaper rate from vendors without actually purchasing them in bulk. It is used in many industries to purchase raw materials and supplies, but it is commonly used in agricultural industries, groceries, healthcare, electronics, and industrial manufacturing.
Ethical consumerism refers to the preferences of consumers of goods based on their own ethical beliefs and morality. The principle behind this stresses individual purchasing power rather than group purchasing power, as happens in organised buying, which tries to increase the social capacity of a committed group of buyers and consumers.
Both organised buying and ethical consumption have the capacity to democratise the economy by subordinating large business corporations and companies. However, it is only possible if the activities are run uniformly by the activists and the business corporations internally have a spirit of democracy rather than focusing on the exploitation of the purchasing power of consumers.
Relationship between civil rights and economic democracy
Civil rights and economic democracy have an integral relationship with each other. While civil rights guarantee equal treatment in political and social situations, the rights provided by economic democracy confirm economic equality and look after the well-being of individuals. The economic perspective of civil rights is closely related to economic democracy in respect of political and cultural concerns.
Economic democracy ensures the economic and non-economic perspectives of any civil rights movement, which depend on the possession of economic power by the people belonging to the marginal sections of society. The concentration of economic power in the hands of a few privileged sections of society not only promotes inequality but also creates economic disparity and racial discrimination.
Economic democracy also fosters cultural goals, which are relevant to achieving civil rights. The cultural goals include the transformation of several cultural values across people of different races and classes, and this requires financial stability. Economic well-being which is provided by economic democracy ensures that everyone can participate in propagating their traditions and culture.
Inclusion and equality of people from all sects of life irrespective of any discrimination are usually achieved through the civil rights movement and it opposes subordination and individualism. Thus, the movement for civil rights seeks to achieve solidarity and empowerment with respect to economic rights. It makes clear that economic rights are not absolute and should not be concentrated in the hands of a few powerful individuals.
Views of international organisations on economic democracy
The International Labour Organisation (ILO), in its Symposium on Workers’ Participation in Decisions within Undertakings (1974), has hailed economic democracy as a means to achieve the self-management of workers. Besides, through measures like decentralisation of the market economy by the intervention of the government, the economic activities of production, consumption, and distribution should improve in favour of the workers. Capital goods will have social ownership, and there will be freedom of employment.
In another study undertaken by the ILO based in India in 1996 titled “Promotion of Social and Economic Democracy through Employment-Intensive Policies”, the ILO termed the achievement of social and economic democracy as an important means to fight against poverty and inequality. It also stated that economic democracy can be achieved by removing economic inequalities by eliminating unemployment and underemployment.
The United Nations (UN) has also been supportive of the promotion of economic democracy. Though the UN has never been vocal for the direct promotion of economic democracy like the ILO, it has focused on the advancement of democracy for the promotion of economic growth. At the World Summit in 2005, the UN stressed on holistic economic development while also calling for sustainable development of the world.
In a 2016 study published by UNESCO titled “Inequality, economic democracy and sustainability”, economic democracy has been credited to reduce inequality, to improve economic growth and to achieve a sustainable way of life. It further states that reducing differences in income does not only depend upon redistribution but also upon the transfer of incomes. Direct representations by the employees on company boards help to expand the economy by consisting of mutual, cooperative, employee-owned companies and social enterprises. It also applauded the benefits of economic democracy in the long run.
Merits and demerits of economic democracy
Economic democracy has several social merits. They are as follows –
- There is less hierarchy in any workplace, which improves the work experiences of every individual, provides a sense of self-worth and values individual contributions.
- Employee-owned business sectors help in creating new jobs faster and the companies have higher productivity.
- Apart from the lack of hierarchy and improvement in production, economic democracy also benefits investors with a long-term interest in any company. Economic democracy helps in replacing shareholder control in the form of the long-term interests of employees.
- Economic democracy has the potential to eliminate the conflicts between the public interests and the anti-democratic manipulations of multinational companies for their own interests.
- Economic democracy helps in the improvement of social relationships which directly contribute to health and happiness.
- Economic democracy helps in reducing consumerism which promotes sustainability.
The demerits of economic democracy are that it is a comparatively new term without any proper framework and guidelines to follow. Besides, large business corporations and companies will be focused on their own self-interest rather than that of the common public. There is no proper way to deal with bankrupt organisations. The taxation system by the government in an economic democracy is not clear. Hence, the promotion of economic democracy will be quite difficult in reality. However, with the proper implementation of economic democracy, it has huge potential to reform economic and social growth.
Promotion of economic democracy in India
In India, economic democracy can be promoted by shifting from schemes to programmes that suit the livelihoods and provide ways and responsibilities that focus on the interests and requirements of the local community. These can be promoted through decentralisation. Decentralisation, in simple words, means when power is taken away from Central and state governments and given to local governments, in this case, the Gram Panchayat in rural areas and municipalities in urban areas.
Decentralisation in India can be of three types. They are:
1. Political decentralisation;
2. Administrative decentralisation; and
3. Fiscal decentralisation.
Political decentralisation is handing back the powers to the local self-government instead of the national or state government. Administrative decentralisation is the redistribution of administrative authority and financial resources to the local government and fiscal decentralisation is the power given to the local government to raise revenues and taxes. Fiscal decentralisation also includes self-financing or co-financing.
Political decentralisation has already taken place in India through the rural local government, i.e., Panchayat Raj and Gram Sabha, through the Constitution (Seventy-third Amendment) Act, 1992. Political decentralisation has also taken place in the urban areas through the Municipalities through the Constitution (Seventy-fourth Amendment) Act, 1992. However, India needs to stress more administrative and fiscal decentralisation for the promotion of economic democracy.
Though there are several challenges in administrative and fiscal decentralisation. For example, in a country like India with a large population, the results of administrative and fiscal democracy are unknown and ambiguous. However, the total decentralisation of every organ of the government can promote economic democracy in India, which is ultimately beneficial for the economic and social growth of the country.
In the system of economic democracy, employees share responsibilities, ownership, control, and decision-making powers over the resources in their communities. The concept is based on the values of solidarity, cooperation, democracy, and sustainability as opposed to the targets of profits and self-interest.
The presence of economic democracy can significantly reduce inequality and lead to greater well-being for all classes, especially the working classes. It also increases the amount of shared wealth in communities instead of concentrating huge amounts of wealth in the hands of a few.
To achieve economic democracy, instead of creating more access to participation, the focus should be on real partnership and shared power, control, and benefits for individuals for the resources that matter in our lives.
Due to various financial and political crises and the worldwide inequalities due to the pandemic of COVID-19, economic democracy has arisen as the need of the moment to remove economic disparity across society.
Frequently asked questions (FAQs) on economic democracy
What is economic democracy?
‘Economic Democracy’ means a system that supports the presence of economically democratic corporations or firms. These are the corporations or films owned by all the employees working there, just as the citizens own the government. It abolishes the employer-employee relation or master-servant relation. All the stakeholders are responsible for the decision-making and changes in policies.
Why do we need to form an economic democracy?
Economic democracy is an economy of, for, and by the people.
- It aims to meet the essential needs of all.
- Balances human consumption.
- Addresses the regenerative capacity of the environment.
- Responds to the concerns of common people.
- Share economic prosperity without any discrimination.
What are the issues that economic democracy advocates for?
Economic democracy supports the following issues:
- Supporting the creation of worker, consumer and platform cooperatives instead of traditional shareholding corporations and venture-funded tech startups.
- Removing fiscal benefits and subsidies to corporations.
- Public banking.
- Social control of investment through initiatives.
What is the importance of economic democracy?
Capitalism has created massive economic inequality and compromised the political systems by concentrating the wealth in the hands of a few powerful individuals and the business corporations owned by them. Economic democracy supports equal participation of every individual in a business corporation which, in turn, will provide economic equality. Economic democracy also ensures that the economy is controlled by the common people.
What is decentralisation?
Decentralisation is a policy matter consisting of even and systematic distribution of authority at every level of management. Every employee working in the institution gets some share in the authority irrespective of the levels of work due to decentralisation.
Decentralisation acts as the basis of economic democracy.
What is the Economic Democracy Index (EDI)?
Economic Democracy Index (EDI) is a standard developed by the team of professor Andrew Cumbers of the University of Glasgow and Nottingham Trent University, in partnership with the New Economics Foundation and Oxfam to measure the democratic standard of various economies. It also checks for the countries that encourage the democratic participation of common citizens in economic decision-making.
- Gary Chartier, Civil Rights and Economic Democracy, 40 Washburn L.J. 267 (2001).
- R. Henry Weaver, Is Consumer Activism Economic Democracy, 22 U. PA. J.L. & Soc.CHANGE 241 (2019).
- The Workings of Economic Democracy, 7 FREE WORLD 524 (1944).
- Arasy Pradana A. Azis, Economic Democracy and the Quest of Net Neutrality in Indonesia, 8 LENTERA HUKUM 387 (2021).
- David N. Cooper, Economic Democracy: The Challenge of the 1980s, 6 LAB. Stud. J. 330 (1982).
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