Business Magazine

Tracing the Link Between Capital Markets and the Development of Democracy

Posted on the 06 March 2015 by Center For International Private Enterprise @CIPEglobal

Synonymous with the aristocracy and social elite for much of history, the “political class” took a new form – that of the merchants and businessmen – during the Middle Ages. A class that reached their position from hard work and skills, their growing power came from their business activities instead of social origin.

But how do the origins of the middle class relate to – or even have a role in – democracy?

As the business activities of the middle class expanded, fueled in part by the New World’s silver, its increasing power signaled need for special regulation by the political elite – the roots of today’s government regulations.

Unlike the rest of society, the middle class worked to convert property into capital. In the words of Max Weber, “only those who own property have the possibility of shifting what they own from the sphere of benefit as ‘wealth’ to the sphere of employment as ‘capital’: hence they alone can become entrepreneurs.” The evolving middle class and capital markets offered economic progress for its entrepreneurs as well as betterment for the entirety of society as they paid taxes used for fulfilling state functions.

This relationship is explored in the latest Economic Reform Feature Service article. Former Director of the G17 Institute and Commissioner of the Securities Exchange Commission in the Republic of Serbia, Milko Stimac examines the shared characteristics, principles, and parallel institutions of democracy and capital markets in this article derived from his work, Shareholding and Democracy.  

Stimac writes:

“The middle class also created a system of values, a framework that emphasized respect for social values, adherence to laws and regulation, diligence and thrift, and recognition of property rights. The democratic system, with its institutions and procedures, is the best defense of fundamental values upon which the entire middle class-based society rests.”

Whereas ideologies have at times pitted capital markets and democratic bodies against one another, Stimac examines the shared principles underlying both market economies and a political democracy. For example, openness of institutions, anonymity and transparency, freedom of association, and division of responsibility and risk serve to represent and reconcile interests, whether as a member of society or a shareholder.

Through identifying shared principles and institutions, Stimac demonstrates not only the mutual reinforcement of capital markets and a democracy, but shows how one cannot exist in its fullest form without the other.

Read the whole article here.

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