At least at the global level, the correlation between free markets and plural politics breaks down, and it seems to do so from both ends. Democratic politics often do not support open markets, and open markets do not always reinforce the tendency to democratic government.
And:
Young, still-developing democracies lack the resources and the institutions to counteract the enormous lobbying power of global business. Young democracies have few mechanisms to prevent large corporate contributions from influencing political outcomes. Even mature democracies, after all, often fail to meet this challenge.
Yet it is also clearly the case that under the correct circumstances, capitalism is a major pillar of democracy, as has been the case in the United States. Under what conditions then does capitalism foster democracy. It seems to me that three conditions need to be present in order for capitalism to foster democracy: the rule of law, limited government, and an economy with its foundations in entrepreneurial activity.
American political philosophy begins with the premise that government governs with the consent of the governed and that its powers and duties are established by the Constitution, which is held to be the supreme law of the land. No man is held to be above the law or beneath it, and the legitimate actions of government, groups and individuals are bounded by the law, not by the whims of a king or potentate.
Closely linked to the rule of law, though not necessarily following from it (see the European Constitution), is the notion of limited government. The Constitution of the United States limits the power of the United States' government to regulate the economic activity of the people of the United States. This limitation on government power reduces the incentive of players in the marketplace to use the government to advance their business ends through regulation of the market, seizure of the assets of competing firms, etc.
The third major component of the equation, an economy grounded in entrepreneurial ventures, is also essential because it limits the ability of larger corporations to drive competitors out of the market. It also reduces the political power of individual corporations and increases the incentive of individuals to fight for limited market regulation to give them freedom to carry on their businesses as they see fit.
Though the power of government has waxed, especially since the 1930's; living constitutionalism has somewhat undermined the rule of law; and large corporations play a larger role in American life than they had in the early history of the United States, and many of them pressure the government to pass regulations designed to benefit them to the hindrance of their competition, especially small businesses, the foundations of American society, built on the rule of law, limited government and the entrepreneurial spirit continue to drive American vitality and preserve its democratic society.
What does this tell us about, say, Iraq. There is no history of the rule of law in Iraq; many people look to the government for jobs; the nation's largest portion GDP comes from oil revenue, and the Iraqi oil industry is state-run. None of the three elements that contribute to a flourishing of capitalism and democracy are present, though there is a significant entrepreneurial element in Iraqi society. As long as the United States remains in Iraq, something like democracy and capitalism will survive in Iraq because that is the system the United States is promoting, and they are the dominant power in the country. If the United States leaves too soon, it is likely that the cycle of tribalism and nationalism that dominated Iraqi society in the post-Ottoman era will come to dominate Iraq again with spikes of Saudi Wahabbism and radical Iranian Shi'ism further enflaming the situation. If the United States is willing to remain the dominant player in Iraq for the foreseeable future, a stable, democratic, capitalist Iraq may yet emerge, but it will take awhile.
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