Classical Liberalism, Democracy, and Economic Growth: A Hypothesis About the Lipset Hypothesis

Abstract

Does economic growth create democracy, as suggested by the proposition known as the Lipset hypothesis? According to this paper, for the Lipset hypothesis to be valid, it is sufficient for an ideological and a technological condition to be fulfilled. The ideological condition is that the political agenda-setting ideology should be classical liberalism, which can be characterized as combining an aversion towards democracy with a positive assessment of economic and civil liberties. The technological condition is that the country in question should be advanced enough in the technological sense, because in such a country there is no economic growth without innovation maintained by a free market for ideas. Logit regressions run with panel data show that in the period up until the early 20th century a higher per capita income increases the probability of a democratic regime change, but afterwards it does not. The explanation is that before the early 20th century the two conditions were met, but they were not met in those countries that were about to become democratic after the first two decades of the 20th century.

Keywords: classical liberalism, democracy, economic growth, Lipset hypothesis

JEL Classification: D70, O11, O43