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In this interview with Noam Chomsky on a book Requiem for an American Dream based upon a documentary that he did, he is asked:

Let's go to your next point about 'shaping of ideology'. You talk about the difference between Madison & Aristotle. Both of them understood that if there was inequality, there would be tensions between rich and poor. Madison was calling for the government to reduce democracy. Aristotle saying, the solution, which you obviously support is to reduce inequality.

Where does Aristotle mention this and what did he actually write? Also, in what way was Madison calling for democracy to be reduced?

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Aristotle refers to this in Politics. For example, in Book IV he states that a society with a large middle class (i.e. low inequality) is the "best constitution" of society. A quote in extenso below (from here):

It is therefore the greatest happiness which the citizens can enjoy to possess a moderate and convenient fortune; for when some possess too much, and others nothing at [1296a] all, the government must either be in the hands of the meanest rabble or else a pure oligarchy; or, from the excesses of both, a tyranny; for this arises from a headstrong democracy or an oligarchy, but very seldom when the members of the community are nearly on an equality with each other. We will assign a reason for this when we come to treat of the alterations which different states are likely to undergo. The middle state is therefore best, as being least liable to those seditions and insurrections which disturb the community; and for the same reason extensive governments are least liable to these inconveniences; for there those in a middle state are very numerous, whereas in small ones it is easy to pass to the two extremes, so as hardly to have any in a medium remaining, but the one half rich, the other poor: and from the same principle it is that democracies are more firmly established and of longer continuance than oligarchies; but even in those when there is a want of a proper number of men of middling fortune, the poor extend their power too far, abuses arise, and the government is soon at an end.

A more thorough analysis of Aristotle and his thought on inequality is here.

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What Chomsky said is garbage: cf., "Noam Chomsky on Madison and Aristotle." Chomsky claimed that Aristotle’s democracy, which he identified as participatory democracy, aimed to reduce economic inequality, but that James Madison’s democracy (i.e., the founding principle of American democracy), which he identified as reduced democracy, aimed to maintain existing economic inequality. Chomsky is mistaken on both Aristotle’s and Madison’s.

Chomsky's claim

Chomsky argues that both Madison and Aristotle saw the problem of democracy precisely in the same way, but that their solutions to the problem were the opposite: the morally praiseworthy solution of Aristotle and the morally reprehensible (conspiracy) solution of Madison. The problem of democracy, which Chomsky attributed to both Aristotle and Madison, is that the poor majority will violate the (property) rights of the minority, i.e., the rich. According to Chomsky, Aristotle's solution to the problem is to minimize the inequality to the direction of the welfare gov. Chomsky however does not explain how Aristotle said this welfare gov could be realized. Madison's solution, on the other hand, according to Chomsky, is to restrain the democratic principle (i.e., the government by the majority) through the installment of institutions that are independent of the democratic principle: e.g., division of power (legislative, executive and judiciary branches), the senate system (political elitism), and the judicial review (the rule of the law). To Chomsky, these institutions are to reduce democracy, that is, to take the power away from the people (i.e., from the poor majority) and to continue the deep economic inequality.

Chomsky's garbage

Chomsky seriously misunderstood both Aristotle's democracy and Madison's democracy. First, regarding Aristotle's democracy, it is true that Aristotle believed that the quality of democracy is deeply affected by the economic conditions of its people. To Aristotle, democracy with fat middle class (land-owning farmers during his time) is the most stable, and democracy composed of the poor majority (day laborers during his time) is the least stable. Aristotle concludes, “when there is no middle class, and the poor are excessive in number, troubles arise, and the state soon comes to an end.” (Aristotle, The Politics 1296a16-17). In nowhere, however, contrary to Chomsky’s assertion, Aristotle says that democracy with poor majority should aim to reduce economic inequality. Common sensically, if the majority are poor but have the political power, they would eliminate the economic inequality through the foreseeable means: by plundering the rich (extremely high taxation, imposition of involuntary large donations, and forceful confiscation). In other words, the most feasible way to reduce inequality is to violate the property rights of the rich minority. To Aristotle, democracy consisted of the poor majority is simply hopeless, and this kind of democracy is given way to tyranny since the poor (= the uneducated and the excitable) will be easily swayed by demagogues.

Chomsky's interpretation of Madison’s democracy is even worse. It is true that Madison believed that the government ought to protect the minority of the opulent against the majority. The American democracy installed by the Founding Fathers, i.e., the reduced democracy a la Chomsky, however cannot be translated into Chomsky’s conspiracy theory that the reduced democracy is a means to preserve the status quo of the deep economic inequality. The reduced democracy indeed has the effect of making democracy inefficient, as Justice Clarence Thomas states: “The Framers divided the powers of the national government into three branches: legislative, executive and judicial. Not because they believed that this would lead always to a strong government, but because they believed it would create an inefficient government.” (http://www.jmu.edu/jmuweb/general/news2/general_200132382450.shtml) How could inefficiecy be a virtue? The reason is clear in Madison’s Federalist No. 10. It is to manage factions that could lead to a violent revolution, since Madison believed that an unchecked, unbalanced and undisciplined democracy is subject to "the turbulency and weakness of unruly passions”. In other words, an essential reason for the reduced democracy is to prevent a demagogue from inciting the majority to topple democracy and to elect a tyranny, which Plato believed to be the natural course of democracy (happened in the German democracy with Hitler).

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The Internet Encyclopedia of Philosophy (IEP) > Aristotle: Politics > The Politics, Book VI > The Role of Wealth in a Democracy. Summarizing Aristotle's thinking:

It seems somewhat unusual for Aristotle to be advocating a form of welfare, but that is what he is doing, on the grounds that poverty is harmful to the character of the poor and this harms the community as a whole by undermining its stability.

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