A system of government with elected representatives is a good thing, but more fundamental than the form by which the government is chosen are the powers it has and the rights it respects. Objectivism
holds that a properly limited government should be one founded on the strict respect for individual rights to life, liberty, and property. It should govern through the use of objective laws. In this context, but only in this context, a "democratic," or popularly elected government, is the best known way choose a legislature or the executive. Without respect for basic rights and objectivity, even a democratic government can be oppressive and tyrannical.
"Democracy," in its original and etymological sense, means rule by the people, i.e., the rule of a state by its citizens (as opposed to rule by a monarch, a dictator, an elite group, or by no one at all). If understood in this very basic way, democracy is a highly ambiguous, if not indeterminate, concept. Who are "the people"? How do they "rule"? Until these questions are answered, it is impossible to assess democracy philosophically.
However, we can reach a verdict on democracy in its most popular sense. In modern America, "democracy" is often used to denote liberal democracy, a political system in which the right to make political decisions is exercised by the people within a framework of constitutional restraints (this system is alternately called a democratic republic or a constitutional democracy). On the Objectivist view, the propriety of such a democratic political system depends on the nature of the framework of constitutional restraints that exist on political powers. If this framework is properly conceived, so that the protection of individual rights is its organizing principle and guiding purpose, then liberal democracy is a logical extension of Objectivist political principles.
When properly conceived, the fundamental purpose of a liberal democratic system is not rule by the people, but the protection of rights. Rights, on the Objectivist view, sanction an individual's freedom "to take all the actions required by the nature of a rational being for the support, furtherance, the fulfillment, and enjoyment of his own life" (Ayn Rand, Virtue Of Selfishness, 93). The fundamental right is the right to life, i.e., the right to engage in self-sustaining, self-generated action. The rights to liberty, the pursuit of happiness, property, and free trade are simply the key aspects of this right - aspects that further guide its practical implementation.
To understand the validation for this view of rights and the nature of government, one must understand the basic framework of the Objectivist ethics. Objectivism holds that the ultimate value, for each individual, is his or her life and well-being. The purpose of ethics is to establish a set of principles that will offer people fundamental guidance in realizing, for themselves, this ultimate value. A fundamental principle, in this regard, is that one must act on the basis of one's own, rational judgment, because reason is one's basic means of survival. Individual rights apply this fundamental principle to a social context.
Living in civil society has many benefits, among which are knowledge, wealth, and psychological visibility. All of these count as means to individual well-being. But to secure these benefits, one must be free to think independently and act on one's own rational judgment, and one must respect the freedom of others to do the same. This means that (1) one must be free from physical coercion, and (2) one must refrain from initiating coercion - force or fraud - against others. The rights enumerated above (to life, liberty, etc.) apply these two principles to various contexts of human action. A government is established to enforce these rights; it achieves this by administering a military, a police force, and a judiciary. In the end, when the abolition of force and fraud is successfully established as a general rule of social organization, people can live together as independent producers, voluntarily trading value for value, enriching and sustaining their own lives. When rights are protected, people can securely and maximally realize their ultimate value.
Democratic procedures (such as referendum and balloted election) are only appropriate within the context of a government that is founded to protect rights, and then only to guide their implementation. There can be no compromise on the nature of rights because they are based on the conditions of human life. Any government that does not recognize them no longer serves its own purpose. As Ayn Rand writes, "A society that robs an individual of the product of his effort, or enslaves him, or attempts to limit the freedom of his mind, or compels him to act against his own rational judgment … is not, strictly speaking, a society, but a mob held together by institutionalized gang rule. Such a society destroys all the values of human coexistence, has no possible justification and represents, not a source of benefits, but the deadliest threat to man's survival" (Ayn Rand, Virtue Of Selfishness, 126). (It follows that, if the government's violation of individual rights is egregious enough, that government is illegitimate, and should be abolished.)
Democratic procedures are appropriate for guiding the implementation of rights because there is no viable alternative: any other means would undermine the stability of government, and people's lives would be worse off as a result. If legislators and executive officers were appointed by random lot (as some were in Ancient Athens), or if they inherited their positions (like the members of the British House of Lords), there would be no recourse for the citizens if the government became corrupt or abusive. In addition, there would be no way for citizens to influence or change the government's practices of implementation and interpretation on topics where there is much room for rational disagreement. Without democratic procedures, the only way to change the government would be revolution, and the state would periodically disintegrate. Democratic decision procedures, though not foolproof, facilitate a more durable, peaceful society.
Many of the familiar democratic procedures are legitimate. For example, it is appropriate to select government personnel by balloted election and to determine government policy on derivative issues (e.g., foreign relations, allocation of government funds) by referendum. The factors surrounding these issues are so multi-faceted and complex that there is much room for rational disagreement, and this disagreement is best settled by democratic means. When selecting a candidate, for example, there are many factors to weigh in addition to the candidate's explicit policy stance. One has to assess the candidate's character, leadership skills, managerial competence, and even health. No one is in the appropriate context to have full knowledge of all of these relevant details. In regards to policy-making, rational disagreement can arise for similar, epistemic reasons. It can also arise because of new circumstances. For example, the invention of the computer, which occurred centuries after the adoption of the United States Constitution, required the development of new intellectual property laws.
To this extent, liberal democracy is a necessary extension of Objectivist political theory. By contrast, questions of organization, such as whether it is better to have a representative or direct democracy, a simple majority or a two-thirds majority, etc., have no philosophical answers - they are the proper domain of political science.
There are two other senses of the word, "democracy," that deserve special attention.
"Democracy" has been understood (e.g., by its monarchist critics, and by populists like Ross Perot) to mean unlimited majority rule, where the populace can vote to have the state do anything at all. Given an understanding of why liberal democracy is justified, one should see clearly why unlimited majority rule is inimical to human well-being. If there is no constitution to limit what the government can do, the government can infringe upon individual rights, and thereby defy its fundamental purpose. For example, without a framework of constitutional limits, the majority could legally execute or exterminate any minority it chose. This "populist" form of democracy is incompatible with Objectivism.
"Democracy" is used by others (e.g., Franklin Roosevelt, Jesse Jackson) to mean social democracy, or egalitarianism. This political perspective advocates not the protection of the right to life and its derivatives, but the "equality of outcome." It regards disparities in innate human ability and wealth as impediments to be "overcome" by colossal government interference. In order to equalize "outcomes" and "overcome" differences in ability or talent, social democrats advocate the redistribution of wealth, the provision of social services to the "needy," and forcible, discriminatory hiring and firing practices. Some social democrats even advocate censorship. Because it advocates the blatant violation of the most fundamental individual rights social democracy is totally incompatible with Objectivism.
Sadly, the political system of the United States today is a hybrid of legitimate liberal democracy, mob rule, and social democracy. Majoritarian and egalitarian influences have corrupted the U.S. government. Still, the United States was founded as a liberal democracy. Our constitution articulates a correct, explicit framework of constitutional restraints on power, which were designed to protect individual rights. And this nation's political system is (to this day) closer to a proper liberal democracy than any other political system in the world.