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George Washington hated parties, but they formed anyway. Britain has a Brazilion parties, but they all merge into two anyway after an election. They have an election with several parties earning seats, then all the parties form into two alliances, and the two alliances battle each other. We do the same thing, we just alter it slightly. Our primaries are when all the factions battle it out, and the voters decide the coalitions, and those coalitions run in the general under the names "Democrat" and "Republican."
If you did away with parties, people would still take the opposite views on issues and elections would still center around those views, and the candidates who could appeal to the most voters would still divide ideologically from the candidates who appealed to the second most voters.
As for the system leading to extremism, it does on some levels, and it leads to the opposite in others. In national elections it leads to moderates--whichever candidate can get the most middle voters wins, just by simple math, so our presidents tend to be moderates, or at least they have to pretend to be. On a state level--governors or senators--the candidates still have to be closest to the center for that state, but of course different states have different centers, for a number of reasons (ag versus industry, city versus rural, educated versus not-so-educated, etc). So each state chooses senators in their middle, and the basic ideology of that state is represented.
Where it leads to extremes is in the local elections, especially the House of Representatives, and that is the fault of the party system to some degree. Each state's dominant party draws Congressional districts to maximize its party's strength, and to create safe districts for their party. So, conservative regions are grouped together (under a conservative state), while liberal regions are divided up and each smaller section is combined with a nearby conservative district to eliminate the power of the liberal region. Austin is an example. It used to be one liberal district, but when Tom DeLay redrew the districts (twice) after the 2000 census, he split Austin into four districts, and combined each with a very conservative area--mine, for instance, comprises north Austin and a chunk of Houston, so make sure my liberal neighbors have no voice.
So in that way, the party system, or at least the specific federal system of districting we use, does lead to extremism. Many seats in the House are held by Reps from these extreme districts (of either party), and only about a third of them are really open to change each time.
But I don't believe for a second you can change that by trying to either eliminate parties or trying to force a multi-party system. Either way, it will still come down to a choice between right and left, and the two sides will still divide things up, no matter how they are organized. They might spend more time haggling over leadership issues, since the party structure won't be as clear-cut, but that's about it.
As for money, money is always going to dominate any power structure. Money is power. It doesn't buy power, it is power. It dominated communism (even if the concept of wealth and money were a little different), it dominated feudalism, it dominates capitalism--the only question is really what system the government uses to divide up money. In a democracy, what offsets the power of the wealthy is the masses of the people. The poor can outvote the rich, the rich can twist the perceptions of the poor--it's always a struggle. In most other systems, there is no struggle--the rich just dominate.
The Teabaggers are a populist movement controlled by the moneyed interests, so they aren't populist in effect, only in their intentions. They are a weapon that the moneyed can buy, without realizing they've been bought. The leftists are the real populists, but they don't know what to do with power when they get it, and they can find few allies in power (power and money are the same thing), so they are impotent. Some leftists want to toss capitalism for some form of socialism or communism or some imagined system, but it wouldn't matter--they'd still be the little guys who get trodden on by the wealthy, even if wealth is defined in a different way.
Those in the middle are the most powerful. They aren't always right, and that's not always good, but they are the swing voters who decide between the wealthy and the poor. And they are influenced by advertising and demogagues, but they are also influenced by their own economic situation. If the wealthy are too powerful and are hurting the middle classes economically, the middle shifts to the left. If they are being taxed too heavily for social spending, they shift to the right. Like it or not, that's the basic rule of democracy. People vote their pocketbook. A lot can be done to persuade and sway them either way, but only within a few degrees. The exception to this comes when the middle class is very comfortable, and the wealthy classes aren't too much richer, so they can feels safe spending on social programs without greatly upsetting their own comfort.
It all boils down to the two parties being divisions that will just happen, even if we change the name and the way elections are held. Maybe we should change things, maybe we shouldn't--that's another debate--but things won't change dramatically if we do.
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