I would argue that it does both.
In a way capitalism and democracy are very well-suited to coexist. Both capitalism and democracy emphasize the idea that people should choose their own ways and should have a great deal of freedom. Since both systems emphasize freedom and personal choice, they go very well together.
There is also a way in which capitalism can undermine democracy. This is because capitalism tends to cause inequality whereas democracy depends to some extent on having all members of a society be relatively equal to one another. Capitalism tends to cause situations in which some people are much richer than others. When this happens, democracy can be to some extent imperiled because the rich and the poor will have different levels of power. In addition, they may feel a great deal of enimity for each other and class warfare might erupt. Both of these are bad for democracy.
So, while democracy and capitalism can go together very well, they can also clash with one another.
Two great economists of the last generation, Max Weber and Joseph Schumpeter, detailed the linkage. Weber contended that democracy in its clearest form can occur only under capitalist industrialization, and that it had its greatest opportunity in a society which emphasizes individual responsibility. He stated flatly that history clearly confirms that modern democracy rose along with capitalism and in a casual connection with it. Schumpeter was even more emphatic. He stated that modern democracy is a product of the capitalist process, and the two were mutually supportive parts of a rising modern civilization. Schumpeter was careful to point out, however, the tension between capitalism and democracy. He cautioned that the means at the disposal of private interests were often used to interfere with the mechanism of competitive leadership. The Friedmans say that despite the advantages which flow from capitalism, the relationship between political and economic freedom is complex and by no means unilateral. The essential nature of capitalism is social harmony through the pursuit of self-interest. Under capitalism, the individual's pursuit of his own economic self-interest benefits the economic self-interests of all others. The system means the complete separation of economy and state, just like the separation of church and state. Capitalism is the social system based upon private ownership of the means of production. However, the primary premise of capitalism, the one that I consider most important, is that is based on individual rights. It is the only politico-economic system based on the doctrine of individual rights. This means that capitalism recognizes that each person is the owner of his own life, and has the right to live his life in any manner he chooses as long as he does not violate the rights of others.
Although capitalism is given credit, for generating wealth and increasing economic growth, it is commonly thought of for its focus and celebration of greed. The elite Powerful corporations which have a concentrated economic power are a great threat to democracy. These corporations, finance political campaigns, lobby congress and use their immense resources in many legal and illegal ways to influence government to serve their interests. By doing this Capitalism is undermining “ the governments capacity to respond to citizens concerns”. The big corporations and economic elites make up only 1% of our population but they are the ones in control and making the rules. We have to remember that Democracy is much more then elections its about citizens joining together of further the common good. Democracy is designed to address the issues of inequalities of income and wealth , yet we as democratic citizens and unable to cope with capitalisms negative effect. The average American working class citizen just goes with the flow, he follows the rules, works hard and obeys the boss and the ones in charge because they are the ones in control of his paycheck. The CEO of his company may be immoral, greedy and have no interest in the welfare and rights of his workers, but he just assumes that that’s the way life is and theirs nothing he can do to change his situation. We as democratic citizens have to start realizing that we could actually make a change, it doesn’t have to and its really not supposed to be this way. The question is do we really even care enough to make this change?