Public Debt: The Paradox of Free-Market Democracy?

Cormac McCarthyThis blog post is the sixth in a series of posts that come from students of our capitalism and democracy undergraduate course. As part of the course, students were asked to write about an issue pertaining to the political economy of distribution. The best blog posts have been selected to provide an opportunity to exceptional young scholars at UCD to contribute to the debate on the future of European and global economic governance, and to promote the insightful scholarship being undertaken at UCD to a wider public audience.

Thomas Piketty’s latest book, “Capital in the Twenty-First Century” contends that inequality is on the rise and that this inequality is an inevitable outcome of free market capitalism. Consequently, Piketty argues that the inherent nature of free market capitalism (R>G) threatens the foundations of modern democratic societies by allowing for the concentration of wealth into the hands of the top 1%. In recent decades, the inability of fiscal policy-makers, global economic organisations, and political elites to either prevent financial crises or control the economic and political fallout from such crises, has become patently clear. Consequently public concerns are increasing in regard to the need to attain and safeguard economic and democratic stability.

In particular, public expectations of elected representatives to maintain consistent economic growth whilst ensuring ‘responsible’ fiscal consolidation challenge policy-makers to achieve and preserve the social state: hence the paradox of market democracies. By examining and critically analysing how elected governments and economic institutions have sought to address this paradox, this blog aims to demonstrate the increasing inability of democratic institutions to control the market and thus highlights the now commonplace concern that democracy is at risk of subversion from market forces in the wake of the 2008 financial crisis.

Since the late 1970s, accumulating “policy legacies” have resulted in chronic budget deficits in most of the world’s advanced democracies (Streeck, 2010, p 5). The ensuing rise in public debt has thus substantially limited the means by which national governments can reverse or even reduce their budget deficits (Streeck, 2010, p 5). For example, in recent decades national governments have been under consistent pressure to fund public services and income transfers in their societies through supplementing existing capital resources by borrowing from the future (Streeck, 2010, p 5). Consequently, public debt increases, as well as the annual interest on this debt (Streeck, 2010, p 5).

Therefore, the cost of servicing this swelling public debt and the social state “is likely to consume an increasing stake of tax revenue, and in so doing, progressively fill fiscal space for policy innovation and gradually limit options for democratic governments” (Streeck, 2010, p 5).

The accumulation of policy legacies has been perceived by some, such as Streeck and Olson, as a process of institutional ageing (Streeck, 2010, p 5). Essentially, by introducing time as a causal factor when analysing institutional change, it can be anticipated that democracies become more limited in their options for redistributing available resources, according to the length of time that such democracies have been in existence (Streeck, 2010, p 5). For example, Streeck argues that although tax increases would temporarily halt institutional ageing, it would be difficult for governments to introduce tax increases in older democracies where there may be an even greater build-up of policy legacies, because these tax increases are then being used to pay off public debt and do not directly benefit the citizens who are asked to foot the bill (Streeck, 2010, p 5).



Thus, the gradual accumulation of policy legacies under the constraint of liberalized capital markets inevitably leads to greater instability, and can undermine or even subvert democracy itself (Streeck, 2010, p 5).

The inability of national governments to prevent increasing public debt accumulation and rising inequality is central to the implicit conflict between market forces and democratic society, or capitalism and democracy (Chua, 2000, p 315). As Adam Smith contends, “For every one rich man there must be at least five hundred poor…The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions” (Chua, 2000, p 315). In essence, the contrast between free markets that allow for the concentration of enormous wealth, and democracies which provide universal suffrage, and politically empower the poor, inevitably leads to social tension to varying degrees (Chua, 2000, p 315).

In the US and Europe, the erosion of democracy has led, arguably, to citizens voicing their discontent through electoral means such as voting for more radical parties such as the Tea Party, U.K.I.P. and the Golden Dawn party, as well as through public demonstrations, lobbying and street protests such as the Occupy Wall Street movement (Streeck, 2011, p 1). Likewise, in more newly developing democracies such as Indonesia, a combined simultaneous pursuit of rapid marketisation and democratisation in the late 1990s led to just 3% of the population owning 70% of the private economy (Chua, 2000, p 315). This inflamed ethnic tensions and resulted in widespread protest, dissent and violence, and ultimately subverted Indonesian markets and democracy (Chua, 2000, p 315).

In conclusion, there is a pressing need for greater efforts from national governments and international financial organisations to resolve the fundamental inconsistencies between free market capitalism and democratic rights. In recent decades, the inability of fiscal policy-makers, global economic organisations, and political elites to prevent rising inequality and the deprivation of low and middle income earners has challenged the democratic process. Ultimately, it remains to be seen if there will be any concerted effort by international and national authorities to reconcile the fundamental tensions between free market liberalization and institutional democracy. Perhaps, as Piketty argues, the answer lies in a progressive redistributive global tax on wealth; though the vast political determination that would be required to implement such a tax seems unlikely in the foreseeable future.

Cormac McCarthy is currently studying at University College Dublin, Ireland. This blog post was submitted as part of his coursework in winter 2014 for his undergraduate degree in Politics & International Relations. Upon completing his degree in 2015, he will aim to pursue further postgraduate studies.



  • Chua, A. 2000, ‘The Paradox of Free Market Democracy: Rethinking Development Policy’, Harvard International Law Journal, Vol. 41, No. 287, pp 315 – 405.


  • Furner, M. 2007, ‘The Paradox of Democratic Capitalism: Politics and Economics in American Thought’, The Business History Review, Vol. 81, No. 3, pp 478 – 580.


  • Piketty, T. 2014, Capital in the Twenty-First Century, London: Harvard University Press.



  • Streeck, W. and Mertens, D. 2010, ‘An Index of Fiscal Democracy’, Max Planck Institute for the Study of Societies, Vol. 10, No. 3, pp 1 – 15.


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