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Is Democracy Compatible with Liberal Markets?

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“Is democracy compatible with liberal markets?”

Part I:

Introduction: This paper seeks to explore if there is a possibility of coexistence between democracy and liberal markets. This paper argues that these two are compatible; the pillar on which this argument is built is that the two concepts are inseparable because they share the common heritage of being able to flourish under conditions of freedom.[1] Because of this, it becomes impossible for any other form of government to fit so neatly with liberal markets as democracy.

The methodologies adapted, the problems encountered in the process, the arguments this thesis question addresses, and the case study proffered to support this thesis question are spelt out in the forthcoming sections.

Part II:

Summary: The fall of communism in the early 1990’s brought about an economic and political order that replaced the bipolar system. The extent and power of this change has been too dramatic to be described in simple words; the engine that has propelled this change has been democracy, capitalism and with it, liberal markets. While these may not have been the sole factors for the collapse of communism, the world order that came about following this event has certainly been driven wholly by these factors. Despite various arguments against the virtues of capitalism and market-driven economies, it is an ineluctable fact that this is a system that has come to stay. The bedrock on which liberal markets are built is democracy. This is because of the simple fact that communism as well as authoritarianism and liberal markets are as greatly antithetical to each other as is democracy to state-controlled economies. Hence, it follows that if there is an element of compatibility between the present political and economic systems, it has to be between democracy and liberal markets. This is not to suggest that each is an easy, automatic and inevitable part of the other; this position encounters enormous stumbling blocks, as listed in Part III of this paper. This leaves the paper its chief difficulty, that of the quandary over which position to assume, in light of equally strident, contradictory viewpoints about the compatibility of the two. One of the ways by which this paper seeks to extricate itself from the task of examining such broad and seamless concepts is in adapting Giovanni Sartori’s method in his book, The Theory of Democracy Revisited (1987), in which one of the ways by which one can arrive at a definition of democracy is in understanding it for what it is not, as much as for what it is. (Sartori, 1987, pp. 183, 184) To simplify this further, one of the approaches to the thesis question has been that of elimination; what this means is that in seeking to arrive at the essence of the thesis, this paper rules out the compatibility of liberal markets with other forms of governance. To demonstrate this, this paper takes up the case of Argentina’s economic crisis as a case study. In this discussion, this case’s detailed history is not made; rather, the important aspects of political profligacy that led to this crisis is illustrated, to show that long periods of political misrule characterised by an absence of democracy, and not liberal markets in themselves, was the cause of the crisis. It also shows up the example, on the contrary, of India, to show how liberal markets can succeed when introduced into a democratic polity. India, too, undertook several structural reforms of its economy under the IMF, but did not go the Argentine way, mainly because the political system was different.

Part III: Limitations of this study: The core predicament of this paper concerns an investigation into the possibility of union between two ideas whose ages are incomparable –the concept, however amorphous, of democracy is as old as the hills,[2] while that of free markets, free trade and liberal markets are only decades old. In the attempted marriage of the two concepts, there is a very great possibility, perhaps even a near certainty, that there are sharply divided opinions. Secondly, as is well-known, there is no fixed, single definition of a democracy. This makes any treatment of this debate highly fluid and volatile. Another factor is that the focus of this paper is on liberal markets. This adds another problematic dimension to this paper, since the debate on the compatibility or lack of it, between liberal, free markets and democracy is charged with a feverish emotiveness and lack of dispassionate reasoning as by the core difference between communism and democracy, a direct hangover of the situation that prevailed during the height of the Cold War. Accentuating this debate was, as logically pointed out by Giovanni Sartori in his book, The Theory of Democracy Revisited (1987) the fact that while communism could be defined by clearly demarcated terms and meanings set out by its prophet, Karl Marx, no such fixed boundaries could be assigned to democracy. In such a scenario, as the author suggests, there is a tendency for what may be called “confused democracy”, while none of these applies to communism. (Sartori, 1987, pp. 3-6) This makes this system’s compatibility, or otherwise, with a sharply and narrowly described term even more difficult to explain. In view of this, it is to be conceded that all understanding and judgment of this paper’s position is highly subjective. Yet, since a position has to be taken, this paper proceeds in the full acceptance of the fact that an equally opposite viewpoint can be conceded. [3]

Part IV:

Discussion: The most important factor that facilitates the harmonious relationship between democracy and liberal market is that both are founded on the same edifice: of their common linkage with freedom. The rapid economic changes taking place in the world today are almost entirely market-driven. Following the death of the Soviet Union, this has been brought to bear even more heavily on the world. During the years following this event of critical importance to the world, there has been an unprecedented growth in the liberal markets of the world. A key point that perhaps best illustrates this dramatic transformation is the migration has been taking place from rural and semi-rural communities to urban centres all over the world, but principally in Third World countries, driven entirely by liberal markets. De Soto (2000) considers this nothing short of a modern industrial revolution, whose scale is quite unmatched, before which the original revolution pales in comparison. Consider the fact that the earlier industrial revolution in England had to support a migration of something like a mere eight million people in the two and a half centuries it took to transit from agriculture to the New Economy. In contrast, today, the world is witness to urbanisation caused by the influx of several million people, out of which some 200 million migrated to liberal market-driven urban centres in Indonesia alone. To accommodate changes of this magnitude, the only viable system of governance is democracy. Western economies were able to cope up with earth-shaking changes only because they had the democratic, legal institutions to absorb these changes; the Third World would today turn chaotic if the same conditions of democracy do not exist to accommodate the marginalised sections. (Soto, 2000, pp. 70-72)

Another example, at the micro level, but of nearly equal gravity, of how democracy and liberal markets not only coexist but also promote each other is that of the sweeping changes taking place in the Indian economy. The deeply entrenched caste-ridden Indian mindset could not change its basic fabric in centuries; yet, less than just two decades of market-driven economic changes[4] showed the promise of instilling change at an unimagined speed. For instance, access to computers, a direct result of liberal markets-oriented economic reforms, has brought in democracy at the rural level at hitherto unimaginable speed. Farmers are now able to sell their produce to the user directly, bypassing the centuries-old feudal system by which they had to necessarily sell through the middle man, who used to be from the upper castes. This has been a direct result of the mating of liberal markets with democracy. This phenomenon is not restricted to India; as quoted by the political scientist, Sheri Berman, shifts to democracy by most of Latin America in the 1980’s were closely related to a corresponding shift to free-market economy. (Bhagwati, 2004, pp. 93-95)

Case study: This next section strengthens the thesis topic further by demonstrating that liberal markets have been a great failure when they have been introduced into non-democratic economies. The case study this paper takes up to vindicate this stand is the Argentine economic crisis of the late 1990’s. This paper takes up this case mainly because contrary to popular belief, the Argentine economic crisis was not the result of IMF-prescribed market economy measures; rather, they were the product of decades of economic mishandling characterised by wrong prioritisation, by a succession of dictators, (Peralta-Ramos, 1992, pp. 35-38) which the IMF intervention failed to correct. (Frenkel, 2002) The position this paper takes is that this correction could not come about because the system’s rot had been too deep-rooted, not on account of liberal market-oriented economic policy per se, but because of systematic squandering by the military in the decades following the end of Peronist populism, by which the economy was reduced to bare bones over time. In this transition, the beneficiaries of public spending shifted gradually but firmly from the middle class to the ruling class. (Little, 1975, p. 163)

These economic misdemeanours were concomitant with political notoriety spread over the decades during the reign of and following the overthrow of the populist, Juan Peron, that came to be called by the collective epithet, ‘Dirty Wars’. Started initially in the name of fighting Leftist guerrillas, (Marchak & Marchak, 1999, p. null27) this phase soon degenerated into state terrorism, marked by innumerable political kidnaps, extortion and disappearances, of people who dared to raise their voices against the military regimes. (Taylor, 1997, p. 258) In line with this, and more importantly, the governments, to support these activities, had built up a highly porous banking system which could easily be exploited by the ruling class with little accountability. The entire economy was built on debts, of which three-fourths was in the public sector, which the dictatorial ruling class could use for its benefit by draining the nation at will. In only 10 years between the mid-1970’s and the mid-1980’s, the interest payments the governments collected had fallen from 17 percent to a puny one percent of the consolidated public sector expenditure. (Ferrer, 1985, p. 6) This is just one example of the ruin the military brought upon the economy. Thus, the basis of the Argentine economic crisis was economic mishandling by the ruling class, and not so much the policies of the IMF, which came into the picture much later, when the economy had crossed the Rubicon.

It is fashionable to put most of the blame for Argentina’s economic crisis of the late 1990’s, which snowballed into a full-blown economic catastrophe, on the IMF and its prescriptions for a free market economy. (Frenkel, 2002) While this may be true to some extent, it has to be borne in mind that this was only a last ditch effort to resuscitate the economy, whose causes for decline dated to several decades, as is seen here. In contrast, India, with its deeply ensconced democratic system, could absorb the momentous changes wrought into its economy with relative ease, breaking free from the shackles that had bound the economy in the earlier decades under restrictive policies. It is now admitted that India’s economic recovery from the deep crisis it was in, was the result as much of liberal market reforms as due to the inherent strength of its political system. (Drèze & Sen, 1995, p. 179) Far from going the Argentine way, India is now an economy that is firmly and surely on the road to liberalisation, from which there seems no looking back.[5] In a matter of just one generation, it is one of the fastest growing economies of the world today. (Cetron & Davies, 2006)

Part V:

Conclusion: The congruence between democracy and liberal markets is indubitable; while admitting that there are several areas that need rectifying, and that this is not the most viable of all possibilities, it has to be admitted that there exist no better alternatives. While it is conceded that this system is far from perfect, the fact is that no system is; had the socialist system been perfect, then all the economic upheavals the world has been going through should have been averted. In this scenario, it makes little sense to argue about the disharmony of the market economy with democracy. If anything, what needs to be put into place is a supporting set of laws and regulation that tempers down some of the inequalities of the system. (Wolf, 2003) Historical experience shows that liberal markets have always flourished in the industrialised nations, which have been democratic, prime examples of which are the US, UK, Canada, Australia and New Zealand. (Dryzek, 1996, p. 68) However, a new dimension has been added to this notion, with India showing that the engine for this growth is not so much a belonging to the group of industrialised nations[6], but the existence of democratic systems as its bulwark. This, rather than liberal markets in isolation, is the prerequisite for achieving economic growth. In the light of these findings, it is meaningless to argue that democracy and liberal markets are incompatible; on the contrary, they are almost inextricably bound to each other and are inseparable, fuelling each other’s development.


Bhagwati, J., (2004), In Defense of Globalization, Oxford University Press, New York.

Cetron, M. J., & Davies, O., 2006, July/August, “The Dragon vs. the Tiger: China and India Reshape the Global Economy; India and China Will Vie for Economic and Political Dominance on the World Stage. Here's an Assessment of the Two Nations' Short-Term and Long-Term Prospects”, The Futurist, Vol. 40, No. 38+. Retrieved April 16, 2007, from Questia database: http://www.questia.com/PM.

Dryzek, J. S., (1996), Democracy in Capitalist Times: Ideals, Limits, and Struggles, Oxford University Press, New York.

Drèze, J., & Sen, A., (1995), India, Economic Development and Social Opportunity, Oxford University Press, Delhi.

Ferrer, A., (1985), Living within Our Means: An Examination of the Argentine Economic Crisis (Alvarez, M. & Caistor, N., Trans.), Westview Press, London.

Frenkel, R., (2002), “Argentina: A Decade of the Convertibility Regime”, Challenge, Vol. 45, No. 4, p. 41+. Retrieved April 16, 2007, from Questia database: http://www.questia.com/PM.

Little, W., (1975), 7 “The Popular Origins of Peronism”, in Argentina in the Twentieth Century, Rock, D., (Ed.) (pp. 162-178), Gerald Duckworth, London.

Marchak, P., & Marchak, W., (1999), God's Assassins: State Terrorism in Argentina in the 1970s, McGill-Queen's University Press, Montreal.

Peralta-Ramos, M., (1992), The Political Economy of Argentina: Power and Class since 1930, Westview Press, Boulder, CO.

Sartori, G., (1987), The Theory of Democracy Revisited, Chatham House Publishers, Chatham NJ.

Soto, H. D., (2000), The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Basic Books, New York.

Taylor, D., (1997), Disappearing Acts: Spectacles of Gender and Nationalism in Argentina's "Dirty War", Duke University Press, Durham, NC.

Wolf, M., 2003, September/October, “The Morality of the Market”, Foreign Policy, 46+. Retrieved April 16, 2007, from Questia database: http://www.questia.com/



[1] An excellent source for an analytical study between democracy and capitalism, or liberal markets, is the book, We the Nation, The Lost Decades, by one of India’s pre-eminent jurists, the late Nani Palkhivala. The book’s paperback edition has been a bestseller, having seen almost two dozen reprints in about two decades. In particular, his eulogy of the free market enterprise and its suitability to the democratic setup as practiced in India is sharp, and is in evidence in several chapters.

[2] Here, the reference is to some forms of governance in the ancient world that can be described as being non-despotic. For instance, one of the core ideas on which one of ancient India’s most famous mythological texts, the Ramayana, is built is good governance, in which the king is fair, just and non-arbitrary. The protagonist, Lord Ram, is seen as the exemplar of a perfect democrat and upholder of virtue, who goes to the extent of banishing his wife to the forests to honour a lowly washerman, an example of how the ruler was expected to uphold the wishes of the ruled. Even if one were to dismiss this example as mere mythology, the fact that there is reference to what may be called the forerunner to present democracy in such an ancient text suggests that democracy existed in some or another conceptual form in the ancient world. If one were to entirely omit mythology and take historically recorded facts as the benchmark, there is sufficient evidence to suggest that republican democracy existed in India far before the western concept of Athenian democracy. For more details on the recorded instances of democracy in ancient India, this link may be a good source of understanding: http://www.infinityfoundation.com/mandala/h_es/h_es_muhlb_democra_frameset.htm. And this is by no means a declaration that India’s was the only case of such a system of governance; there may have existed several others in other civilisations of this period.

[3] To get a rough idea about how this subject can be interpreted in virtually any manner, this article, posted on the following blogs, in which the idea of compatibility of the two is denounced in the strongest possible terms, may serve as a pointer: http://blog.myspace.com/index.cfm?fuseaction=blog.view&friendID=12432772&blogID=140524780&MyToken=5144b54f-2d93-4349-9274-e6526a5a57d6, http://blog.myspace.com/index.cfm?fuseaction=blog.view&friendID=12432772&blogID=140524780&MyToken=cb1631f6-cb16-4a39-85c6-a9b05c6cc9d9 and http://blog.myspace.com/index.cfm?fuseaction=blog.ListAll&friendID=12432772&MyToken=5d4d6701-da69-40c8-adc9-3fb794f3fedbML

This is given as a reference here mainly because this is not to be considered a work of erudition, and is just an illustration of the point sought to be made here.

[4] India started the process of economic liberalisation under the P. V.Narasimha Rao government in 1991. At that time, it was considered a step over which the government had little alternative, given the nearly moribund state in which the economy was. However, in the period since then, it cannot be disputed that despite its problems, liberalisation has brought about changes of a magnitude India had not seen earlier under the socialist dispensation of the Nehru-Gandhi rule.

[5] So entrenched has the programme of liberalisation become that it is now an a priori, with both the Right wing BJP that was voted out of power in 2004, and more surprisingly, a coalition partner in the present UPA government, the Communist Party of India (Marxist) (CPI-M), too, embarking on a programme of massive market-oriented reforms of the economy.

[6] It is easy to see how all the G8 members are democratic; the former Soviet Union had been kept out of this grouping till the end of the Cold War.

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