Democratic Indulgence

In ‘The Republic(360 B.C.), Plato describes five forms of government and the typical sequence following which a government evolves to ultimately end in tyranny.

The path from aristocracy to oligarchy via timocracy is rather straightforward. As it grows, the inner circle of wise leaders gets diluted by individuals of a lesser quality, motivated by wealth and debauchery. As a result, the government morphs into an oligarchy. From there on, inequality foments a revolution which leads to democracy.


Unfortunately, it is not the end of the story. In ‘The Republic’s’ Book VIII, Plato describes ‘democracy [as] a charming form of government, full of variety and disorder, and dispensing all sort of equality to equals and unequals alike .[…] The son is on a level with his father, he having no respect or reverence for either of his parents; […] The master fears and flatters his scholars; […] young and old are all alike; […] [Animals] have a way of marching along with all the rights and dignities of freemen.[…] All things are just ready to burst with liberty.[…] Citizens chafe impatiently at the least touch of authority.” Indeed, ‘the insatiable desire of [freedom] and the neglect of other things [leads to anarchy].’


As the people rebel against any form of inequality, they yearn for some new form of leadership. ‘[The people] have always some champion whom they set over them and nurse into greatness.[…] This and no other is the root from which a tyrant springs; when he first appears above ground he is a protector. […] Having a mob entirely at his disposal, he is not restrained from shedding the blood of kinsmen. […] He who has tasted the entrails of a single human victim minced up with the entrails of other victims is destined to become a wolf. [He] is always stirring up some war or other, in order that the people may require a leader. [The tyrant], if he means to rule, must get rid of [his detractors][…] until he has made a purgation of the State.’


Democracy indulges itself until it falls apart. The fiscal drift in the majority of democracies is the perfect expression of this inherent flaw, with Italy being only one of many recent examples. Its proposed budget deficit for 2019 not only goes beyond fiscal prudence, but it also relies on assumptions bearing the same credibility as the hockey-stick business plan written in a low quality confidential information memorandum.


To its benefits, Italy can rely on a structurally positive current account surplus and a population made of great savers. As the UBS Global Chief Economist, Paul Donovan, reminded readers this week, ‘Italian grandmothers could pay for the national debt three or four times over.’ Unlike Greece and like China, Italy’s fiscal deficit is more a domestic, intergenerational matter than an international one. As in other democracies, the issue may not be the budget deficit and government debt level in themselves but the slow slide into anarchy they symbolize. In the case of Italy, this is true not only for the country itself but also for the European Union which is proving incapable of enforcing fiscal rectitude.


Research shows that more than half of the world population lives in democracies today, against a third in 1950. According to Plato’s work more than two thousand years ago, populism’s best days lie ahead, paving the way for tyrannies: ’The excess of liberty […] seems only to pass into excess of slavery.’ Fortunately, it is too distant a risk to affect the financial markets today. And what is currently priced into an Italian default risk is blown out of proportion.

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