Not long ago a certain stream of pro-market philosophers made a noisy public case for the creative synergy between capitalism and democracy. The growth of free-market capitalism, they argued, would inevitably bring democracy. Then came the financial crisis of 2007 and the rescue of the financial markets by individual nations, the European Union and the International Monetary Fund. Financial markets failed, and government came to the rescue. Of course, though it is hidden in the footnotes of economics textbooks and ignored by free-market-oriented think tanks, that is what is supposed to happen in democratic capitalism. But what are we to do when the financial markets saved by states threaten to bring down governments unless they do what the mercurial markets demand?

The Republic of Ireland faced that question last month, when after weeks of resistance it accepted an 85-billion euro line of credit from the European Central Bank. In doing so, it effectively surrendered its sovereignty, yielding its national budget, national priorities and government services to the direction of outside auditors. The Irish government’s big mistake was to bail out the country’s banks when they failed in the Great Recession. Now it must accept government by bankruptcy accountants. Has democracy been undone by capitalism? For the most part.

The Irish government, led on by the conventional wisdom promoted by the banks, the building industry and the business press, certainly had a role in the collapse by establishing policies that inflated the speculative real estate bubble before it burst. But unlike the banks and other business sectors, the government accepted responsibility and took on the debt of the failing banks. Then it adopted one of the most austere budgets in Europe to make good on its outstanding obligations. Now, because of “the market’s” fear of the impact of Irish indebtedness on the euro zone, the European Central Bank has forced Ireland to accept an outsized line of credit at the price of even more draconian budget cuts.

Of the many object lessons to be drawn from this latest drama in the Great Recession, two in particular demand consideration. First, the primary perpetrators in the collapse have not borne the burden of their offenses. Second, the myth of the synergy between capitalism and democracy is shattered. They are lessons that apply to the United States no less than to Ireland.

In Ireland prosecutors have yet to announce whether they will prosecute officers of the Anglo-Irish Bank for fraud. But by and large the geniuses behind the Celtic Tiger’s unnatural growth will not be held accountable, just as in the United States most of those responsible for the inflated housing market, bundled mortgages and other infernal investment devices will not be held liable for the irreparable harm they worked in tens of millions of lives. Indeed, once rescued by public largesse, financiers seem to flaunt their continued prosperity without exhibiting the least sign of social responsibility. The people shouldering the burden will be politicians, the taxpaying public and society’s weakest and most vulnerable members.

The second lesson is that free-market capitalism and democracy are not always mutually re-enforcing. The success of China’s entrepreneurial government since Deng Xiaopeng took it down the capitalist road should be proof enough. But the events of the Great Recession have proved that once financial markets use governments to pay for market abuses, financial leaders can also turn on governments and demand the last drop of citizens’ blood. To be sure, neither governments nor their publics lack responsibility in this tragedy. Governments (and regulators) established the business-friendly environment that brought prosperity; prosperity brought them popularity; and the public enjoyed the apparent growth in household wealth and higher lifestyles. But ultimately the major responsibility lies with “the masters of the universe,” the financial titans who with few exceptions created the conditions for this crisis by bending laws to their purposes. The powerful financial class that benefitted from public rescues continues today to fight against re-regulation (at least in the United States), wallowing in renewed profitability and bringing governments to their knees.

How can free-market capitalism, especially financial markets, be made less inimical to democracy? The future of democratic government requires greater distance between finance and government, not an easy task given the modern expectation that government manages the economy. It also requires a rebirth of social responsibility and concern for the common good on the part of corporations and their leaders, and a renewed sense of moderation on the part of the public at large. But since government and the public continue to measure well-being almost solely in terms of economic growth, such moderation too may be out of reach—until the markets bring on a collapse too great for even a government rescue.

This article appears in December 13 2010.