Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion
AbstractThe present paper documents that political stability is positively associated with the extent of domestic trade. In explaining this reg- ularity, we provide a model where political cohesion is linked to the emergence of a fully functioning market economy. Without market ex- change, the welfare of inherently selfish individuals will be mutually independent. As a result, political negotiations, echoing the prefer- ences of the citizens of society, will be dog-eat-dog in nature. Whoever has greater bargaining power will be willing to make decisions that en- hance the productivity of his supporters at the expense of other groups in society. If the gains from specialization become sufficiently large, however, a market economy will emerge. From being essentially non- cooperative under self-su¢ ciency, the political decision making process becomes cooperative in the market economy, as the welfare of individ- uals will be mutually interdependent due to the exchange of goods.
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Bibliographic InfoPaper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 280.
Length: 43 pages
Date of creation: 14 Dec 2007
Date of revision:
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Political cohesion; Economic growth;
Other versions of this item:
- Dalgaard, C. & Olsson, O., 2007. "Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion," Cambridge Working Papers in Economics 0765, Faculty of Economics, University of Cambridge.
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-19 (All new papers)
- NEP-DEV-2007-12-19 (Development)
- NEP-POL-2007-12-19 (Positive Political Economics)
- NEP-SOC-2007-12-19 (Social Norms & Social Capital)
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