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Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion

  • Dalgaard, Carl-Johan

    ()

    (University of Copenhagen)

  • Olsson, Ola

    ()

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

The 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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File URL: http://hdl.handle.net/2077/8481
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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 280.

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Length: 43 pages
Date of creation: 14 Dec 2007
Date of revision:
Handle: RePEc:hhs:gunwpe:0280
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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