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

Carl-Johan Dalgaard and Ola Olsson

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The present paper documents that political stability is positively associated with the extent of domestic trade. In explaining this regularity, we provide a model where political cohesion is linked to the emergence of a fully functioning market economy. Without market exchange, the welfare of inherently selfish individuals will be mutually independent. As a result, political negotiations, echoing the preferences of the citizens of society, will be dog-eat-dog in nature. Whoever has greater bargaining power will be willing to make decisions that enhance 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-sufficiency, the political decision making process becomes cooperative in the market economy, as the welfare of individuals will be mutually interdependent due to the exchange of good.

Keywords: Political cohesion; Economic growth (search for similar items in EconPapers)
JEL-codes: O41 P16 (search for similar items in EconPapers)
Pages: 24
Date: 2007-10
New Economics Papers: this item is included in nep-dev, nep-hpe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://files.econ.cam.ac.uk/repec/cam/pdf/cwpe0765.pdf Working Paper Version (application/pdf)

Related works:
Working Paper: Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0765

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().