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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: P16 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-hpe and nep-pol
Date: 2007-10
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