Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion
Carl-Johan Dalgaard () and
Ola Olsson ()
No 280, Working Papers in Economics from University of Gothenburg, Department of Economics
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.
Keywords: Political cohesion; Economic growth (search for similar items in EconPapers)
JEL-codes: O41 P16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-pol and nep-soc
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Working Paper: Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:gunwpe:0280
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