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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

Abstract: 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
Date: 2007-12-14
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