Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion
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Date
2007-12-14T07:48:55Z
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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.
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Political cohesion, Economic growth, JEL codes: P16, O41