TY - UNPB

T1 - Why are Market Economies Politically Stable?

T2 - A Theory of Capitalist Cohesion

AU - Dalgaard, Carl-Johan Lars

AU - Olsson, Ola

N1 - JEL Classification: P16, O41

PY - 2007

Y1 - 2007

N2 - 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 su¢ ciently large, however, a market economy will emerge. From being essentially noncooperative 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 goods.

AB - 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 su¢ ciently large, however, a market economy will emerge. From being essentially noncooperative 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 goods.

M3 - Working paper

BT - Why are Market Economies Politically Stable?

PB - University of Cambridge, Faculty of Economics

ER -