Why are Market Economies Politically Stable? A Theory of Capitalist Cohesion

Publikation: Working paperForskning

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.

UdgiverUniversity of Cambridge, Faculty of Economics
Antal sider36
StatusUdgivet - 2007

Bibliografisk note

JEL Classification: P16, O41

ID: 12923501