Why Are Market Economies Politically Stable? A Theory Of Capitalist Cohesion

The present paper documents that political stability is positively associated with the extent of domestic trade. In explaining this regularity, the authors 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.