The Connection Between
Economics and Politics
A. Capitalism –
1. The capitalist economic system is the only one in
human history to have achieved long-run real percapita income growth.
2. Private Property Rights and a Means of Enforcement
are necessary for long run real per capita growth.
3. For most of human history little or no growth has
been the norm.
4. Capitalism is a recent historical phenomenon – it is only
about 250 years old.
Joseph Schumpeter argues that Capitalism
and Science developed together. Both are products of the rise
of rationalism – that is, rational thought and rational
behavior in which logic plays the key role.
5. Government is the best means to enforce private property
rights. Problem: No guarantee that Government will protect
those private property rights that promote efficiency!
6. How do you get Government to behave rationally to promote
growth? The short-run incentives of politicians are usually
contrary to the long-run interests of the mass public.
B. It is Impossible to Establish Capitalism in Some
Countries
1.You need the Rule of Law
2.You need Separation of Church and State
3.You need the “open-mindedness” that is a
necessary condition for the scientific method.
C. Capitalism and Democracy are Not Necessarily Compatible –
1.For a capitalist economic system to establish itself, long
periods of inequality and sacrifice are necessary.
Democracy
and Capitalism can only be sustained if a large majority of the
population has private property (that is, a vested interest in
the survival of Capitalist institutions – protection of private
property in land, contracts, goods, etc.).
2. In England Capitalism was slowly established as power was
gradually divided between the King and Parliament. The merchant
class intermarried with the traditional aristocracy and both
groups had a vested interest in government guaranteed private
property rights.
Voting rights only expanded in the late 19th
Century after the industrial revolution.
3. In the North American British Colonies private property
rights in land (free and common socage – title in fee
simple) was established from the beginning.
Wealth was
fairly evenly distributed until the middle of the 19th
Century.
By then, Capitalism and Democracy had
“cohabitated” for a long time.
4. Introducing democracy into very poor countries with
great inequalities of wealth does not appear to produce
stable economic institutions; that is, long run real per
capita income growth is very difficult to achieve in these
conditions.
D. Economics Drives Politics under Capitalism –
1.If you have private property rights and a means of
enforcement, then entrepreneurs will create new goods,
new mediums of exchange, etc.
2.These creations produce unanticipated structural changes
in the economy and social system (e.g., Carnegie and
steel; Rockefeller and kerosene; Ford and cheap cars;
Morse and the telegraph; Bell and the telephone; James J.
Hill and the railroad; William H. Gates and the computer
operating system; etc.).
What Joseph A. Schumpeter
called the perennial gale of creative destruction.
3. These unanticipated changes in the economy and social
system generate massive ripple effects that in turn
produce political responses (e.g., railroad regulation;
highway construction and the creation of “suburbs”;
regulation of the “ether”; anti-trust law and broad-band
communication; etc.)
4. The political responses produce a feedback into the
economic system by altering the structure of incentives
(e.g., flow of capital out of the railroads and into the
electric, automotive, and radio industries – “smart-
guys” go where the money is!).
5. The Nature of the Political Response is shaped by Ideology.
The Glue that binds together the members of a Political Party is
provided by a set of beliefs about what is "good" -- Who gets
what, who should rule.
6. The Effects of Shocks Go Both Ways -- There can be Political
Shocks -- War -- that produce Economic Change.