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 per-

capita 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.