Capitalism and Economic Liberty: The Political Foundations of Economic Growth

Abstract

Economists emphasize the creation of markets as the central problem of development, encapsulated in the oft-used phrase, “get prices right.” In the economists’ approach, the role of the government is to provide a set of market-enhancing public goods, such as defining property rights, enforcing contracts, a stable macroeconomy, and providing for an appropriate distribution of income. Political decisionmaking can provide these market-enhancing public goods; but instead, it may use of the coercive power of government to take from some and give to others. Because nothing assures that government will do the former instead of the latter, politics is at the center of the problem of development. As John Locke emphasized more than three centuries ago, the protection of property and hence the development of a robust economy arises only with the control of arbitrary government and it use of coercive power.

The thesis of this essay is that the problem of economic development requires building on both ideas. In particular, the political system must be properly constructed so that it is capable of sustaining a thriving market economy rather than preying on it. This paper explains the role of politics and political institutions in creating the conditions for government to be market-enhancing rather than market-predating – or, to use Shleifer and Vishny’s (2000) phrase, to foster the invisible hand rather than the grabbing hand. I apply this framework to the evolution of liberty in the modern world, first looking at seventeenth century England and then the early United States. I also discuss the foundations of liberty in modern China. Finally, I show how the failure of these principles helps explain authoritarian regimes, examining the case of modern Mexico.