Democracy and Capitalism

The welfare state is at the centre of a long-standing debate about the relationship between capitalism and democracy. One view holds that democracy and capitalism are in tension with each other, and that footloose capital undermine redistribution; another view holds that democracy and capitalism are complements, and that democracy compensates for inequalities in the distribution of property and income. This chapter provides a critical review of the literature on advanced democracies and capitalism, and how the two coexist and co-evolve. It explores several topics: (a) approaches to the study of democratic redistribution and how democratic institutions shape distributive outcomes; (b) the relationship between democracy and capitalism, and in particular whether democracy is constrained by footloose capital; and (c) the historical origins and co-evolution of advanced capitalist democracies.

Market Access and Home Market Effect

Based on the standard Footloose Capital model developed by Martin and Rogers (1995), I consider an integrated model that consists of a system of two regions and a third external region, in order to study the impact of improved market access on the Home Market Effect within the system of the two regions. The concept of the Home Market Effect is well known in the literature, but once we extend the number of regions, many are unknown. The main finding of the model suggests that improved market access with respect to an external market enhances the Home Market Effect within the system of the two regions. Interestingly, I show that this finding comes from the fact that improved market access increases the Market Access Effect, while it has no impact on the Market Crowding Effect.