Capitalism and Democracy

Capitalism and Democracy

A Fragile Alliance

New Horizons in Institutional and Evolutionary Economics series

Theo C.M.J. van de Klundert

Capitalism is driven by technological revolutions, leading to alternating periods of regulation and deregulation in leading economies. Technologically backward countries face a different situation as they have to catch up with the leaders. Against this backdrop, Theo van de Klundert examines the relationship between capitalism and democracy, combining economic theory and historical description to analyse long-run economic development. Emphasis is placed on the interrelation between economic and political power, and a robust state-of-the-art overview of today’s political economy is presented.

Chapter 4: Follow the leader

Theo C.M.J. van de Klundert

Subjects: economics and finance, economic psychology, institutional economics, political economy


As already noted in Chapter 3, in the neoclassical growth theory technological progress is considered as an exogenous variable. Thus, the technological knowledge is publicly accessible. It is as if every firm can look up in the book of blueprints how it can produce specific goods. This assumption is still valid in the case where more countries are distinguished. In every country firms are able to make use of the technological possibilities of the more advanced countries. Differences in welfare between countries may be caused by several other factors, such as saving behaviour, population growth and the given initial situation. The question then arises whether the backward countries are able to catch up with the more advanced economies. If the production per worker in poor countries grows faster than the production per worker in rich countries, then we indicate this as convergence. In this case, countries grow towards each other, but it is not warranted that the levels of per capita production will be equal when the growth rates are the same. Structural differences may be present, which cause welfare levels to diverge, even though the process of convergence has been finished. Convergence is then incomplete.

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