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Capitalism and Economic Growth: A Game-Theoretic Perspective

Leong, Chee Kian (2008): Capitalism and Economic Growth: A Game-Theoretic Perspective.

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Why has capitalism prevailed as an institution in promoting economic growth despite its apparent unfairness? In this paper, we argue that within a neoclassical framework, capitalism is fairer compared to collectivism due to the absence of a rationally acceptable collective solution. This is demonstrated using a dynamic game with a vote-maximizing government(G) and profit-maximizing representative firm(F). In this GF game, collectivism or cooperation between the players appears to trump capitalism at the aggregate level. Developing countries operating below the steady state may be better off cooperating as they will enjoy positive long term economic growth and profit growth once their capital stock exceeds the steady state level. But this requires them to sacrifice short term growth and possible inequity as the firm's profits grow. Developed countries operating above the steady state will find the cooperative solution attractive since both economic growth and profit growth will be positive. So, from an aggregate level, collectivism or cooperation performs better than capitalism. However, a fair imputation of cooperative or collective solutions which is rationally acceptable for all players does not exist. In every stage of development, the firm always finds it rationally unacceptable to cooperate because the profits earned by the firm under the feedback Nash equilibrium always dominate the profits under cooperation. On the other hand, the government only finds the cooperative solution to be rationally acceptable when the economy is above the steady state. Hence, collectivist cooperation between the government and the firm are not rationally acceptable for both and a fair equilibrium cannot be attained with collectivism.

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