Abstract

This article presents arguments and evidence that should prompt a rethinking and qualification of the conventional wisdom about the dominance of international markets over national politics. Empirical analysis of OECD data shows that expanding trade, foreign direct investment and liquid capital mobility have not prompted a pervasive policy race to the neoliberal bottom in the past decade. One reason is that there are strong political incentives for governments to cushion the dislocations and risk associated with open international markets. Moreover, countries with large and expanding public economies (when balanced with increasing revenues, even from capital taxes) have not suffered from capital flight or higher interest rates. This may be because income transfers and the public provision of social services generate economically important collective goods that are under-supplied by markets and that actors who are interested in productivity value. These collective goods range from the accumulation of human and physical capital to social stability under conditions of high market uncertainty to popular support for the market economy itself.