1. 3. Political foundation of the market economy 1. Fundamental ideas 2. The State 3. Institutional development 1

2. Fundamental ideas The philosophers in ancient Greece are usually identified as the first proponents of certain perspectives on the world and political ideas that are still relevant: – Scientific perspective: rationality and reasoning – Focus on the individual: dignity and natural rights (equality of man) – Political organization: legitimacy of power, self-government, social contract “Socrates … one of the handful of philosophers who forever changed how philosophy itself was to be conceived”. (Stanford Encyclopedia of Philopohy) “The safest general characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato”. (Alfred North Whitehead) “Aristotle, more than any other thinker, defined the direction and substance of western intellectual history”. (Encyclopedia Britannica) 2

3. The State The renaissance (16th century) and the reformation gradually paved the way for the view that man is not only at the mercy of God and Nature but can improve his lot by rational action: Comeback of Natural law and Social contract theory in the 17 and 18th century:  Hugo Grotius: natural (secular) rights even in conditions of war  Thomas Hobbes: all power to an absolute sovereign  John Locke: inalienable natural rights, accountability of sovereign The political philosophy of enlightenment: the state (based on a social contract), rule of law, accountabiliry of sovereign to citizens “We hold these truths to be self-evident, that all men are created equal, that they are endowed with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. – That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed ” 3

4. Insitutional development Why is northern Nogales so different from southern Nogales? - technology, natural resources, geography, climate, race? - extractive versus inclusive institutions What explains the rise of the Western Hemisphere? - inventions and the industrial revolution based on them? - institutional innovation, enlightenment, competition of ideas Key issues for the economy: basic human rights, including property rights, tolerance and freedom of speech, the rule of law, the openness of the economy, regulation of markets and freedom of enterprise, monetary stability, the political preconditions of taxation and the role of the state for the provision of certain public or collective goods Particularly: 1) monopoly power to use force, 2) some separation of powers, and 3) avoidance of undue twisting rules in favor of specific interests, that is (Fukuyama): STATE + RULE OF LAW + ACCOUNTABILITY NB: developments in Great Britain from the “glorious revolution” (1688) to the industrial revolution in the early 19 th century, there is (arguably) a link 4