Market Forces and Fair Institutions: The Political Economy of Europe and the U.S. Reconsidered. CES Working Paper, no.138, 2006

The paper introduces a new perspective in the vast literature devoted to the political economy of Europe and the U.S. American preferences for a liberal market economy are relatively clear; by contrast, European preferences for a social market economy remain confusing and are the subject of continuing debates in the field of political economy in positive as well as normative terms. Redistribution is the most usual way to deal with different attitudes towards inequalities in the two continents. But redistribution is not the most appropriate summary of what the “welfare state” in Europe actually does: social insurance mechanisms are a more appropriate reference. These deep and persistent differences between Europe and the U.S. are well interpreted in many historical and political aspects. A more theoretical perspective is developed here in five steps. First, those goods (health, pension, education...) with which the welfare state is concerned have powerful inter-temporal properties so that market solutions are not unequivocally optimal. Second, those goods have a strong impact on equality and modern political philosophy clarifies why their production and distribution should reflect considerations of justice as well as of efficiency. A two-step decision process is subsequently introduced: actual choices are the consumer’s job (utility maximization) but embedding fairness in redistributive policies or within institutions providing universal insurance lies in the citizens’ hands. Fourth, this choice between pure or mixed market solutions is referred to two models of political philosophies differently combining Liberty and Equality in the western philosophical tradition. Finally, some elements of the legal system are introduced as a natural bridge between the abstract formulations of collective preferences and actual social institutions