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Social contract theory depicts a constitutional contract as the result of a hypothetical agreement among society's members to escape a prisoners' dilemma situation. It depicts citizens as political equals agreeing to be forced into a cooperative strategy rather than a socially suboptimal strategy that gives them the highest personal payoff. Government is the organization that forces everyone to cooperate. However, citizens can never bargain as political equals. An elite few design the rules, and others are forced to comply with them. The contractarian ideology that depicts government as acting in the general public interest legitimizes the actions of government, giving those elite few who hold government power a greater ability to use it to further their own interests, often at the expense of the masses. Within the context of a prisoners' dilemma game, contractarian ideology leads to an outcome that is socially suboptimal, but beneficial for the political elite.
Problems associated with cronyism, corporatism, and policies that favor the elite over the masses have received increasing attention in recent years. Political Capitalism explains that what people often view as the result of corruption and unethical behavior are symptoms of a distinct system of political economy. The symptoms of political capitalism are often viewed as the result of government intervention in a market economy, or as attributes of a capitalist economy itself. Randall G. Holcombe combines well-established theories in economics and the social sciences to show that political capitalism is not a mixed economy, or government intervention in a market economy, or some intermediate step between capitalism and socialism. After developing the economic theory of political capitalism, Holcombe goes on to explain how changes in political ideology have facilitated the growth of political capitalism, and what can be done to redirect public policy back toward the public interest.
Some economic analysis concludes that capitalist institutions tend to produce growing income inequality. Piketty (2014 Capital in the Twenty-First Century., Cambridge: Harvard University Press) is a recent example. This paper uses two different datasets on income shares of the top 10% to analyze the effect of market institutions on income inequality. The same empirical specifications give different results for the two datasets. This empirical investigation suggests that whether market institutions generate income inequality is an open question.