This chapter establishes the theoretical foundations of my argument about the effects of domestic political and organizational conditions on economic policy and macroeconomic performance in the global economy. The first three sections of the chapter develop a closed economy understanding of the political economy of capitalist democracy that can be used as a baseline against which to compare the case where countries are deeply integrated into global markets. Section 2.1 argues that governments of the left and right can be expected to pursue partisan economic policies consistently – based, respectively, on the reform or acceptance of market allocations of wealth and social risk – only when these are consistent with strong macroeconomic outcomes.

Section 2.2 reviews the corporatism literature on the macroeconomic effects of labor market institutions. The basic insight of this literature is that labor markets will function effectively – in terms of gearing economywide wage developments to maximizing overall levels of employment – where the workforce is either atomized (free labor markets) or highly organized and coordinated (encompassing labor market institutions). In contrast, wage push is expected to curtail employment and economic activity where individual trade unions are strong but their behavior is not coordinated by powerful central labor confederations.

Section 2.3 analyzes the interaction between partisan political competition and labor market institutions in a closed economy context. The central feature of this model is that the economic viability of left- and right-wing policies is contingent upon the organizational characteristics of national labor market institutions. I argue that economic policy should be more consistently partisan and macroeconomic performance should be stronger the more “coherent” conditions are in the politics and the labor market.