Disclaimer. Don't rely on these old notes in lieu of reading the literature, but they can jog your memory. As a grad student long ago, my peers and I collaborated to write and exchange summaries of political science research. I posted them to a wiki-style website. "Wikisum" is now dead but archived here. I cannot vouch for these notes' accuracy, nor can I say who wrote them.
Weingast. 1995. The economic role of political institutions: Market-Preserving federalism and economic development. Journal of Law, Economics, and Organization 11 (1): 1-31..
In brief: In a thriving market, you need both a well-designed economic system and a political system that "limits the ability of the state to confiscate wealth:" in other words, "limited government, that is, political institutions that credibly commit the state to honor economic and political rights." Federalism was a key element in the economic rise of England and the US. It is also helping China's recent growth.
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