Usher Political Economy (Blackwell, 2003)

Political Economy

Political Economy

D A N U S H E R

© 2003 by Dan Usher

350 Main Street, Malden, MA 02148-5020, USA

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs, and Patents Act 1988, without the prior permission of the publisher.

First published 2003 by Blackwell Publishing Ltd

Library of Congress Cataloging-in-Publication Data

Usher, Dan 1934-

Political economy/Dan Usher. p. cm.

Includes bibliographical references and index.

ISBN 0-631-23333-4 (alk. paper) – ISBN 0-631-23334-2 (pbk.: alk. paper) 1. Economics. I. Title.

HB 171.5 .U84 2003 330–dc21

2002038290

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CONTENTS

List of Figures	viii
List of Tables	x
Preface	xiii
1 How Dreadful Life Used to Be	1

[People are better off today than at any time in the entire history of the world. Over the last century and a half, people in most countries have acquired a cornucopia of new types of goods, have increased income per head by more than ten fold and have doubled life expectancy. The competitive market is a necessary, though by no means sufficient, condition for our prosperity.]

2 Making and Taking

41

[The importance of property rights is illustrated in an example where property is not secure. People may devote resources to producing goods for consumption or to taking goods produced by others. The example highlights the role of government as policeman and the danger – rarely averted until modern times – of the emergence of a predatory ruling class.]

3 Taste, Technology, and Markets

70

[Once property is secure, the price mechanism can be counted on to direct resources for the production of goods and to allocate goods among people, automatically, without central direction and so efficiently that no planner, however knowledgeable, could redirect resources to make everybody better off simultaneously.]

4 Putting Demand and Supply Curves to Work

117

[Demand and supply curves are the principal tools of economic analysis. Both curves connect quantity and price, the demand curve in accordance with the utility, or preferences, of

vi	C O N T E N T S

the consumer, the supply curve in accordance with the technology of the economy. Together, demand and supply curves are employed in analyzing taxes, tariffs, rules for public projects, monopoly, patents and the gain from invention. Different interpretations of the demand curve are compared.]

5 Taste

160

[As indicators of the preferences of the consumer, utility functions can accommodate many types of goods and situations: private goods, public goods, shared goods, externalities, risk, consumption today and consumption tomorrow. The competitive economy is less efficient in some circumstances than in others, and the role of the government may be established accordingly.]

6 Technology

202

[Production functions connect outputs of goods with inputs of labour, land and capital. Firms maximize profit in choosing what to produce and what resources to employ. Technical change is represented by a shift in the aggregate production function. Prosperity and impoverization can be seen as the outcome of a war between population growth and technical change.]

7 Associations

227

[In the ideal competitive economy, people respond not to other people, but to marketclearing prices. Beneath the price-guided economy is a sub-stratum of bargaining and deal-making in transactions that are to some extent unique. Corporations, labour unions, charities and political parties are elaborate contracts within which price-taking is displaced by hierarchy.]

8 The Common Good

256

[Evaluation of public policy requires a standard of what is best for society as a whole. A person’s sense of the common good – called a social welfare function – can be identified through a generalization of the method, discussed in chapter 3, for identifying a person’s ordinary utility function ranking the different bundles of goods he might consume. There should be some similarity in people’s sense of the common good, though full agreement is too much to expect.]

9 Voting

276

[Government by majority-rule voting is indispensable but potentially self-destructive. It is an indispensable component of what most people see as a good society. It is potentially selfdestructive because it may expose a minority – any minority identified by wealth, region, language or race – to expropriation at the hands of the majority. Redistribution of income can be safely consigned to the domain of voting. Other aspects of society must be protected from the electoral arena.]

C O N T E N T S	vii
10 Administration	322

[Legislation is an incomplete guide to public administration. Two subsidiary criteria are that all citizens be treated equally and that the available public revenue be assigned efficiently to projects within each category of expenditure. Cost-benefit analysis acquires a political as well as an economic dimension. The executive branch of government and the civil service must be constrained in their dealings with citizens not just for efficiency in the economy, but to avoid placing citizens at the mercy of the administrators.]

11 Law

361

[The domain of political economy overlaps with the domain of law. The law’s resolution of disputes sheds light on the meaning of property rights. Principles for choosing among public projects and policies can be extended to the choice among laws. The “rule of law” is a significant part of society’s defense against predatory government.]

The Four Pillars

401

[Markets with private ownership of the means of production, politics based upon majorityrule voting, a rule-bound public administration and a degree of independence for the judiciary are mutually reinforcing ingredients of what most people see as a good society.]

Notes	410
Author Index	421
Subject Index	423

FIGURES

2.1Incomes of fishermen and pirates depending on the

number of pirates	48
2.2 The revenue of the police	57

2.3How a responsible police force raises the income of

	fishermen and pirates	59
2.4	How incomes of fishermen and police are affected by the tax rate	62
2.5	How predatory government may be worse for
	fishermen than no government	64
2.6	How the output of a fisherman increases with his income	66
3.1	The production possibility curve	75
3.2	The supply curve of cheese	77
3.3	An indifference curve	78
3.4	Several indifference curves	79
3.5	Technology and taste: supply and demand	82
3.6	Income, the budget constraint, and the market price of cheese	87
3.7	The indeterminacy of bargaining	90

3.8The production possibility curve and the budget constraint of

person C

95

3.9Demand and supply curves showing the combined response of the

	five people to the world price of cheese	101
4.1	The deadweight loss from a tax on water	118
4.2	Tax revenue, deadweight loss, and surplus	121
4.3	The deadweight loss from the taxation of cheese	123
4.4	The measurement of surplus	126
4.5	The full cost to the tax payer per additional dollar of tax revenue	127
4.6	How tax revenue and deadweight loss vary with the tax rate	135
4.7	The gain from trade	143
4.8	The gain from trade when both goods can be produced at home	145
4.9	A tariff on the import of cheese	146

	F I G U R E S	ix
4.10	The price-consumption curve for the constant income demand curve	151
4.11	Price and income elasticities of demand for cheese	153
4.12	Comparison of the price elasticities on the constant income demand
	curve and the constant utility demand curve	158
5.1	Guns and butter	165
5.2	How universal selfishness may be worse than cooperation	168
5.3	Private and social cost of smoking	169

5.4How the equilibrium quantity of cheese differs from the optimal

quantity when there is an uncorrected externality	171
5.5 Intertemporal choice	177

5.6The utility of income function when a person is risk neutral and

when a person is risk averse	182
5.7 The expected utility of a risky prospect	184

5.8Different technologies and common tastes in the years

1950 and 2000

195

5.9Income at current prices, income at prices in the year

2000, and real income	198
6.1 The production function	204

6.2How an increase in the input of labor lowers the

	output of bread per worker	204
6.3	How the farm’s demand for labor responds to the wage rate	205
6.4	The average cost curve	207
6.5	Births, deaths, and the standard of living	214
6.6	Growth rates of labor and capital	217
7.1	The context of bargaining	230

8.1The effects on the utilities of a rich man and a poor man of a

transfer of income from one to the other

269

9.1A directed graph of the outcomes of pair-wise votes between ham,

	cheese, and tuna	282
9.2	A directed graph of the paradox of voting	286
9.3	Person i’s preference for guns	295
9.4	Identifying the median voter	295
9.5	The instability of voting in a world of extremists	319
10.1	How the demand and supply for public expenditure determine the
	size of the public sector and the marginal cost of public funds	332
10.2	Redistribution of income and the marginal cost of public funds	337
11.1	The branches of the law	366
11.2	A person’s indifference curves for income and probability of survival	383
11.3	Indifference curves for the cost of the criminal justice system and
	the murder rate	384

TABLES

1.1

Life expectancy at birth from ancient times to the present

5

1.2Improvements in age-specific mortality rates and life expectancy in the

United States during the twentieth century (males)

6

1.3Improvements in age-specific mortality rates and life expectancy in the

United States during the twentieth century (females)

7

1.4Selected causes of mortality among young adults in the

	United States	9
1.5	Life expectancy at birth in several countries, 1750–2000	10
1.6	Worldwide life expectancy at birth, 1950–1999	11
1.7	The population of imperial China, 206 BC to AD 1911	12
1.8	Real wages and population: England and Wales, 1340–1997	14
1.9	Canadian economic growth, 1870–2000	16
1.10	Selected indicators of prosperity in Canada, 1935–1997	17
1.11	Worldwide gross domestic product per head in 1990	18

1.12Life expectancy at birth and the number of

	children per woman in Canada, 1700–1999	18
1.13	A fall in fertility rates and a rise in population	19
1.14	Steps on the path to liberty and equality in Canada	28
1.15	The distribution of family income in the United States, 1926–1998	29
1.16	Death toll in wars and exterminations	32
1.17	Death toll in the Second World War	32
1.18	Death toll in the Russian collectivization of agriculture, 1930–1937	34
1.19	Death toll in democratic Kampuchea, 1975–1979	35
1.20	The severity of war	37

2.1How the income of fishermen, the income of pirates, and the average

income per head depend on the number of pirates

47

2.2How the number of pirates increases by more than the increase in population, and how the average income per person

declines accordingly	50
2.3 How the police make everybody better off by harming pirates	58