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Chapters
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Preface
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I |
How Dreadful Life Used to Be
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.
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II |
Making and Taking
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.
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III |
Taste, Technology and Markets
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.
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IV |
Putting Demand and Supply Curves to Work
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
the consumer, the supply curve in accordance with the technology of the economy. Together,
demand and supply curves are employed in analysing taxes, tariffs, rules for public projects,
monopoly, patents and the gain from invention. Different interpretations of the demand curve are
compared.
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V |
Taste
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.
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VI |
Technology
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.
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VII |
Associations
In the ideal competitive economy, people respond not to other people, but to market-clearing
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.
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VIII |
The Common Good
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 III, 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.
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IX |
Voting
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 self-destructive
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.
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X |
Administration
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.
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XI |
Law
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.
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The Four Pillars
Markets with private ownership of the means of production, politics based upon
majority-rule 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.
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Dan Usher
Economics Department
Queen's University
Kingston, Canada K7L 3N6
Tel. (613) 533-2285
Fax. (613) 533-6668
usher@qed.econ.queensu.ca
January 1,2002
Revised
February 1, 2003
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