Political Economy





Chapters

Preface

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.
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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