Skip to main content Accessibility help
×
Home
  • This chapter is unavailable for purchase
  • Print publication year: 2009
  • Online publication date: June 2012

1 - MARKETS AND GOVERNMENTS

Summary

The most important question in the study of economics is:

When should a society forgo the economic freedom of markets and rely on the public finance and public policy of government?

This is a normative question. A normative question asks what ideally should be done or what ideally should happen. Normative questions are distinct from positive questions, the answers to which are predictions and explanations. The primary positive question that we shall ask is:

What do we predict will be the outcome when voters and taxpayers delegate responsibilities to governments through public finance and public policy?

These normative and positive questions, asked in different circumstances, are the focus of this book. We shall take care to distinguish between normative and positive questions. A clear distinction is required because we do not wish to confuse what governments ideally ought to do with what governments actually do. The two can coincide but need not.

We shall not study any one particular government – federal or central, state or provincial, or local. Descriptions of a particular government's budget and public policies become outdated when the government and the policies change. Today's government budget is not necessarily tomorrow's, nor are today's public policies necessarily the policies that will be appropriate or in place in the future. Studying the details of a particular government's budget and public policies, therefore, does not provide useful, long-lasting knowledge. Lasting knowledge requires identification of general principles that remain applicable anywhere at any time.

Related content

Powered by UNSILO
Literature notes
The prima facie case for the market
Friedman, M., 1953. The methodology of positive economics. In Essays in Positive Economics. University of Chicago Press, Chicago. Reprinted in Hausman, D. M. (Ed.), 1994. The Philosophy of Economics. Cambridge University Press, New York, pp. 180–213.
Grampp, W. D., 2000. What did Smith mean by the invisible hand?Journal of Political Economy 108:441–65.
Evensky, J., 2005. Adam Smith's Moral Philosophy: A Historical and Contemporary Perspective on Markets, Law, Ethics and Culture. Cambridge University Press, New York.
Reisman, D. A., 1975. Adam Smith's Sociological Economics. Croon Helm, London; Barnes & Noble, New York.
Smith, A., 1759/1976. The Theory of Moral Sentiments. Oxford University Press, Oxford.
Smith, A., 1776/1937. An Enquiry into the Nature and Causes of the Wealth of Nations. Cannan, E. (Ed.), Modern Library Edition. Random House, New York.
Jevons, W. S., 1871/1957. The Theory of Political Economy (5th edition). Kelley and Millman, New York.
Dupuit, J., 1844/1969. On the measurement of the utility of public works. In Arrow, K. J. and Scitovsky, T. (Eds.), Readings in Welfare Economics. Irwin, Homewood IL, pp. 255–83.
Houghton, R. W., 1958. A note on the early history of consumer surplus. Economica 25:49–57.
Mishan, E. J. and Quah, E., 2007. Cost-Benefit Analysis. Routledge, Abington U.K., and New York.
Willig, R. D., 1976. Consumer's surplus without apology. American Economic Review 66:589–97.
Harberger, A. C., 1954. Monopoly and resource allocation. American Economic Review 44:77–87.
Demsetz, H., 1982. Barriers to entry. American Economic Review 72:47–57.
Efficiency and social justice
Hicks, J. R., 1939. The foundations of welfare economics. Economic Journal 49:696–712.
Kaldor, N., 1939. Welfare propositions of economics and interpersonal comparisons of utility. Economic Journal 49:549–52.
Kemp, M. C. and Pezanis-Christou, P., 1999. Pareto's compensation principle. Social Choice and Welfare 16:441–4.
Pareto, V., 1894. Il massimo di utilità dato dalla libera concorrenza. Giornale degli Economisti 9:48–66.
Mill, J. S., 1848/1909. Principles of Political Economy (7th edition). Ashley, W. J. (Ed.). Longmans, Green, and Co., London.
Frey, B. S. and Pommerehne, W. W., 1993. On the fairness of pricing: An empirical survey among the general population. Journal of Economic Behavior and Organization 20:295–307.
Kahneman, D., J. Knetsch, L., and Thaler, R., 1986. Fairness as a constraint on profit seeking. American Economic Review 76:728–41.
Kirchgässner, G., 2005. (Why) are economists different?European Journal of Political Economy 21:543–62.
Konrad, K. A., 2004. Altruism and envy in contests: An evolutionarily stable symbiosis. Social Choice and Welfare 22:479–90.
Mui, V.-L., 1995. The economics of envy. Journal of Economic Behavior and Organization 26:311–36.
Brennan, G. and Buchanan, J. M., 1984. Voter choice: Evaluating political alternatives. American Behavioral Scientist 28:185–201.
Brennan, G. and Hamlin, A., 2000. Democratic Devices and Desires. Cambridge University Press, Cambridge U.K.
Glazer, A., 2008. Voting to anger and to please others. Public Choice 134:247–54.
Buchanan, J. M., 1954. Individual choice in voting and the market. Journal of Political Economy 62:334–43.
The rule of law
Soto, H., 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books, New York.
Demsetz, H., 1967. Toward a theory of property rights. American Economic Review 57:347–59.
Frey, B. S. and Buhofer, H., 1988. Prisoners and property rights. Journal of Law and Economics 31:19–46.
Cournot, A., 1838. Recherches sur les principes mathematiques de la theorie des richesses. English edition: Bacon, N. (Ed.), 1897. Researches into the Mathematical Principles of the Theory of Wealth. Macmillan, London.
Nash, J. F., 1951. Non-cooperative games. Annals of Mathematics 54:286–95.
Selten, R., 1975. Re-examination of the perfectness concept for equilibrium points in extensive games. International Journal of Game Theory 4:25–55.
Dixit, A. K., 2004. Lawlessness and Economics: Alternative Modes of Governance. Princeton University Press, Princeton NJ.
Hillman, A. L., 2004. Nietzschean development failures. Public Choice 119:263–80.
Moselle, B. and Polak, B., 2001. A model of a predatory state. Journal of Law, Economics, and Organization 17:1–33.
Nietzsche, F., 1886/1997. Beyond Good and Evil: Prelude to a Philosophy of the Future. Dover Publications, New York.
Olson, M., 2000. Power and Prosperity. Basic Books, New York.
Feld, L. and Voigt, S., 2003. Economic growth and judicial independence: Cross-country evidence using a new set of indicators. European Journal of Political Economy 19:497–527.
Market efficiency in general equilibrium
Hillman, A. L., 1989. The Political Economy of Protection. Harwood Academic Publishers, Chur, Switzerland. Reprinted 2001, Routledge, Abington U.K., and New York.
Kemp, M. C., 1962. The gains from international trade. Economic Journal 72:803–19.
Ricardo, D., 1817. Principles of Political Economy and Taxation. Reprinted as volume I in Straffa, P. (Ed.), 1951. The Works and Correspondence of David Ricardo. Cambridge University Press, Cambridge U.K.
Samuelson, P. A., 1939. The gains from international trade. Canadian Journal of Economics and Political Science 5:195–205.
The competitive market-adjustment mechanism
Marshall, A., 1938. The Principles of Economics (8th edition). Macmillan, London.
Samuelson, P. A., 1947. Foundations of Economic Analysis. Harvard University Press, Cambridge MA.
Walras, L., 1877, 1889, 1896. Elements d'economie politique pure, ou Theorie de la richesse sociale. Corbaz, Lausanne (1877, second edition); Rouge, Lausanne (1889 and 1896, third and fourth editions). In English, 1954. Theory of Pure Economics. Translated by Jaffe, W.. Allen and Unwin, London.
Monopoly profits and social justice
Tullock, G., 1975. The transitional gains trap. Bell Journal of Economics 6:671–78. Reprinted in Buchanan, J. M., Tollison, R., and Tullock, G. (Eds.), 1980. Toward a Theory of the Rent-Seeking Society. Texas A&M University Press, College Station, pp. 211–21.