Search

This chapter presents a positive theory of externality control that explains the observed frequency of direct regulation as opposed to penalty taxes or charges. In the public-choice theory of policy, the interests of those who are subjected to the control instruments must be taken into account as well as the interests of those affected by the external diseconomies. The chapter emphasizes an elementary efficiency basis for preferring taxes and charges which heretofore has been neglected by economists. Economists of divergent political persuasions agree on the superior efficacy of penalty taxes as instruments for controlling significant external diseconomies which involve the interaction of many parties. There is an important economic basis for favoring the penalty tax over the direct control instrument, one that has been neglected by economists. By assessing a tax per unit of output on all firms in the industry, the government can insure that profit-maximizing decisions lead to a new and lower industry output that is Pareto optimal.

On the basis of the historical record of power relationships among countries, reaching back to antiquity, as surveyed in this paper record, it rather looks as if the balance of power among states is basically an exceptional phenomenon, although sometimes it lasted a long time. The present situation in which the world is dominated by one non‐aggressive power certainly looks at least as exceptional.

In spite of the significant research literature identifying a tradeoff between income redistribution and economic growth, massive public programs have been implemented to help the poor by transferring income to them. Since Lyndon Johnson's war on poverty began in 1964, over 3.5 trillion dollars have been transferred. However, the possibility that everyone, including the poor, may in fact be made worse off by the transfer has largely been ignored. With a simple algebraic model, the authors demonstrate that, over time, both high and low-income groups are harmed by redistribution. In addition, social mobility, as well as political concerns with relative poverty and international income redistribution increases the damage to all income groups produced by redistribution.

Since the rational voter model was first introduced, the issue of voting determinants has been the subject of extensive study. Moreover, the significance of the democratic process has long been a subject of extensive study and controversy. This study addresses a related pair of issues and offers some challenges for students of voting, the voting process, and the nature of democracy to ponder. The two issues are: (1) what does democracy mean? and (2) which is the best or least bad of these various choices.

It is now over 200 years since Condorcet discovered a serious paradox in the standard method of voting under substantially any of the rules of order. Most Americans are most familiar with the rules developed by General Robert’s, but almost all sets of rules used in genuinely democratic bodies are similar. A proposal is made and then modifications, called amendments are added. There is then a series of binary votes so arranged that the final outcome is a modified version of the original proposal. The modification can be extreme. Unfortunately, Condorcet discovered that some amendments or proposals, which had been defeated in the earlier part of the voting series, might be able to beat the ultimate outcome. A colleague of Condorcet in the academy proposed another voting method in which all alternatives are listed by each voter and then given a weight depending upon their location in the list. It was immediately pointed out that this method provided strategic opportunities for the voter to cheat by misspecifying his preferences. Borda replied that he designed his system for honest men, but since politics is not full of honest men this was regarded as a weak defense. The problem was largely ignored for the next two centuries. Some mathematicians seem to have been interested and one of them Dodson, better known as Lewis Carrol put in a good deal of work on the matter, but without reaching any solution. People advocating democracy, or for that matter opposing it, seem not to have known about this problem or in any event they did not discuss it. In the 1930s, a mathematician interested in field sports and engaged in scoring sports meets discovered that the method used for scoring in which the winner in a given sport was given five points, the second three points, and the third one point, and these points were aggregated in order to determine which university team won had a serious paradox (see Huntingdon, 1938). Specifically, whether A or B won the meet could be determined by whether C, a weak team was physically present or not. He published this result in a mathematical journal and it was ignored for some time. It was not until the late 40s that Arrow used this as part of his proof that voting methods all have severe difficulties.

To be considered for publication in the Comments section, letters should be relatively short—generally fewer than 1,000 words—and should be sent to the journal offices at the address appearing inside the front cover. The editors will choose which letters will be published. All published letters will be subject to editing for style and length.

Possibly as a prelude to a mini series of critical review essays, this short paper is intended to revisit and clarify Tullock's contributions to the concept of rent-seeking. Some subsequent contributions are highlighted, so are its implications on social costs and wealth transfers.

Synopsis: Ants and honeybees are both social insects that share many characteristics in common. But there is a fundamental difference between ants and bees. Ants can and do construct main nests with satellite nests, whereas bees construct only a main nest with no satellite nests. In this paper we explain the difference between the socio-economic organization of ants and bees: ants can identify nest-mates from satellite nests because ants leave odor trails connecting main nests to satellite nests so that fellow nest-mate from satellite nests smell the same. Bees, on the other hand, cannot leave odor trails in the air, and hence are unable to identify bees from another nest; bees from another nest with different pheromone smells are stung to death by guard bees in the main nest.

The simple economic approach to human behavior is inconsistent with many human actions. Firstly we engage in very considerable charitable gifts to strangers, people who are not related to us. We also risk our lives, or some of us do, sometimes for the benefit of collective entities like nations. This is not only a deviation from simple maximization for the individual and hence uneconomic, but would appear to contradict the general principles of evolution. At first glance these traits should have been selected out. Looking back to primitive times it can be seen that both of these activities had evolutionary value then and hence have been preserved, although maybe they will be eliminated after a number of generations of modern society. Hamiltonian altruism led to gifts to people who were members of tribal groups and to neighboring tribes. With the improvement in communication, these gifts, albeit small gifts, are much more widely distributed. The preservation of the territory of a tribe also had evolutionary value and hence the willingness of individuals to take risk to that end.

Most Europeans have heard a good deal of criticism of the last U.S. presidential election. There are two normal criticisms, one of which regards the electoral college system, which means that the person who gets the majority of the popular votes does not necessarily win. The other criticism regards a set of specific criticisms of this election.

Economists can to some extent enlighten policymakers and the public and influence public policy. That enlightenment is achieved more by concrete policy work and application of basics than by fancy models and fancy statistical significance. There is a trade-off between relevance/importance and rigor/precision. Because many economists concentrate on rigor and precision, their influence in public affairs is not as good as it could be. The professional emphasis on scholastic crafts forsakes the Smithian character of political economy. A more Smithian character for the economics profession would lead to better government policy. The primary article by Daniel B. Klein is followed by comments by Gordon Tullock, Deirdre McCloskey, Israel M. Kirzner, C.A.E. Goodhart, Robert H. Frank and James K. Galbraith and a rejoinder by Daniel B. Klein.

A consequence of income redistribution may well be to make everyone (including lower-income groups to which redistribution takes place) worse off after a period of years. Possibly income redistribution might gain consent because of risk aversion. The paper also draws attention to the tendency for people to be more concerned about poverty close at hand rather than far away.

This article explains the absence of cycles in regular governmental voting procedures. Most acts of Congress and other legislative bodies are the result of the negotiation carried on in private. As a result of this negotiation, the bill would be impossible to beat by any ordinary alternative.

This paper argues that we do not and cannot actually use Paretian criteria, therefore, I recommend that we stop pretending we do.

All prisoner’s dilemma experiments pre-select contestants, prevents them from communicating and changing partners in the middle of things. This brief experiment changes all three of these conditions, and gets a very high degree of cooperation.

Editor's Note: This is a collection of papers and edited transcription from a general session of the January 1998 Pacific Rim Allied Economic Organizations 3rd Biennial Conference, held in Bangkok, Thailand. Michael D. Intriligator: This session will focus on the evolution of transition to development in countries around the world, so people can become more appreciative of the importance of institutions. We have different perspectives on the subject of institutions in the transition to development. We are going to look at things from a national perspective, from an historical perspective, and from a comparative perspective. We are going to start out with a paper about Japan by Serguey Braguinsky, who is from Russia but has a position at Yokohama City University in Japan. Then I will make a presentation about Russia. Next we are going to switch emphasis to the importance of technology in a presentation by Gordon Tullock, who will give us a historical perspective of the evolution of China and Europe. Ray Bowen will be talking about China today, and finally Hilton Root will be presenting a comparative analysis of the role of market institutions in East Asia and South Asia. Serguey Braguinsky: The title of my paper is "The Main-Bank Relationship Revisited - Its Role in Economic Development and Some Current Problems." I. INTRODUCTION A controversy surrounds the institutional structure of the Japanese economy and the role that it has played in country's economic development. On the one hand, we have a view that was most explicitly stated in Ezra Vogel's bestseller "Japan as Number 1" (Vogel, 1979) but repeated many times since - i.e., that unique features of the Japanese economy were the driving force behind its catch-up with other industrialized nations in the post-war period, and that even the 21st century is likely to become "the century of Japan." Understandably, we have been hearing less of this view in recent years. An opposite view, represented by many mainstream economists not only in the United States but in Japan itself, maintains that Japan developed in the post-war period not due to but despite of what they consider to be a "backward institutional structure" characterized by too strong emphasis on long-term relationships and too much government regulation at the expense of market competition and economic efficiency. Again understandably, this view has been boosted by the recent troubles that the Japanese economy (along with other Asian economies) has run into. It would be impossible, in a short presentation, to deal with this question in its full complexity. Japan, the only advanced industrial nation in Asia, has well-developed and complex market institutions, and the background, nature and the role each of it has played in economic development of the country should be a subject of a separate study. In this paper, we will concentrate on just one aspect of the Japanese institutional structure. However, that would be the single one concerning which the above controversy is perhaps most pronounced: the financial sector of the Japanese economy, especially its banking system. Even skeptics admit the extraordinary competitiveness and technological strength of the Japanese manufacturing industry, which apparently has not been shaken by the recent crisis. However, the Japanese banking system, only some eight-to-nine years ago widely regarded as one of the strongest in the world (nine of the top 14 banks in the world were Japanese banks, according to the American Bankers' 1989 survey; see Hoshi et al., 1991) has since plunged into a complete turmoil, the way out of which cannot be easily detected. This system is also known to present one of the most striking cases of difference between the way in which capital markets operate in most other developed countries and in Japan. In this paper, we will try to figure out what economic reasons might have contributed to the formation of this very specific institutional structure of the banking sphere and the role it has played in post-war development of the Japanese economy. …

This is a rather impressionist report of my recollections of the history of the bioeconomics field.

In Whither socialism Stiglitz (1994) argues market equilibria with imperfect or incomplete information are generally not constrained pareto efficient.' A government subject to the same informational limitations can achieve better outcomes. In this he is, of course, following the conventional wisdom. For him this is the central proposition that establishes the merit of policy activism. Of course, this is not perfectly true, but he at least says it can achieve better outcomes, not that it will. There are two problems here. The first and least important is that he is implicitly assuming a set of motives which are not exactly likely. He is assuming that the market participants are solely engaged in maximizing their own utility, and the government officials are trying to do good. We can invert this and assume that the government officials are trying to maximize their own utility, and the market participants, perhaps under the influence of St. Thomas, are attempting to do good. Under these circumstances, the government would not achieve Pareto efficiency, and the market could do better, although once again it is not obvious that it would. Of course, the incentives implicitly assumed here are not very realistic. Both the participants in the market, and the participants in the government are primarily interested in their own and their families well-being, but both of them to some extent are willing to sacrifice to help the poor and downtrodden, carry out moral duties, etc. From my own experience, I would say that perhaps the government officials are less interested in helping others than the private business men. This may come from the fact that it is easier for a government official to conceal, even from himself his private interests, than it is for business men. Of course, my perspective may be biased. My initiation into government was

The above figure which has been famous since The Welfare Costs of Tariffs, Monopolies and Theft (Tullock, 1967) has led to a very large amount of research, and even a larger amount of references to the importance of the rent-seeking cost. Basically, what the article claimed was that the total cost of monopolies, tariffs and crimes was represented not only by the triangle at the right, usually called the Harberger triangle, but also by the rectangle. It argued that the development of monopoly, tariff, or other special privilege normally involved the investment of resources. There is no reason why these resources should receive a higher return than resources invested in other activities, hence the rectangle, which represented the return on them should more or less equal the amount of resources invested. In the words, the social waste from rent seeking was much greater than the previous studies had indicated.

This book makes a valuable, analytical contribution to recent debates on the ongoing institutional changes occurring within the European Union. It provides a comprehensive and diverse insight into a variety of areas, including in-depth studies of fiscal, monetary and voting issues, to help elucidate the current period of transitional change.

Corruption is a very widespread phenomenon with most governments having a least some. While corruption usually meets with disapproval, it may have some redeeming features. It may make possible smaller or no salary payments to officials who, if carefully supervised, will still carry out their functions on a fee-for-service basis. The purchase of government jobs usually is thought to be corrupt, but in some cases, it has worked out quite well.

It is always sensible to start a lecture with a joke. As it happens, I know a very good one about presidential addresses. Unfortunately, it is not original with me, it was produced many years ago by a president of the Economic History Society, but the younger of you presumably have not heard it. A president of a learned society is much like an insect. He lives one year, lays an egg and dies. You are about to hear my egg. I started out as a lawyer long ago, and wrote the first book on Economics of the Law,(1) but in essence I have been cast into the outer darkness where there is wailing and gnashing of teeth by the law and economics movement in the United States. The reason for this is simple and straightforward--I am a heretic. I propose use this opportunity to do a little proselytizing in favor of my heresies. I should say that the basic characteristic of my heresy is that I am not a great admirer of the Anglo-Saxon common law. Note, I say I am not a great admirer, not that I am a thoroughgoing opponent. I dislike the procedural methods of our legal system, but the substantive law is not markedly worse than that of any other country. Indeed, comparisons usually indicate that on importance matters of substance legal systems are much alike, and on the unimportant matters it doesn't make much difference. I want to concentrate on important laws. For example, my first book explained why we should have laws against theft, robbery, etc. instead of simply accepting that we do. Most work on law in law and economics deals with less important parts of the law, and demonstrates that the courts have it right, which frequently they do, or, particularly in antitrust law, that they have it wrong. There is little on murder, or robbery, not even explanations as to why they should be illegal. Apparently this is thought to be a purely moral matter. Let us look at the matter a little more formally. In essence, the law consists of three different stages. Firstly, there is some mechanism which detects the violator of the law. If it is the criminal law we normally depend on the police for this, for civil law the person injured is expected to bring the matter to the attention of the court. The court exists essentially to make certain there are no errors in the first stage. In other words the court does not seek out murderers. What it does is try to make sure that the police have actually got the murderer and not some innocent person. We call this the trial. There may be appeals at this stage. The next stage is the application or threat of coercion to carry out the court's decision. If it turns out that the accused should go to prison for a certain period of time or that the person who loses the civil suit should pay a significant amount of money to the winner, normally it will require force or the threat of force to make certain that the decision is carried out. The organizational distinction between these three functions is not necessarily the one which we use in the United States. In the European countries, for example, the investigation is supervised or in some cases actually carried out by a legally trained official or magistrate, although he has different titles in different countries. In the investigation this legal official formally decides that the person under investigation is guilty or innocent, and if he decides that he is guilty it goes to a trial, normally before a bench of three. Thus, the first and second stages of our procedure are to some extent intermingled and the "court" in many ways is sort of half way between our court of first instance and an appellate court. Appeal procedures in Europe differ from ours in one radical way. At least in theory, in the United States the appeals court considers only possible errors of law and not errors of fact. I know that the appeals courts frequently cheat on this issue, but nevertheless normally they follow that rule. …

The desirable degree of detail in the law has not been previously discussed. The point of this article is to begin the discussion by raising a number of problems. The first deals with the fact that a highly detailed law cannot, of course, be remembered and, in fact, may be very hard even to discover. Second, if the law is not highly detailed, it is apt to be uncertain in marginal cases, of which there should be many. Detail can be added to the law either by judicial decision or legislation or by some kind of special body as in France. In any event, however, there will certainly be cases in which it is not clear what the law is and there will be at least some obscurities in the law. These problems are discussed and not solved in this paper. It is intended to start the discussion, not finish it.

The law is essentially an intellectual activity, and our understanding of the thinking processes are important. This article presents a discussion not of pure logic or what psychologists have worked out by experiments on rats, but a general description of how we actually think in problems such as those faced by lawyers.

The measure of the cost of rent-seeking has been difficult and its theory is complicated. For example, I devoted to the first half of my The Economics of Special Privilege and Rent Seeking (1992) to the mysterious fact that the apparent size of the rent-seeking industry is considerably smaller than the resources obtained. This raises the question of whether there are, in fact, concealed expenses or that entrepreneurs are making mistakes. The Dougan-Snyder (1993) article raises and attempts to answer the problem. They assume a case in which $100 is distributed to the first 1000 people who are at a given point at noon of a specified day. One would expect that this prize would be wholly dissipated by people coming long distances, getting in early in the morning, etc. They call this rent-seeking, and it is legitimate, although unusual, use of the word.' There is another set of rent-seeking costs. These are costs of impelling the decision or policy makers to make the award. It is this second meaning of the term that attracts most attention from students. To repeat, it is not illegitimate of Dougan-Snyder to talk about the first meaning, but they should not ignore the second. In their model the decision maker simply decides to make a gift to certain people. There is no pressure brought to bear on him; resources are not used to convince him that he should. Altogether, this is quite unlike what we normally see when Congress is handing out money. I am not alleging that waste in the process of handing out the money is unimportant. However, the pressure brought to bear on policy makers to make the distribution is what has normally been discussed under the title of rent-seeking. Take the U.S. agricultural program which provides benefits to the farmers at a cost to society very much larger than those benefits. The benefits themselves are modest even to the farmers. The farmers bring a good deal of pressure to bear on the political representatives to keep the program going, and this is what we normally think of as rent-seeking costs, and not the allocative inefficiency waste that the program generates. However, Dougan and Snyder perform a service by bringing these allocative wastes to our attention. The cost to the United States of the farm program is of the order of $20

The Forum consists of comments on previously published papers and responses by authors. Unlike the Comment section in many other academic journals, the Forum includes solicited as well as unsolicited contributions. We encourage debates by actively seeking points of view contrary to those expressed in articles published in the journal. The Forum is intended to promote an open and critical debate that contributes to the intellectual vitality and further development of rational-choice-based theory and research. Forum contributions should follow the form used by Rationality and Society and should not exceed five double-spaced pages.