Knowledge that Transforms

The policies used by Britain to finance World War II represented a dramatic departure from the policies used to finance earlier wars and were very different from the policies used by the united states during the war. Following Keynes's recommendations, Britain taxed capital income at a much higher rate than the United States during the war and for much of the postwar period. We analyze quantitatively the policies designed by Keneys using an endogenous growth model and the ncoclassical growth model. We also evaluate the implications of tax‐smoothing policies. We find that the welfare costs of Keynes's policies were very high relative to a tax‐smoothing policy and argue that Britain's poor macroeconomic performance in the early postwar period is a consequence of the high tax rates levied on capital income.

We develop a model of common agency with complete information and general preferences with nontransferable utility, and we prove that the principals' Nash equilibrium in truthful strategies implements an efficient action. We apply this theory to the construction of a positive model of public finance, where organized special interests can lobby the government for consumer and producer taxes or subsidies and targeted lump‐sum taxes or transfers. The lobbies use only the nondistorting transfers in their noncooperative equilibrium, but their intergroup competition for transfers turns into a prisoners' dilemma in which the government captures all the gain that is potentially available to the parties.

It is argued that Schumpeter's widely accepted judgment that Pareto's work is “completely rooted in Walras's system” constitutes a misreading of Pareto. In fact, already during the period 1892–1900, Pareto traces the methodological outlines of an economic science profoundly different from that of Walras. It is maintained that his methodological contribution represents an attempt to define the conditions for political economy to be a science. In this context, Pareto examines the theoretical premises of economic theories and questions the hypotheses of perfect foresight and rationality. The ordinalist hypothesis is also shown to be a consequence of these methodological reflections.

There are two principal theories of why countries trade: comparative advantage and increasing returns to scale. Which is most important in practice? The large volume of intra‐OECD trade is frequently cited as critical evidence on this question. It is argued that comparative advantage, unlike scale economies, is incapable of accounting for the large volume of trade between seemingly similar economies. This is a theoretical claim. In this paper. I show that it is possible to give an account of this trade based on comparative advantage. The elements that may give rise to a large volume of North‐North trade are traced to identifiable features of technology and endowments.

A traditional argument against a balanced-budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction. This paper suggests an additional source of instability that may arise from this type of fiscal policy rule. It shows that, within the standard neoclassical growth model, a balanced-budget rule can make expectations of higher tax rates self-fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short-run fiscal imbalances. Copyright 1997 by the University of Chicago.

Regulation regimes subject to the influence of interest groups are compared. It is shown that the allocation of the regulated commodity varies with the implemented control and that the advantage of prices (vs. quotas) increases with the elasticity of the demand for or the supply of the commodity and decreases with the number of organized producers in the regulated industry. Control regimes can be ranked for negative, but not positive, externalities. Finally, a control regime leading to a more efficient commodity allocation also entails using fewer resources in rent-seeking activities.

This paper examines the roles of markets and banks when both are active, characterizing the effects of financial market development on the structure and market share of banks. Banks lower the cost of giving investors rapid access to their capital and improve the liquidity of markets by diverting demand for liquidity from markets. Increased participation in markets causes the banking sector to shrink, primarily through reduced holdings of long‐term assets. In addition, increased participation leads to longer‐maturity real and financial assets and a smaller gap between the maturity of financial and real assets.

This paper examines the claim that expansion of the voting franchise has been an important factor in the growth of government. State government spending and state and local spending are explained using a panel of 46 states for 1950-88. Elimination of poll taxes and literacy tests led to higher turnout, particularly among the poor, and a poorer pivotal voter. As predicted, we find that these changes, a fall in the income of voters relative to state income, and the ouster of Republicans from state government led to a sharp rise in welfare spending but no change in other spending.

COMPUSTAT data on 12,000 firms for the years 1961-92 indicate that large firms hold less cash as a percentage of sales than small ones. Whether comparisons are made within or across industries, the elasticity of cash balances with respect to sales is about 0.8. Firms headquartered in countries with high wages hold more money for a given level of sales, a finding consistent with the idea that time can substitute for money in the provision of transactions services. The estimates are consistent with both scale economies in the holding of money and secular declines in velocity. Copyright 1997 by the University of Chicago.

The effectiveness of China's incremental industrial reform between 1980-89 is empirically investigated using a panel data set of 769 state enterprises from 36 2-digit industries. I derive and apply a method that measures marginal products of factors, changes in total factor productivity (TFP), and improvements in factor allocation between enterprises by comparing actual changes in output to actual changes in inputs. Under this approach, the production functions can differ arbitrarily across rms. Market power in product markets and deviations from efficient allocation of factors are also permitted. This study finds that there were marked improvements in marginal productivity of factors and in TFP between 1980-89, and that over 73 percent of output growth was attributable to TFP growth, and over 87 percent of TFP growth was attributable to improved incentives, intensified product market competition, and improvements in factor allocation.