Reviews

The Review of Austrian Economics -     

Rational choice and the taxation of sin

The traditional literature on sumptuary taxation indicates that these taxes are the results of a majority of individuals imposing their moral code upon consumers of goods that are thought to be undesirable. Undoubtedly, this explanation is not trivial, and accounts for the existence of some of the present sumptuary taxes. This paper has developed a choice model of sumptuary taxes based on a wealth-maximization assumption that illustrates the possibility that an individual could approve of an excise tax on a good that he consumes.     

Monopoly aspects of political parties

Conclusions The standard economic model of a natural monopoly offers a useful conceptual means to examine some of the characteristics of political parties. The declining cost curves for producing political products are attributable to the indivisible nature of the majority asset. In the absence of subsidies, political parties can be expected to produce at the point where their marginal evaluation equals average cost. Thus, they have an incentive to seek subsidies in order to expand production to the point where marginal evaluation equals marginal cost. While this is optimizing behavior on the part of the individual party, it may not be optimal in competing for the majority asset, because this process decreases the value of resources that the other party has expended towards acquiring the asset. Parties will determine their optimal output calculating only the private costs and benefits to be secured through party competition, but will ignore the social costs caused by the externality they generate in competing for a fixed percentage of votes. As a result, optimizing behavior by the individual parties may lead to an excess of resources devoted to producing political decisions.     

Equilibrium Versus the Invisible Hand

Twentieth century equilibrium modeling depicts an end state toward which an economy tends, whereas the invisible hand, as Adam Smith depicted it, suggests an economy continually progressing as an increased division of labor is produced by growing markets. Thus, there is an inherent tension between the concepts of an equilibrium outcome versus the invisible hand process. The paper discusses different concepts of equilibrium, and relates entrepreneurship to the invisible hand. The paper concludes that the invisible hand concept provides a more fruitful framework for economic analysis than the twentieth century equilibrium framework.     

Is institutional improvement possible?

A substantial literature shows that economic prosperity is dependent on the quality of economic institutions. Countries with low-quality institutions remain poor while countries with high-quality institutions prosper. Improvement in institutional quality brings with it economic growth. Poor countries must improve their economic institutions to escape poverty; so, if a poor country’s institutional structure is unlikely to improve, that suggests dismal prospects for economic growth and an escape from poverty. An examination of institutional quality over 30 years indicates that countries with low-quality institutions have improved their institutional quality, which demonstrates that poor countries are not stuck with low-quality institutions. They can improve their institutions, and consequently, can generate economic growth and escape poverty.