Topics on Economics and Social Science

By Barrington K. Brown

This manuscript consists of 16 research papers that were completed between the years 1982 and 2005, the analyses of which range from the purely theoretical, to the empirical, and extending to the more ideological and philosophical. In any case, the emphasis of each paper is upon creativity, with inventiveness and innovation being the essential elements.

Part two of this manuscript consists of a purely theoretical paper. This paper presents a fresh approach to macroeconomic theory and policy.

Part Three, consisting of empirically oriented projects, employs unique variable and model specifications in order to verify existing theories in economics. The first three papers, in this part, verifies the theories of bilateral monopoly and the employment effects of minimum wage legislation under conditions of competition, monopsony, and monopoly. The next paper examines Caribbean economic integration and verifies the principle of comparative advantage. The fifth paper, in this part, examines the relationship between market structure and rates of return. The sixth paper, in this part, deals with the gaming industry.

The fourth part of this manuscript deals with the more ideological and philosophical aspects of economics and social science. The first two papers, in this part, tend to emphasize laissez faire capitalism. The third, and last, paper of this part, begins to break with this tendency, and, thus, serves as somewhat of an introduction to the fifth part of this manuscript.

The fifth part of this manuscript is much more interdisciplinary in nature compared to the earlier parts and deals with class conflict and extends to conflict in general. The first paper presents the primary class conflict model and five additional papers follow. The fifth paper, while an empirical undertaking, is included here because it is consistent with the general topic of this part of the manuscript.

• Language: English
• Publisher: Xlibris US
• Release date: May 11, 2009
• ISBN: 9781477160138

Barrington K. Brown

Barrington k. Brown recieved his Ph.d degree from the American Univeristy in Washinton DC in 1980 and received his Masters Degree in Economics from Howard University in Washington DC. in 1965.P

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Copyright © 2009 by Barrington K. Brown.

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Contents

Part I   Introduction

1.   Introducing the Book

Part II   Economic Theory

2.   Toward a Realistic Approach to Achieving Full Employment Price Stability and a Balanced Federal Budget

Part III   Empirical Studies

3.   Empirical Test of the Firm-Union Bilateral Monopoly Model for United States Manufacturing Industries

4.   Employment Effects of Minimum Wage Legislation: Competition, Monopsony, and the Shock Effect

5.   Minimum Wages, Monopsony, and Shocks: Revisited

6.   Principle of Comparative Advantage and Economic Integration: Potential for the Caribbean Region

7.   The Maintenance of Monopoly Profits In United States Manufacturing Industries

8.   Is The Game Fair?: A Statistical Study of State Lotteries

Part IV   Ideological and Philosophical Ideas

9.   Theoretical Analysis of Jamaican Economic Policy

10.   The Start-up, Decline, and Collapse of Communism

11.   The Philosophical Nature of the Social Sciences and the Development of Human Technology

Part V   Class Conflict and Related Matters

12.   The Class Conflict Model: Theory and History

13.   Application of the Conflict Model: The Nature and Causes of Conflict

14.   Application of the Conflict Model: Toward A More Complete Analysis

15.   The Class Conflict Model: Some Additional Remarks

16.   The Class Conflict Model: An Empirical Analysis

17.   The Class Conflict Model: Some Concluding Remarks

Part I

Introduction

Introducing the Book

This manuscript consists of 16 research papers that were completed between the years 1982 and 2005, the analyses of which range from the purely theoretical, to the empirical, and extending to the more ideological and philosophical. In any case, the emphasis of each paper is upon creativity, with inventiveness and innovation being the essential elements.

Part two of this manuscript consists of a purely theoretical paper. This paper presents a fresh approach to macroeconomic theory and policy.

Part Three, consisting of empirically oriented projects, employs unique variable and model specifications in order to verify existing theories in economics. The first three papers, in this part, verifies the theories of bilateral monopoly and the employment effects of minimum wage legislation under conditions of competition, monopsony, and monopoly. The next paper examines Caribbean economic integration and verifies the principle of comparative advantage. The fifth paper, in this part, examines the relationship between market structure and rates of return. The sixth paper, in this part, deals with the gaming industry.

The fourth part of this manuscript deals with the more ideological and philosophical aspects of economics and social science. The first two papers, in this part, tend to emphasize laissez faire capitalism. The third, and last, paper of this part, begins to break with this tendency, and, thus, serves as somewhat of an introduction to the fifth part of this manuscript.

The fifth part of this manuscript is much more interdisciplinary in nature compared to the earlier parts and deals with class conflict and extends to conflict in general. The first paper presents the primary class conflict model and five additional papers follow. The fifth paper, while an empirical undertaking, is included here because it is consistent with the general topic of this part of the manuscript.

As was mentioned at the beginning of this introductory section, the papers included in this manuscript were completed between 1982 and 2005. They are presented, in this manuscript, with regard to topic area rather than by the year of completion. The year each paper was completed is indicated under the title of the paper.

Part II

Economic Theory

Toward a Realistic Approach to Achieving Full Employment Price Stability and a Balanced Federal Budget

(1983)

I. Introduction

The purpose of this paper is to extend the boundaries of macroeconomic theory and develop appropriate policy measures. The present approach to macroeconomic theory and policy accepts as given and builds upon certain prevailing principles of macroeconomic thought, and demonstrates, with the aid of graphical analyses, the appropriate use of monetary and budgetary policy in achieving full employment, price stability, and a balanced federal budget. The prevailing principles of macroeconomic thought which the present approach accepts as given and builds upon¹ encompasses, and is included in, Keynesian, monetarist, and supply-side economic theory. The analyses employed in this paper is, further, based upon the principle of effective market classification.², ³

Prevailing macroeconomic theory assumes that the various policy instruments are perfect substitutes with respect to the various policy targets. It is assumed, for instance, that an easy monetary policy, increased government expenditures, or some combination of these is sufficient to achieve full employment. It is also assumed that decreased government expenditures, increased taxation, or some combination of these is sufficient to curb inflation. This paper, however, contends that certain special features of monetary policy and government spending and taxing policy renders each policy instrument relatively more efficient when aimed at a specific policy target.

II. The Special Features

This section examines the certain special features of monetary and budgetary policy which renders each policy instrument relatively more efficient when applied to a specific policy target. Each type of policy will be examined in turn.

A. Government Spending Policy

It is generally recognized by economists that government spending tends to discourage private investment spending and results in inefficiencies in the aggregate production process. Economic literature refers to these two features as crowding out and creating distortions. To the extent that government spending is financed by borrowing in the credit market, loanable funds available for private investment is diminished; or crowded out. Further, when government spending replaces spending by private businesses, inefficiencies result since less real economic growth per dollar spent is obtained when government spends than when these funds are spent in private activities. Thus, government spending causes distortions in the economic system.

B. Government Tax Policy

When tax rates are too high, both on average and at the margin, private saving and investment is discouraged. Therefore, productivity and real economic growth are retarded. When tax rates are lowered, saving and investment is encouraged, thus improving productivity and stimulating real economic growth. These are the supply-side effects of government taxing policies. The demand-side effect of taxation is usually taken as given in economic literature. Therefore, the present analysis implicitly assumes that the significant net effects of taxation are the supply-side effects.

C. Monetary Policy

According to monetary theory,⁴ the public, at any point in time, desires to hold a given amount of cash balances in relationship to annual income. Suppose for instance that, at a zero rate of inflation, the public desires to hold five weeks’ income in the form of cash balances. Now, suppose that the money supply is increased at an annual rate of, say, five percent. This increase in the money supply puts more money into the economy than the public is willing to hold in the form of cash balances. In order to draw cash balances down to the desired level, spending is increased. This increase in spending causes prices to rise, at, say, the same annual rate as the increase in the money supply. Thus, the inflation rate is five percent.

When inflation occurs in the economy, the cost of holding cash balances increases by an amount equal to the rate of inflation, that is, five percent per year. As was mentioned in the above paragraph, when the inflation rate was zero the public desired to hold 5 weeks’ income in the form of cash balances. Since the inflation that has occurred has increased the cost of holding cash balances, the public no longer desires to hold 5 weeks’ income in the form of cash balances. Suppose now that the public desires to hold only 4.5 weeks’ income in the form of cash balances. The public, then, draws down cash balances from 5 weeks’ income to 4.5 weeks’ income. This drawing down of cash balances from 5 weeks’ income to 4.5 weeks’ income is carried out by a one shot increase in the velocity of circulation.

Although inflation continues along at the same rate, say, five percent per year, this one shot increase in the velocity of circulation causes a once and for all increase in the general price level. An analogous circumstances occurs during periods of deflation (negative inflation) where there is a once and for all decrease in the general price level. Thus, when there is a change in the rate of growth of the money supply, not only is there a change in the annual rate at which prices change, but there is also a once and for all change in the general price level.

At this point it is necessary to note a significant principle of monetary theory. According to monetary theory,⁵ the demand for real money balances is a function of permanent income. During periods of economic contractions, measured income falls relative to permanent income. Therefore, the demand for money rises in relationship to measured income; or alternatively, the velocity of circulation falls. During periods of economic expansion, measured income rises relative to permanent income. Therefore, the demand for money falls in relationship to measured income; or alternatively, the velocity of circulation rises.

D. Preliminary Summary

This section of the paper examined the special features of monetary and budgetary policy: namely, the crowding out effect and the distortions creating effect of government spending, the supply-side effects of government taxation, and the once-and-for-all price level effect of monetary policy. With these special features clearly stated, this paper now proceeds to develop appropriate policy models for achieving full employment, price stability, and a balanced federal budget.

The first analysis, of the following sections, considers the federal budget and full employment as policy targets and government spending and government taxation as policy instruments. The second analysis considers full employment and price stability as policy targets and monetary policy and budgetary policy as policy instruments.

III. Model #1

THE AGGREGATE REAL ECONOMY AND THE FEDERAL BUDGET

A. Introduction

For the sake of clarity of analysis, several assumptions are made with regard to the model employed for the present analysis. First, it is assumed that monetary policy is constant throughout each time period under consideration; that is, the money supply grows at some constant rate in each of the time periods considered. Second, it is assumed that all forces acting on the economic variables other than those policy variables employed in this analysis cancel themselves out. Thus, the net effect of all other factors is zero. The third assumption concerns the time periods considered in the model. Time periods employed refer to units of time, and there is no special designation assigned to the length of a time period. Thus, implicit references to time are abstractions.

B. The Model

In the diagrams which follow, the horizontal axis measures the tax rate. The tax rate increases to the right away from the origin. These tax rates should be viewed as composite tax rates since there is no distinction between personal and business taxes. The vertical axis in the following diagrams measures the rate of government spending. Upward movements away from the origin represent increases in the rate of government spending.

The line labeled BB, in figures 1 and 2, represents various combinations of government spending rates and tax rates for which the federal budget is balanced. The area to the left and above the BB line, with higher rates of

1.jpg

government spending and lower tax rates, represents a federal budget deficit (denoted by letter D). The area to the right and below the BB line, with lower government spending rates and higher tax rates, represents a federal budget surplus (denoted by the letter S).

The positive slope of the BB line denotes the fact that as the rate of spending is increased, the tax rate has to be increased in order to eliminate the federal budget deficit and bring the budget into balance. Alternatively, if the rate of spending is decreased, the tax rate has to be decreased in order to avoid a federal budget surplus and keep the budget balanced.

The line NN, in figures 1 and 2, represents various combinations of government spending rates and tax rates for which the aggregate real economy is in equilibrium (where the aggregate demand for resources is equal to the aggregate supply of resources). The area to the left and above the NN line, with higher rates of government spending and lower tax rates, represents overfull employment of resources (denoted by the letter O). In this area, the aggregate demand for resources is greater than the aggregate supply of resources. The area to the right and below the NN line, with lower rates of government spending and higher tax rates, represents recession (denoted by the letter R). In this area, the aggregate supply of resources is greater than the aggregate demand for resources.

The positive slope of the NN line denotes the fact that as the rate of government spending increases (increasing the aggregate demand for resources relative to the aggregate supply of resources), the tax rate has to be increased in order to avoid overfull employment of resources. This increase in the tax rate has the effect of decreasing the aggregate demand for resources relative to the aggregate supply resources.

In figure 1, the BB line and the NN lines coincide. Figure 1 depicts the situation where there are no distortions and crowding out effects due to government spending and no supply-side effects of taxation. In a situation of a budget surplus and a recession, represented by point a, the government has the option of either decreasing the tax rate, increasing the rate of spending, or a combination of both in order to bring the budget into balance and to restore equilibrium to the aggregate economy. Similarly, in a situation of a budget deficit and overfull employment of resources, represented by point c, the government has the option of either increasing the tax rate, decreasing the rate of spending, or some combination of both in order to bring the federal budget into balance and to restore equilibrium to the aggregate economy.

The cases depicted in Figure 1 represent the more conventional types of theoretical situations where government taxing and spending policies are perfect substitutes with respect to their impact upon the aggregate economy and the federal budget. However, where government spending creates distortions and crowds out private spending and government tax policies have supply-side effects, the relative efficiency of changes in government spending rates and changes in tax rates differ with respect to their impact upon the federal budget and the aggregate economy. As can be seen in figure 2, the distorting and crowding out effects of government spending and the supply-side effects of taxes, increases the slope of NN line relative to the slope of the BB line (or decreases the slope of the BB line relative to the slope of the NN line). Figure 2 shows that the slope of the NN line is steeper than the slope of the BB line. Because the slope of the two lines differ, the graph is divided into four areas. Area A represents a budget surplus and recession (S-R), area B represents a budget deficit and overfull employment (D-O), area C represents a budget surplus and overfull employment (S-O), and area D represents a budget deficit and recession (D-R). At point E, where line NN and line BB intersect, the budget is balanced and there is equilibrium in the aggregate economy.

As was mentioned above, due to the crowding out effect and the distortions that result from government spending and the supply-side effects of taxes, the slope of the aggregate economy equilibrium line (NN) is greater than the slope of the budget balance line (BB). In figure 1, it was shown that with no distorting and crowding out effects of government spending and no supply-side effects of taxes, an increase in rate of government spending, from point a, was sufficient to restore equilibrium to the aggregate economy and balance the budget. However, starting from a like position in figure 2 (say, point p), it is seen that the rate of increase in government spending (pz) required to restore equilibrium to the aggregate economy is greater than the rate of increase in government spending (pq) required to balance the budget. This occurs because in a situation of a budget surplus and recession, as point p represents, an increase in the rate of government spending, through balancing the budget in the short run, prolongs a recession because it creates inefficiencies and crowds out private spending (and a deficit occurs in the movement from point Q to point Z). Alternatively, starting at point p, the tax rate reduction (pt) required to balance the budget is greater than the tax rate reduction (ps) required to restore equilibrium to the aggregate economy. This occurs because, in a situation of a budget surplus and a recession, a decrease in the tax rate, though causing equilibrium in the aggregate economy in the short run, prolongs the budget surplus because of the supply-side effects. Of course, overfull employment of resources occurs in the movement from point s to point t because of the stimulating supply-side effects.

It can easily be shown that the above analysis is symmetrical. All that is required is to start at a point in area B, a situation of a budget deficit and overfull employment of resources. Here the crowding in and anti-distortion effects of a decrease in the rate of growth of government spending is analyzed along with the anti-supply-side effects of an increase in the tax rate.

The primary point of this analysis is to demonstrate that differences in the relative efficiency of government spending policy and taxing policy exist with regard to their impact upon the aggregate economy and the federal budget. It was shown that the federal budget is relatively more responsive to changes in the rate of government spending and the aggregate real economy is relatively more responsive to changes in tax rates.

In figure 3, starting at point P in area A, it is shown that if tax rate policy is aimed at balancing the federal budget and spending policy is aimed at restoring equilibrium to the resource market, the movements are farther and farther away from the equilibrium point (E). Thus, the movement is from point P (area A), to point F (area B), to point Q (area A), and so on.

However, figure 4 demonstrates, starting at point P, that if tax policy is aimed at restoring equilibrium to the aggregate real economy and spending policy is aimed at balancing the budget, the movements converge upon the equilibrium point (E). Thus, the movement is from point P (area A) to point F (area B), to pint S (area A), and so on until both the budget is balanced and equilibrium is restored to the resource market.

2.jpg2.jpg2.jpg3.jpg

Suppose that the starting position is point a, in area D, a situation of a budget deficit and a recession in the aggregate real economy. This is illustrated in figure 5, where area D is blown up to allow for greater emphasis. If the tax rate is increased in order to balance the budget, the movement is from point a to point b. At point b, the budget is balanced, but the situation is farther away from the NN line than at point a. Suppose, next, that the rate of spending is increased in order to end the recession. This is represented by a movement from point b to point c on the NN line. Continuing this process leads to points farther away from the equilibrium point (E).

However, if tax policy is aimed at restoring equilibrium to the aggregate economy and spending policy is aimed at balancing the budget, as shown in figure 6, the moment converges on the equilibrium point (E). Thus, in a situation of a budget deficit and recession, the correct mix of policies is to decrease the tax rate in order to stimulate the economy and to decrease the rate of spending in order to balance the budget.

C. Preliminary Conclusion

The foregoing analysis emphasized the crowding out and distortions creating effects of government spending and the supply-side effects of government taxation. The analysis concluded that given two policy instruments—government spending and taxes—and two policy targets—the federal budget and full employment of resources—tax rate policy, due to the supply-side effects, has an advantage relative to government spending policy in achieving full employment. Further, the analysis concludes that government spending policy, due to the crowding-out and distortions creating effects, has a disadvantaged relative to tax rate policy in achieving full employment. Thus, given these two policy instruments and these two policy targets, government spending holds a comparative advantage in balancing the federal budget and tax rate policy holds a comparative advantage in achieving full employment of productive resources.

IV. Model #2

PRICE STABILITY AND THE AGGREGATE REAL ECONOMY

A. Introduction

For the sake of clarity of analysis, several assumptions are made with regard to the present model. The first assumption states that all factors affecting economic activity, other than the policy variables employed in the present analysis, cancel themselves out. Thus, the net effect of all other factors on economic activity is zero.

The second assumption relates to certain features of the tools of federal budgetary policy; namely, the crowding out effect of government spending and the supply-side effects of government taxation. This analysis assumes that the crowding out effects and the supply-side effects are offsetting. With an expansionary budgetary policy, the rate of federal spending is increased and tax rates are reduced. This, second, assumption states that the negative effects on the economy due to the crowding out as a result of the increase in the rate of government spending is just offset by the positive economic effects of the supply-side features of a reduction in tax rates. The converse holds with a contractionary budgetary policy; where the rate of spending is reduced and tax rates are increased. In this instance, the positive effects on the economy due to the anti-crowding out effects of a decline in the rate of government spending is just offset by negative economic effects