Herschel I. Grossman

Swords or Plowshares? A Theory of the Security of Claims to Property

This paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities. The model emphasizes the distinction between offensive weapons, which are the instruments of predation, and fortifications, which provide defense against predation. The analysis of this model shows how the equilibrium security of claims to property is determined. The analysis focuses on the possibility of a nonaggressive equilibrium, in which no resources are allocated to offensive weapons and claims to property are fully secure. We also analyze the complex relation between economic welfare and the security of claims to property. We find, for example, that a relatively poor agent could be better off in an equilibrium with less secure claims to property.

Proprietary public finance and economic welfare

Abstract We develop a positive theory of public finance in which the objective of tax and spending policy is to extract rents for the incumbent ruler. The analysis shows how dependence of the incumbent rulers survival probability on his tax and spending policy can lower the equilibrium tax rate and increase the equilibrium amount of spending on productive public services, but only until the minimum credible tax rate, which depends on the rulers endogenous survival probability, becomes a binding constraint. The central result of the analysis is that, if a relatively benevolent tax and spending policy is both necessary and sufficient for a high survival probability, then the rulers equilibrium policy is relatively benevolent.

Foreign aid and insurrection

This paper analyses the allocative and distributive effects of foreign aid within a positive theory of insurrections. In this theory, foreign aid causes a reallocation of resources from production to an intensified struggle over distributive shares. Moreover, although the ruler of the recipient economy regards foreign aid as just another possible source of income for his parasitic clientele, the threat of insurrection induces a policy response that increases the income of the general population. The analysis shows how these allocative and distributive effects depend on the technology of insurrection.

Money, Interest, and Prices in Market Disequilibrium

This paper develops a general model of multimarket disequilibrium and uses it to explain the disequilibrium behavior of prices and interest. Section I summarizes the conventional distinctions between the dynamic loanable-funds and liquidity-preference theories of interest and between the dynamic quantity and expenditure theories of prices. Sections II and III develop the concepts of notional demand and gradual market clearing, which are essential in the conventional analysis. The next three sections develop a choice-theoretic theory of effective demands, starting in Section IV with a generalization of Clowers dual-decision hypothesis to a multimarket context. Section V analyzes the determination of quantity constraints on individual transactions implied by market disequilibriums. Section VI deals with aggregation of the individual effective-demands functions. Finally, Section VII shows how the aggregate effective demands determine the dynamic behavior of the interest rate and price level, and Section VIII shows that the traditional dynamic theories mentioned above are all special cases of the more general effective-demands theory. A priori, the dynamic loanable-funds, liquidity-preference, quantity, and expenditure theories all turn out to be consistent with the structure of exchange in a monetary economy. Which better approximates reality depends upon choice-theoretic behavioral parameters which determine the pattern of response to the constraints imposed by market disequilibriums.

Civil Conflict Ended or Never Ending

In many historical cases, victory by a challenger for political dominance over an initially dominant group has ended civil conflict. But in other places, victory by a challenger has provided only a temporary respite, a brief intermission before the resumption of civil conflict. This article uses a theoretical model of civil conflict to identify the factors that determine whether civil conflict is ended or never ending. This theory focuses on how the values that rival groups attach to political dominance relate to each other and to the technology of conflict. These relations determine whether there is civil conflict and, if there is civil conflict, whether civil conflict ends whenever the initial challenger group becomes politically dominant or whether civil conflict is never ending. For example, the authors find that for civil conflict to be never ending, the ratio of values attached to political dominance can be neither too large nor too small. The implications of the theory seem to be consistent with the evolution of 20th-century civil conflicts in such diverse places as Russia, China, Iran, South Africa, the Balkans, Israel/Palestine, and many parts of central Africa.

Aggregate Demand, Job Search, and Employment

This paper presents a critical evaluation of the recent emphasis on job-search and employment-acceptance friction as an explanation for the actual causal relationship between aggregate demand and employment. Although job-search theory seems to provide a choice-theoretic basis for the relationship between aggregate demand and employment, the paper points out that prominent qualitative aspects of the predicted relationship between aggregate demand and employment are empirically unacceptable. In particular, the analysis of employment-acceptance friction (1) does not allow for layoffs and nonwage rationing of jobs, (2) predicts that cyclical variations in employment will involve countercyclical variation in real wages rates, and (3) predicts that cyclical variations in employment will involve countercyclical variations in consumption expenditures. As an alternative, the paper suggests that analysis of friction in the process by which markets are cleared can provide a more satisfactory theoretical basis for the causal relationship between aggregate demand and employment.

Population Increase and the End of Colonialism

Between 1946 and 1976, the European powers granted independence to all of their large colonies in Africa and Southeast Asia. This paper attempts to provide an economic explanation for this remarkable ending to the era of colonialism. The main theoretical innovation is to consider the effect of population increase on the allocation of time by the indigenous population between productive and subversive activities. The analysis suggests that the increase in population during the colonial period increased the potential private return to subversive activity until the colonies became a net burden on the metropolitan governments. It also suggests that there was less subversive activity in colonies in which the market for indigenous labor was monopsonized because monopsonistic employers internalized the potential negative effect of subversive activity on net profits. Copyright 1997 by The London School of Economics and Political Science

Peace and War in Territorial Disputes

Why do sovereign states sometimes fail to settle territorial disputes peacefully? Also, why do even peaceful settlements of territorial disputes rarely call for the resulting border to be unfortified? This paper explores a class of answers to these questions that is based on the following premise: States can settle a territorial dispute peacefully only if (1) their payoffs from a peaceful settlement are larger than their expected payoffs from a default to war, and (2) their promises not to attack are credible. This premise directs the analysis to such factors as the advantage of attacking over both defending and counterattacking, the divisibility of the contested territory, the possibility of recurring war, the depreciation or obsolescence of fortifications, and inequality in the effectiveness of mobilized resources.

Money Balances, Commodity Inventories, and Inflationary Expectations

This paper evaluates the effects of inflationary expectations within an extended inventory model of the determination of optimal money holdings and commodity inventories. One important innovation is to introduce into the consumption bundle a commodity which is purchased less frequently than income is received. A second innovation is to consider household use of earning assets as a store of savings balances rather than working balances. The analysis shows that the effects of inflationary expectations on optimal commodity inventories and money holdings depend critically on whether the household holds part of its savings balance as earning assets. For example, if the household holds its savings balance only as money, and if the real rate of return on earning assets is constant, an increase in the expected rate of inflation would induce a reduction in total money holdings and also, somewhat surprisingly, a reduction in total commodity inventories.