Martin J. Bailey

The Optimal Full-Employment Surplus

In this paper we find the monetary-fiscal mix that will lead to the Pareto-optimal amount of saving and investment. Because knowledge and foresight are imperfect, the monetary-fiscal policy mix affects consumption and the equilibrium interest rate, at full employment without inflation. Optimal policy balances different offsetting failures of household foresight against each other to approximate the results of perfect foresight. It also offsets the distortion in aggregate saving and investment due to the taxation of income from capital.

Progressivity and Investment Yields under U.S. Income Taxation

Because tax deductions and tax credits associated with particular investments are worth more in equivalent pretax income to a high-bracket taxpayer than to a low-bracket one, tax-privileged investments find their way into the hands of high-bracket taxpayers. Their competition with each other and with the next lower brackets drive down pretax rates of return on such investments. As a result, although the tax system is less progressive than the rate structure alone makes it appear, it is more progressive than it would appear if we look only at net economic incomes and taxes. Tax privilege (exemption) relates qualitatively in a simple way to an investments associated deductions and exclusions from income.

The Marshallian Demand Curve

IN AN article with the above title, Professor Friedmnan2 has urged that a constantreal-income demand curve is a more satisfactory tool for economic analysis than the customary constant-other-prices-and-money-incomes demand curve and that, at least in the first two editions of the Principles, this was the type of demand curve which Marshall really had in mind. On the latter, historical question nothing will be said here; but on the former, analytical question I shall contend that Friedman did not make the best choice of a curve as an improvement on the conventional one and that the constant-real-income curve, strictly interpreted, does not on balance possess the superiority he claims for it. Of the various interesting alternative types of demand curve which can be defined, one at least possesses most, if not all, of the advantages which Friedman can claim for any type of constant-real-income demand curve and none of its disadvantages. In his argument in support of the constant-real-income demand curve Friedman demonstrated that the use of an ordinary demand curve in a demand-supply diagram to show the effects of a subsidy on a given commodity fails to take account of the necessary withdrawal of resources from other uses; on the other hand, the constantreal-income demand curve, which in the limit is an approximation of what the community can actually have, allows for this withdrawal of resources and therefore presents a better picture of the final outcome.3 While Friedmans analysis does not contain any errors, it is liable to serious misinterpretation if its assumptions and their relevance are overlooked; on the other hand, with a different type of demand curve which I shall propose the pitfalls can be avoided, and an analytically superior tool can be had in the bargain.

The Possibility of Rational Social Choice in an Economy

This paper examines the implications of an error or oversight in the statement and proof of Arrows celebrated General Possibility Theorem. Besides showing that, strictly speaking, the theorem is false, we show that the force of the correctly stated theorem and of most of its descendants applies only to a class of election procedures and not to social choice in an economy. A Bergson welfare function can be constructed that satisfies all the stated Arrow axioms and conditions, although the construction is unnecessary for consistent, effective social choice.