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http://ssrn.com/abstract=269068
 
 

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Effects of Political Monopoly of the Ruling Elite on the Extent of the Market, Income Distribution, and Development


Wai-Man (Raymond) Liu


School of Finance, Actuarial Studies & Applied Statistics, Australian National University

Xiaokai Yang


Monash University - Department of Economics

January 2002


Abstract:     
This paper develops a general equilibrium model to simultaneously endogenize the level of division of labor, the extent of the market, the degree of inequality of income distribution, and aggregate productivity. It shows that good capitalism with free markets for all goods including government services generates equal income distribution, which entails great extent of the market. Hence, the equilibrium level of division of labor and aggregate productivity are high. Political monopoly by the ruling elite generates unfair relative prices of government services to other goods and inefficient inequality of income distribution, which results in a narrow market, thereby generating inefficient equilibrium level of division of labor and aggregate productivity. The degree of inefficient inequality of income distribution caused by bad capitalism is positively dependent on the degree of commoners' tolerance of unfair income distribution inequality. This degree can be reduced by free migration between countries and competition between different governments. As rivalry between sovereigns and free migration reduces such tolerance in a country with political monopoly of the elite group, the equilibrium degree of inefficient inequality of income distribution decreases. This implies attenuated rents of political monopoly. This shrink political rent will lead to good capitalism with no political monopoly by the elite group. The story of our model is consistent with historical phenomena documented by economic historians. This model may be used as a working hypothesis for analyzing what is going on in the newly industrialized economies.

Note: Previously titled "Good Capitalism versus Bad Capitalism: Effects of Political Monopoly of the Ruling Elite on the Extent of the Market, Income Distribution, and Development"

Number of Pages in PDF File: 32

Keywords: Network effect of division of labor, specialization, the extent of the market, income distribution, political monopoly

JEL Classification: D50, O12, O40, O47

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Date posted: May 30, 2001  

Suggested Citation

Liu, Wai-Man (Raymond) and Yang, Xiaokai, Effects of Political Monopoly of the Ruling Elite on the Extent of the Market, Income Distribution, and Development (January 2002). Available at SSRN: http://ssrn.com/abstract=269068 or http://dx.doi.org/10.2139/ssrn.269068

Contact Information

Wai-Man (Raymond) Liu (Contact Author)
School of Finance, Actuarial Studies & Applied Statistics, Australian National University ( email )
Building 26c College of Business & Economics
Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61 2 612 53471 (Phone)
+61 2 612 50087 (Fax)
Xiaokai Yang
Monash University - Department of Economics ( email )
Wellington Road
Clayton, Victoria 3
Australia
+61-3-99052448 (Phone)
+61-3-99055476 (Fax)
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