One especially interesting aspect of society, whose size is closely related to the grants economy in general, is crime. If we think of crime as a “sector” that, under perfect market conditions, that is, in the absence of public organization, has a strong tendency to become “too large,” we may think of the police and other efforts to reduce it as an enterprise that exists mainly within the grants sector of the economy, concerned with reducing a sector considered undesirable. The crime sector itself, however, also involves substantial illegitimate redistributions of assets whose effect is not well understood.
The second major function of the exchange sector in society is the distribution of income; that is, the determination of how much of total output each person receives. The income of any individual depends, first, on the totality of their assets, including their mind and body, and then on the prices that the market system assigns to the services of those assets.
However, the distribution of income resulting from the unrestricted operation of the exchange sector is frequently considered politically or morally unacceptable by society. Hence the intervention of the grants economy, both private and public, to change the distribution of income into something considered more desirable, usually meaning greater equality. Here, therefore, we again see the grants economy supplementing, or perhaps correcting, the results of the exchange economy.
Just as we can conceive of a grants system that is neutral with respect to the distribution of resources, we can also conceive of one that is neutral with respect to the distribution of income or, more generally, with respect to the distribution of welfare, although this phenomenon seems even less likely than the former, since it would imply robbing Peter to pay Peter.
In fact, any society without a grants economy, or with a grants economy neutral with respect to distribution, would soon cease to exist, since its members would starve. In what might be called “radically egalitarian societies,” such as Cuba or the People’s Republic of China, the political demand for an income distribution different from that produced by exchange is so strong that the exchange economy itself is distorted and may result in serious errors in resource allocation.
On the other hand, in the absence of an adequate system of redistribution through grants, the exchange economy, as occurs in some Latin American countries, may easily produce an income distribution so unequal that it becomes both politically unstable and a major disadvantage for development.
Development, measured as real growth in per capita real income, may be considered a third function of both the exchange economy and the grants economy, since it combines the two aspects of resource distribution and income distribution.
In part, this is a problem of allocating resources to what might be called the “development industry,” that is, that sector of activity which is especially significant from the standpoint of increasing wealth, power or social integration in the future.
There is a widespread belief that the exchange economy, although it will allocate some resources to development, will do so in an amount too small to be politically acceptable. Therefore, the grants economy must intervene once again in order to expand this particular section of economic and social activity.
Income distribution, however, is also relevant to the development process. This process can easily be frustrated if its fruits are not widely distributed, and it can likewise be frustrated if they are distributed too widely and too quickly.
In these three cases, the problem of the correct proportions and of the interaction between the exchange economy and the grants economy is perhaps the most important question of political economy and underlies, as we saw earlier, the entire socialist controversy.
A significant aspect of the relationship between the exchange economy and the grants economy is the concept of an economy of “implicit” grants, which arises as a result of political distortions in the price structure or, more generally, in the exchange structure.
Practically any measure taken by a government, such as regulations, prohibitions, quotas, quantitative restrictions, licenses and so on, will alter the structure of relative prices. This, in turn, will lead to temporary or permanent changes in the distribution of income and assets.
In other words, any state intervention of this kind in the economy will make some people richer and others poorer, constituting an implicit grant from those who become poorer to those who become richer.
If, for example, a person or group of people obtains a monopoly over some commodity, the price of that commodity will rise, and there will be an implicit grant from all those who buy it to those who produce or control it.
Similarly, a tariff will have complex redistributive effects, harming consumers and perhaps benefiting producers in the country that imposes it, while harming producers and perhaps benefiting consumers in other countries.
These implicit grants are enormously complex, and in most practical cases they are very difficult to detect.
