One of the most difficult and interesting questions in the theory of the grants economy is the treatment of implicit grants. Implicit grants may be defined as redistributions of income or wealth that take place as a result of structural changes or manipulations in the set of prices and wages, licenses, prohibitions, opportunities for access or restrictions on access. They are anything that is not a direct and explicit grant but nevertheless produces economic redistributions. There are many examples of this phenomenon, and we can do no more than outline a few of them.
The great problem in defining implicit grants is that the concept always implies some norm or point of reference in the distribution of income or wealth, deviations from which constitute the structure of implicit grants. It is not even clear in concrete cases whether we are referring to wealth, income or economic welfare. If we take welfare as the most general form, then, if under the distribution considered normal individual i has an economic welfare of Xi, and if after some structural change in prices, monopolies, licenses, quotas or anything else that modifies the distribution, that individual has a welfare of Yi, then the implicit grant for him is (Yi – Xi). Of course, this may be a positive grant, if he experiences an increase in welfare, or a negative one, if he experiences a decrease.
The empirical study of the economy of implicit grants is difficult at both ends, because it is often difficult to reach agreement on the norm against which deviations should be measured, and it is also frequently very difficult to estimate the real effects of any particular change on the distribution of economic welfare. The phenomenon of the implicit grant is a real phenomenon and, whatever the difficulties may be, we cannot fail to study it without overlooking an important aspect of the real world.
The problem becomes even more difficult when we try to take into account the dynamics of the system and of distribution over time. The grants economy has an “investment” quality, in the sense that grants in one period may have an impact on grants in the following period and in later periods. It is not possible to grasp properly either the structure of grants or the distributions of welfare at a given moment in time, or over a short period of time, without taking into account their impact on the future.
As a very simple example of this problem, suppose we have a society in which everyone has the same total lifetime income structure, so that over the whole life experience incomes are exactly equal, but in which income rises over the course of life, so that everyone is poor when young and rich when old. The distribution of income measured by conventional means such as the Lorenz curve or the Gini index would appear unequal, but in fact the society would be completely egalitarian. Any distribution of income in a given year must therefore be corrected by taking into account the past and expected future income of each party, an adjustment that will almost always have the effect of reducing the degree of inequality.
The transfer of income between age groups, for example from the middle-aged to the young and the old, is, of course, part of the grants economy. We must consider a certain amount of this transfer as normal, although there is likely to be broad disagreement over what the norm should be. Moreover, we may suppose that if the institutions of society — legal, customary and so on — distort this distribution away from the norm, then a system of implicit grants exists.
For example, if growing military budgets result in a decrease in educational expenditures to the point that the younger generation is inadequately trained to participate in the world left to it by its elders, we may consider this transfer as an implicit grant from the young to the middle-aged. The conceptual problems implied here are quite difficult, though unavoidable, and at times they will have to be resolved through somewhat arbitrary decisions about what constitutes the norm. We are likely to encounter different norms for different purposes, and although this is disorderly, the real world is disorderly too and should not be organized in the interest of excessive intellectual zeal. These principles may perhaps become clearer when we examine concrete cases.
The first example of implicit grants is monopoly. Economists have long recognized that monopoly distorts the distribution of income in favor of the monopolist and may therefore be considered an implicit grant in his favor from his actual or potential customers, who must pay higher prices for the monopolized commodity. Here, a competitive price structure is considered the norm, which is also generally identified with the structure of opportunity costs.
