Econ 107 Midterm 1

Are methods neutral and objective?
Click the card to flip 👆
1 / 86
Terms in this set (86)
Are methods neutral and objective?
No, they are value, interest, and culture-laden. Objectivity must be detached from the subject of study, social influence, fellow researchers, and practical/immediate concerns. This isn't realistic. Economic policies and models aren't apolitical
What is the main focus of classical economics, and what is it tied to?
Classical economics is Smith, Marx, Hayak. They focus on distribution, institutional and society structure, and how it is tied to production. this is unlike neoclassical economics in which distribution is determined endogenously
In Marx's view what determines distribution?
Social relations of production (who owns the means of production/who works for them, class). Marx emphasized the distinction between social relations of production and distribution.
How is scarcity defined in classical economics? How does this differ from the neoclassical view?
In the classical political economy, scarcity is defined as a difficulty of production arising due to largely existing institutional arrangements. Neoclassical view sees resources as externally/exogenously given
How did Keynes view economics?
Economics is essentially a moral science and not a natural science. It employs introspection, passing moral judgments and judgment of value, propensity to consume, animal spirits
What are the consequences of the neoclassical approach?
it treated individuals as if they were atoms of the exchange process and of market behavior. It derived a theory of distribution as incidental to the pricing process. Individuals are embedded in societies and distributions
What are economic decisions based on in the social provisioning view?
It's not just maximizing productivity/utility/etc. Economic decisions are based on social relationships, cultural, moral values, politics, religion, not so much based on individual choice. It includes nonmarket activities like private vegetable gardens and women doing housework instead of working
Describe the key features of social provisioning?
Social provisioning highlights the interdependence of social embeddedness of economic processes. All the economic activities occur in a social and institutional context - cultural values, class/ power relations, norms, ideologies, and ecological human society is organized by both market and non-market activities. Constituents of society are interdependent, not isolated individuals draw attention toward notions of sustenance, cooperation, and support social provisioning emphasizes the importance of social norms in affecting both the process and the outcome of economic processes.
In what ways Smith is relevant today?
a) Against trade restrictions
b) Politicians are preoccupied with short term issues
c) Long range planning by politicians is not relevant
d) Government should be decentralized
e) Individual's desire to better their conditions is powerful to improve economies
f) Individuals save on their own, it is the state that is extravagant
g) Businesses are socially responsible
h) He was in favor of some forms of government intervention
i) Proponents of free markets agree with invisible hand concept
j) Critique of modern interventionist approach to social problems.

Also - supply and demand, competition, self interested behavior, competition, the invisible hand, free markets vs government intervention, he was a champion of
What are the important influences on Smith?
Scottish Enlightenment that had a humanist and rationalist view. He was influenced by earlier economists such as Quesnay and Turgot an attacked trade barriers promoted by mercantilists. Influenced by Hutcheson: People themselves could discover what is ethically good by discovering the actions that serve the good of humanity. The will of God was important in this discovery.
What are the key elements of the Scottish Enlightenment?Humanist and rationalist. Humanist view included liberty, tolerance, and happiness for the greatest numbers while a rationalist view borrowed from the european enlightnemment, looked at empiricism which was looking at the world and building up towards a theory, and practicality. Like Newton's physical world, discover the laws that govern societies. Humans can effect changes for the better of society, can produce unlimited progress.What are the areas Smith saw a role for the government?National security, Justice, Contracts enforcement, Public works, TariffsWhat is the greatest improvement in productive powers of labor due to?Division of LaborWhat is the point Smith is making in his pin factory example (a division of labor improves productivity)?It's more productive to separate the parts of creating a pin than to make a pin itself, this increases productivity. One man draws the wire, another strengthens it, if 10 people divide up the 18 steps for pin making they will make more pins per person than if one person makes it from start to finish all day.How does Smith generalize his division of labor argument?Can be generalized for other manufacturing industries where labor can be subdivided into tasks, can also be generalized for other countries.How does DOL increase productivity?allowance for creativity/inventions However - today inventions mostly take place through group work and not repetition time saving However: getting tired of doing a task decreases productivity improves dexterity While this is true for things like art and writing, it doesn't necessarily continue to improve for tasks like strengthening a pinWhen Smith says that there is "universal opulence", what kind of a society does he assume?A harmonious society where wealth is distributed However: we don't have a harmonious society because of power struggleWhat is the division of labor a consequence of?the propensity to truck, barter, and exchange, division of labor comes from the need for trade. Human nature involves trading with each other, and it would take place even if we were all identicalWhat kinds of comparisons does he make between humans and animals:Truck barter and exchange is unique to humans Animals are independent when they grow up, men are not. Animals get what they want from men by gaining their favor, men appeal to the self-interest of others (i.e by paying money for something) Of course, bees and other animals depend on one anotherHow is the division of labor related to the size of the market?Division of labor increases with market size because there are more goods and surplus (countries focus on goods they can produce more efficiently) Open trade between large markets makes things cheap, trade is good for all parties involved Chapter 3 also acknowledged the flaws of division of labor because if workers strengthen a wire their entire life they will become stupid and ignorantWhat kinds of values does Smith consider, which one does he focus on?use and exchange, focus on exchange Use value - what the usefulness of something is (i.e water) Exchange value - how much you can exchange something for (i.e diamonds)What is labor embodied?sum of direct (production of item) and indirect (production of intermediate item) labor, which is the total labor used in the production of a commodity The labor theory of value is that the labor embodied determines the valueWhat is labor commanded?The value of a good is measured by the quantity of labor it is able to 'command': the value of a commodity 'to those who possess it, and who want to exchange it for some new production, is precisely equal to the quantity of labor which it can enable them to purchase or command." For example if it takes 2 hours to hunt a beaver and an hour to hunt a deer then a beaver is worth two deerWhen do the labor commanded and labor embodied match each other?Before there is rent and profit. Once you sum costs and profits, you get exchange value in a capitalist society. Labor commanded isn't labor embodied because there is a profit rate, labor commanded is higher than labor embodied because labor commanded includes profit.What does the price depend on in a capitalist society?Sum of costs and profits to produce a good- (addition up theory, or cost of production theory). Note that it's not demand that determiens price although demand does determine the allocation of resources assuming capital per worker is the same across different industriesDoes demand play a role when there are increasing or decreasing costs?When there are increasing costs an increase in demand will lead to an increase in costs and prices will increase, when there are decreasing costs an increase in demand will decrease costs leading to a decline in prices.In the Smith labor model, when there are constant costs per unit of output, what is the role of demand?It does not influence value. It determines how capital is distributed among industries and the quantities of goods produced.In a capitalist economy when does the exchange value reflect labor embodied?When capital per worker is the same across industries.What is the invisible hand?In a capitalist economy when individuals pursue their self-interest under competitive conditions the invisible hand is why social good emerges. Buyers and sellers look at each other as opportunities to get what they want, price sends signals to buyers and sellers that lead to supply and demand equaling, this leads to desirable outcomes in a market economy through efficient allocation of resources at the lowest priceWhat does the harmony of interest through the invisible hand implies about the role of government?It should not intrude on the economy.What does the invisible hand accomplish under competitive conditions?a) the productive system will produce those goods the consumers demand b) the chosen production methods are the most efficient, that is those that don't waste resources, c) the goods are sold at the lowest price, which is the production cost inclusive of normal profit.Explain how the division of labor and the accumulation of capital promote economic growthSmith viewed that the introduction of capital is the result of the division of labor. • Division of labor and the accumulation of capital promote increased productivity and economic growth. • Greater national output enables higher levels of consumption, which constitutes a rise in the true wealth of a nation. • Markets widen • Greater accumulation of capitalSmith's opinion on wagesSmith was in favor of high wages The minimum wage rate must be enough for the subsistence of the worker and for the worker to be able to provide for himself and his family, increasing national wealth increases wages which is good Wage fund theory Profit should be high enough to have surplus and account for risk Rent is the highest price paid on rent Interest rate is deduction of profits, the lowest interest rates must be high enough for lenders not to incur losses and for loaners to be able to borrow The role of money and debt Money is useful but it's about the actual value and not the money itself Government spending and increased taxes is badWhat is sympathy and the sympathetic proccess?our fellow feeling with any passion whatever, it's the correspondence of sympathetic and original passions, it's self referential, cognitive dimensions that use the mind and affect dimensions when emotions emerge. It can be felt for someone who is incapable of feeling those things (i.e someone who is dead or insane), and can occur through transfusion (i.e yawning) Sympathetic process The spectator wants mutual sympathy because it's pleasurable The agent wants mutual sympathy but is experiencing the actual situation so there's more at stake The spectator can be partial because they may behave selfishlyWhat is mutual sympathy?getting pleasure out of sympathizing with the otherWho is the impartial spectator?Impartial member of society, in imagination. It's an impartial judge/critic who decidies whether something is due to the sympathetic process and helps us decide how to act. Eventually, smith connects an impartial spectator to The Deity, saying the impartial spectator is representative of The Diety.What does it mean to put ourselves in the other's situation?We imagine ourselves in someone else's situation and imagine how that would make us feelHow does the sympathetic process lead to morality?agent adjusting his behavior, spectator trying to sympathize, they reach a consensusWhy does the agent work hard to have sympathy?Has more at stake than the spectator, his emotions are related to the real situation, yearns for approbation, horror of solitude.What is conscience?Cumulative result of the interaction between the spectator and the agent. Over time, we internalize judgements of the impartial spectator and that becomes our conscience. Our self judgement through the sympathetic process is introspective and helps us make choices. This can also be a part of social opinionHow is moral life created?sympathetic process between impartial spectator and the agency, and concordance of sentiments leads to consensus in society about social norms and morals. General rules of morality are derived from a preceding experience of what is and isn't approved by the impartial spectator, and we observe others and view how they behave before deciding if they are approved by society or not.What are the attributes of the character of virtue?Prudence, benevolence self-commandWhat is prudence?caring for our health, reputation, and other things that make us happy. the prudent man of the theory of moral sentiments is the economic man in the wealth of nations. frugal men who save and spend money in a way that is good for economic growth are public benefactorsWhat is benevolence?Caring about the happiness of others benevolence/of the character of the individual so far as it can affect the happiness of other people. even a selfish man is happy when the people around him are happy. first people need to take care of themselves, but after our own care we start to show care to others around us. as distance increases, care decreases. as human beings, we care about everyone in the world in a universal way but we can only help the people near us. men should only care to be benevolent where they can make a difference (i.e within a country)Is benevolence universal?Our goodwill expands universally, but we can't help others that are far and distant. The care of happiness of everyone in the business of GodWhy is self-command necessary?A man's passions may mislead him. one's own passions might lead one to violate the moral rule, so we have to have the self-control to make sure that we aren't violating moral systems. other virtues stem from self-command. one's own passions might lead one to violate the moral rule, so we have to have the self-control to make sure that we aren't violating moral systems. other virtues stem from self-commandDoes he promote unbridled self-interest in the TMS?No, it must be corrected by general rules.What motive does he emphasize in the TMS, self-interest or benevolence?benevolenceIs Smith an adherent promoter of self-interest in the WN?No, he is against the self- interested behavior of merchants and manufacturers, for example. some think the TMS is about benevolence but in WN self-interest is more emphasized, but this isn't true both books have information on both self-interest should be contained. in WN - competitions and the competitive market contains self-interest. in TMS - the impartial spectator is what contains self-interest. Adam Smith is in favor of restraining self-interest because it's good for society. self-interest is okay but it must be contained. the invisible hand constrains self-interest and betters one's conditionIs bettering one's condition present in the TMS?Yes. Betterment of attainment of wealth and greatness is grand, beautiful, and noble. Bettering one's condition in the TMS rich and great people get the admiration of other people which is why we try to be rich and great we also want to be rich and great because we have an abstract image that the wealthy are happy, this is good because it leads to economic growth interest in bettering condition is good for society because it establishes hierarchy, but it's also one of the most universal causes of the corruption of our moral sentiments because people cut corners to be rich deceiving ourselves into thinking the wealthy are happy is what keeps the economy going Bettering one's conditions in the WN the desire to better our conditions is something we are born with the effort to better our conditions leads to private and public opulenceWhat is the role of bettering one's condition in the WN?Public, national, private opulence increases.Why is the prudent man an economic man?Prudent man is frugal, frugal man is considered public benefactor. Bettering one's condition leads to capital accumulation. Thus, the desire to gain approval through prudence is at the source of economic growth.Why should we care about markets and morality things?If we know that markets corrupt morality, at least some aspects can be addressed, for example, an extreme division of labor can be reduced, monopolies can be eliminated. If markets foster morality, then we can refrain from interfering with markets. If morality fosters markets, for example, due to the justice system, that system should be enforced diligently.morality fosters marketsi.e. comparative advantage and gains from trade through caring about poorer countries being known as a moral company gives you credibility justice justice is a cardinal virtue that upholds society, it's based on a moral system that emerges from society itself systems of justice allow for trade to be fair and possible a justice system is impossible and behaving justly fosters markets approbation good moral conduct without cheating fosters markets the possession of wealth gets the sympathy of other people fosters markets, of course, it can lead to immoral behavior like cheatingmarkets foster morality1. Commerce fosters more capital, wealth alone is inherently corrupting - moral capital - community values that can be enhanced through education, churches, etc., interlocking sets of values and norms during feudalism, rich people were corrupt that took advantage of others - when there's commerce and competition there's less corruption 2. commerce dissolves the feudal ties 3. agricultural society doesn't provide enough impetus to overcome indolence (laziness) - in commercial societies, the markets are larger with lots of commodities which fosters a good economy compared to agricultural ones because people have more to do 4. Men are transformed to pursue business profits instead of pursuing only pleasure - profits are good and people care about more than immediate satisfaction 5. repeated commercial dealings frequent dealings bring principle virtues into the nation through punctuality and other behaviors 6. the commercial economy also instills habits of attention to detail, orderliness, reliability, and precision poverty induces heinous crimes - Poor people in China kill their children - commercial societies that generate wealth leads to trickle down that decreases crime 7. the impersonal relationships in commercial societies lead to individual and institutional liberties injustice 8. the increased distance among people leads to impartiality - expansion of markets leads to more distance among traders, leads to being impartial which is moralmarkets undermine moralityi.e. the housing crash, suspicious borrowing The approbation that comes from the possession and parade of wealth people will cheat to try and become rich, unlike the prudent man the rich and wealthy men are corrupt Monopolies monopolies undermine morality and virtue because it because about luxury and wealth raising prices in a monopoly hurts peopleWhy in the us vs us type of trade, trade is more likely to be benign?Based on benevolence. Malevolent model in commercial societies us-them trade, self-interest becomes more dominating natural prices (the long-run equilibrium price) are determined by the impartial spectatorWhy does trade take place not robbery?Lose approbation. Precommercial societies us-us trade, we trade with relatives, friends, and neighbors in the early and rude stage, trade takes place rather than robbery because: impartial spectator, self-interest, and the desire to dominate in human nature self-interest is tampered with by the impartial spectator impartial spectator eliminates nonvoluntary trades or other radios moral sentiments are more likely to operate in us-us tradeWhy does an exchange take place at natural prices?Impartial spectator approval.Even though there are not contract or laws of property in the rude stage, natural prices prevail. Give two reasons:justice, efficiency.What is the role of injury in price determination in the rude stage?Deviations from it would cause injury and the impartial spectator would not allow it. the price ratio is fair-fair because when someone is injured, the impartial spectator doesn't approve of the behavior of the person who causes injury and sympathizes with the injured, this negative justice eliminates the possibility of robbery and is an instrument of natural prices prevailingWhat is Smith's objective function, what is it based on?social opulence and efficiency - make it necessary for natural prices to prevail, any price that deviates from the natural price is bad for efficiency which is bad for social opulenceWhy should the prices deviate towards the natural prices?Social efficiency.What is the role of the impartial spectator in price determination?He would have to approve natural rents, profits, and wages, that gives the natural priceWhy is commercial society more civilized?More experience with the Impartial Spectator.What is the role of the impersonality of the market in the commercial stage?Malevolent model emerges. markets are impersonal (us-them trade) so self-interest is the dominant motive, greater social distance weakens benevolence. Moral responsibility towards one's fellows declines, moral irregularity rooted in avarice and the desire to dominate are more likely to emerge.How can the social benefits of the benevolent model be extended to the malevolent model be extended?Institutional structure.How can commercial society be extended?Codes of civil society based on general rules. Justice, the property is secure, and each is free to enjoy fruits of labor. 1. process - creating general rules based on a natural sense of justice in the rude state - rules become basis of positive codes of civil law 2. codes evolve with experience - civilized societies have a superior administration of justice more us-us trade through laws and institutions - General rules help broaden the scope of the circle of people we relate to as part of us - moral speaking, eventually all of humanity will view each other as brethren (closeness to more people through globalization) 3. A wealth of civilized nations increase because of a larger web of the interpersonal and mutually beneficial division of labor and exchangeHow does to a wealth of civilized nations come into being?Benevolent model is extended, institutions.When does self-interest emerge as a dominant factor in commercial societies?Impersonality of the market.Justice Backgroundthe emergence of government was due to the emergence of private property, laws were established for private property to exist coevolution of economics and the legal system laws protect private property that creates an economic activity which makes relationships of commerce more complicated which leads us to create new laws to guide the economic progress the most important duty of the government is the maintain justice in the rude stage of society, the conception of private property was very limited so there was little government this is similar in hunting societies in the shepherding stage, animals become private property we see a differentiation between the rich and the poor and that leads to the emergence of government to protect the wealth of the rich from the poor in the agricultural stage, property begins to include land positive laws emerge in commercial societies, positive laws become more complex because of the further expansion of private property the main function of the government early on was to protect the rich from being robbed by the poor justice system emerges after the emergence of government Perfectly virtuous citizens wouldn't need laws and would have a sense of justice government emerges when that perfect virtue is lackingWhat is the role of justice in the TMS?TMS It is necessary for social order It is like the main pillar that holds a building together. justice is like rules of grammar - it's necessary for social order, it's precise/accurate/indispensable, societies can't exist when individuals harm each other without justice, the fabric of human society will crumble into atomsWhat is the role of justice in the WNcommerce can't flourish if there isn't confidence in the justice of government men can compete and pursue self-interest as long as he doesn't violate the laws of justice the goal is liberty, equality, justice the government owes everyone justice and equality of treatment security for everyone is necessary for a liberal system of free people and free markets impartial administration of justice leads individuals to a sense of their own security without justice, even the most fertile lands wouldn't be cultivated perfect justice guarantees the highest degree of prosperity when justice is administered for everyone in England, everyone has secured the fruits of his own industry and are encouraged for the development of every kind of industry compare British colonies in the Americas (had justice and liberty) compared to British colonies in Bengal(?) (had monopolies which prevented economic progress from taking place)David Ricardo Introductionread the wealth of nations, worked on political economy and investing in the stock market wrote about comparative advantage in the Principles of Political Economy and Taxation abstract deductive thinker - he took assumptions and deduced generalizations from them the rigorous theoretician of classical economics, second only to Adam Smith exerted significant influence on the radical left through labor theory of value and to other economists through comparative advantage Best ideas comparative advantage the theory of rent the labor theory of valueWhat is opportunity cost and why does it exist?The opportunity cost of producing something measures the cost of not being able to produce something else. It arises because resources are limited.What is the definition of comparative advantage?a country has a comparative advantage when their opportunity cost for producing something is lower than the other country, the country uses its resources more efficiently when producing that good compared to producing other goods.Suppose aLC/aLW <aLC */aLW*, Who has a comparative advantage in what?Home cheese, foreign wine.Why is the ppf a straight line?1 factor of production, and unit labor requirements are constant.Suppose PC/PW >aLC/aLW, what will be produced?CheeseWho exports what?Countries specialize according to their comparative advantage and export that good.At the specialization point where is the relative world equilibrium price?Between the opportunity costs of countries.why do both countries have a cost advantage in production?The cost of high wages can be offset by high productivity. The cost of low productivity can be offset by low wages.Where do the relative wages between countries lie when there is specialization?The relative wage lies between the ratio of the productivities in each industry.Go over misconception about comparative advantage. assessing these statements: free trade is only beneficial if a country is more productive free trade with low wage countries hurts high wage countries free trade exploits less productive countries.no, it's about comparative advantage not absolute high wage countries have costs offset by high productivity of labor PPFs and CPFs expand in both countries, everybody gainsIs there complete specialization in the real world?No: transportation costs, protectionism, non-traded goods, more than one factor of production.What are some important critics of the ricardian model?There is no learning, it is static, can't say anything about income distribution in a country, no technological innovation. international trade and globalization leads to inequality losing jobs and jobs being cut domestically to be shipped to other countries no learning how to produce one country (i.e. developing countries exported agricultural goods and couldn't learn how to produce things that use technologies more efficiently) can't say what happens to income distribution within a country when there is a trade neglects technological innovations fails to show how gains from trade are distributed between the two countries