History of Economic Thought Final Exam

Milton Friedman quotes

"Inflation is always and everywhere a monetary phenomenon" "Inflation is caused by too much money chasing after too few goods."

Marx on religion

"Religion is the opium of the people." Marx believed that religion had certain practical functions in society that were similar to the function of opium in a sick or injured person: it reduced people's immediate suffering and provided them with pleasant illusions which gave them the strength to carry on. Marx also saw religion as harmful, as it prevents people from seeing the class structure and oppression around them, thus religion can prevent the necessary revolution.

Marx Quotes

"The capitalist has no historical value." Capitalist doesn't add value and doesn't take on risk. "Producing for production sake." Mercantilist viewpoint "Any price of labor is the minimum wage." "What, then, is the cost of production of labour-power? It is the cost required for the maintenance of the labourer as a labourer, and for his education and training as a laborer." "One capitalist always kills many... Along with the constantly diminishing number of ithe magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. Thus integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated." "Socialized production upon a predetermined plan becomes henceforth possible." "Where the worker can attain their goal by peaceful measure."

Keynes quotes

"The government should pay people to dig holes in the ground and then fill them up." "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." "Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

Marshall on consumer surplus

"We have already seen that the price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it: so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price; and he thus derives from the purchase a surplus of satisfaction. The excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction. It may be called consumer's surplus."

Alfred Marshall quotes

"We might as well reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by demand or supply."

Marx's 10 point plan

1) abolition of private property and land 2) heavy progressive or graduated income tax 3) no inheritance tax 4) confiscation of property from all emigrants and rebels 5) centralization of banks, state run banks 6) state controlled communication and transportation 7) extension of factories and instruments of production owned by the state 8) Everyone must work 9) Combination of agricultural and industrial. Gradual abolition of the distinction between town and country. 10) Free children public education. Abolition of child labor. Combination of education with industrial production.

Milton Friedman Gov Policies

1) against wage and price controls 2) against social security 3) against free higher education 4) in favor of a volunteer army system

Five tendencies of laws that point to an economic impulsion

1) falling profit rates and accumulation of capital 2) Increasing concentration of economic power 3) deepening crises and depressions 4) industrial reserve army 5) increasing misery of the proletariat

Constraints on Walras general equilibrium theody

1) trades are made before equilibrium is reached 2) humans make mistakes in the marketplace

The Road to Serfdom

1944 best-seller written by Friedrich A. Hayek that claimed "planning leads to dictatorship" and even the best intentioned gov. efforts to direct the economy threatens individual liberty and the loss of freedom.

Walras on General Equilibrium (P and Q)

5 sets of equations: 1) quantity demanded by consumers for each good (based on preferences and price) 2) price of each good bought by households (assumes competitive markets: price = cost of production) 3) quantities of the inputs used to make goods 4) quantity demanded of inputs 5) money is only a medium of exchange Traders want to maximize utility and as we make trades we will get closer to the equilibrium.

political business cycles

A business cycle that results primarily from the manipulation of policy tools (fiscal policy, monetary policy) by incumbent politicians hoping to stimulate the economy just prior to an election and thereby greatly improve their own and their party's reelection chances

Karl Marx

A historian: life is a series of thesis and antithesis. Series of how we distribute wealth in society. Life is a progression: 1) Hunters and Gatherers 2) Agrarian 3) Feudal 4) Capitalism 5) Communism/Marxism

Hayek on taxes

Against progressive taxation. Believed it violates human law and a violation of self determination.

Milton Friedman

American economist and statistician best known for his strong belief in free-market capitalism. During his time as a professor at the University of Chicago, Friedman developed numerous free-market theories that opposed the views of traditional Keynesian economists. He illustrated the role of monetary policy in creating and arguably worsening the Great Depression. Permanent Income Hypothesis, mv = py, lags with monetary policy, natural rate of unemployment, Phillips curve.

Thinkers on poor laws/taking care of the poor

Aquinas: Helps others but you are allowed to maintain social standards Malthus: Wanted to get rid of poor laws as it removed one of the costs of having a child. The repeal of assistance to the poor. JS Mill: Just enough to survive so there is no incentive to remain poor. Feared that if welfare was too easily doled out, generations of poor people would be born into families weaned of a work ethic. He also thought that higher welfare payments would only promote higher birth rates.

Keynes on Gold Standard

Artificial constraint on money, limiting government discretion. Limited quantity of gold.

Hayek on business cycles

Believed that limiting the Fed involvement will reduce the time and volatility of business cycles. Hayek believed that Keynesian policies to combat unemployment would inevitably cause inflation, and that to keep unemployment low, the central bank would have to increase the money supply faster and faster, causing inflation to get higher and higher. Really scared of government intervention.

Veblen on Business Cycles

Borrowing comes from future profit expectations. Borrow to buy stuff, extra economic activity which would lead to inflation. Higher profits lead others to borrow until there is too much borrowing. Loans will eventually default, leading to a recession. View on profits will diminish until we become optimistic again.

Keynes

Called himself "the master." Germany can't repay the war reparations. Said "it will lead to a rise of and angry militant country in the future." Explained money to the world

Keynes on Great Depression

Can only count on the government. Need government to buy goods: deficit spending. Need more Hospitals, houses, and roads: durable goods. Or wasteful government spending. Another approach is money creation. Government jobs

Marx view of capitalism

Capitalism is a necessary evil and it will inevitably lead to communism. Capital can only increase so much and that is when capitalism will fail.

Marshall list

Ceteris paribus Twin blades: supply and demand can't exist without each other. Both blades cut the paper. Both supply and demand matter. Elasticities and mathematical formula to prove it: partial derivative. Use elasticity to explain human behavior.

The positives of Capitalism

Competition and innovation, utilization of people, and increase in living standards.

Alfred Marshall

Created graphs: wanted to explain economics to poor people and women. What matters about our discipline is being able to teach it to others. Math is a tool. Partial equilibrium. Supply and demand.

Paul Samuelson

Created the first major Economics textbook. Keynesian. Encouraged Kennedy tax cuts.

US dollar is backed by the

Faith of the US government to pay back our debt.

Keynes "Animal Spirits"

Firms are driven by animal spirits: fight or flight. Businesses have a choice. Could fight and try to expand, or flight and take money out of the businesses. We have reverted back to our animal instincts. Rational choice is different than instinctual choice.

Jevons contributions

First to explain diminishing marginal utility. Believed that consumer equilibrium will be reached when any change in spending wouldn't increase the consumers total utility. "Value depends entirely upon utility." Marginal utility applies to labor markets.

Jevon's The Coal Question

Forecasted energy usage based on current energy consumption, current supply for coal, constant increase in the need of coal, and the supply will be decreasing. He believed that the price of coal will increase and that economic growth will decline. He drastically overshot the future energy usage. He believed that we should take all revenues from coal and pay down the national debt. Might as well help the future since decline in the supply of coal is inevitable.

Keynes on unemployment

Frictional unemployment "voluntary" unemployment: seasonal and structural Cyclical unemployment exists because of an external force. Decision of present consumption is very different than savings.

MV = PY: Quantity theory of money

Friedman was concerned that if we print more money this will lead to inflation. Solution is fixed monetary rule: increase in the money supply of 3-5% annually. Monetarists biggest fear is inflation.

Samuelson on free trade

He concludes that free trade isn't always a win-win situation. It is particularly a problem, he says, in a world where large countries with far lower wages, such as India and China, are increasingly able to make almost any product or offer almost any service performed in the United States. If we trade freely with them, then the powerful drag of their far lower wages will begin dragging down our average wages. Our economy may still grow, he calculates, but at a lower rate than it otherwise would have. This opens up the argument against free trade.

Milton Friedman on unemployment

He developed the concept of the natural rate of unemployment.

Samuelson neoclassical theory

He is credited with neoclassical theory, adjustment based on expectations.

Walras on the process of reaching general equilibrium

He proposed a tâtonnement (French for groping) process. There is a trial-and-error process by which the people in the economy "grope" towards this equilibrium. The metaphor he uses is the auctioneer and this is the mechanism in which this process occurs. Similar to an auction, the price was called out and people in the market said how much they were willing to demand or supply at that price. If there was an excess of supply over demand, then the price would be lowered so that less would be supplied and more would be demanded. Thus the prices would "grope" toward equilibrium.

Hayek on governments role

He recognized a limited role for government to perform tasks of which free markets were not capable: 1) regulations that restrict legal methods of production such as limit work hours and requiring certain sanitary arrangements. 2) negative externalities 3) prevent fraud 4) creating a safety net

Menger Diamond Water Paradox

He resolved the paradox of value by showing that value is an outlook of individuals toward individual units of goods and is determined in accordance with the law of diminishing marginal utility. The less of a given good an individual has, the more each additional unit of that good will benefit him. In a desert - where an individual is on the verge of dying from thirst - he might be willing to trade a million diamonds for a glass of water that would save his life.

AW Phillips

His best-known contribution to economics is the Phillips curve, which he first described in 1958.

Marx on the failure of capitalism

Labor and capitalists is a zero sum game. Profit motive will alienate workers. Workers will lose incentive to innovate. Lead to monopolies. Economies of scale only last so long. Capital replaces workers. Increase in the reserve army of labor (unemployed). Eventually they will revolt.

Marx on labor

Labor should get the fruit of their labor.

Capitalism Bandaids

Libraries, public education, child labor laws, progressive tax system, inheritance tax, government run communication/transportation system.

Keynes on interest rates

Liquidity preference: transaction motive, precautionary motive, and speculative motive.

Savings and investment

Must change interest rate if savings doesn't equal investment

Why Jevons was wrong

New technology and substitutes

Marx on how profits can increase

No profits will exist unless labor is exploited. Decrease wage, or increase work effort (increase length of workday or increase the speed of production).

Veblen Theory of the Leisure Class

Non subsistence wage earners. Cultural consumption creates utility. Conspicuous consumption: buy some goods to show off wealth and impress others. We gain utility from what consumption does for others. Goes against consumer rationality. Argues that we are influenced by others. Didn't believe in a stable equilibrium point. Believed there is a range of equilibrium.

Keynes argument: what affects consumer spending?

Objective: interest rate, income and wealth distribution, expected future income, and current income. Subjective: uncertainty, desire for independence, and desires to bequeath a fortune.

Marx on avoiding revolution

Only a classless society could avoid a revolution.

Edgeworth

Opposite of Marshall: "Differential calculus is the key to unlocking economic questions." "Ordinal utility is more important than Cardinal utility." Ordinal utility: ranking utility Cardinal utility: numbers on the utility derived from consumption Invented indifference curves Came up with correlation coefficient

US inflation

Other countries wanted gold from the US - rest of the world wanted gold US closes the gold window - no longer trade dollars for gold. Other countries went on with the agreement.

Marx on Profit for Capitalists

Price - wage bill

Labor theory of value

Price = input of value

Marshall on education

Progressive taxes to support education.

Marx on property

Property now belongs to all of us. We take from the capitalists as they have taken from us.

Gordon Tullock

Public choice theory economist. Political business cycles, Tullock spike, efficient market theory, rent seeking, and logrolling.

Samuelson on public goods

Public goods are non rival and non exclusive. He believes that public goods need to be collectively provided: provided by the government. We need to aggregate the marginal benefit and it should be implemented if the MB > MC. This may lead to a free rider problem.

Marx on self interest and inequality

Rational self interest won't last. Inequality is natural but not preferred.

Keynes General theory:

Says law is wrong. Argued we are focusing on the wrong thing. Should focus on consumption not production. Should focus on demand.

Marshall on short and long run

Short run is today. Short run curve is a vertical line, prices can change but not the quantity. Long run any time period not today.

Hayek on the central bank increasing the money supply

Such increases, he argued would drive down interest rates, making credit artificially cheap. Businessmen would then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market. He concluded, artificially low interest rates not only cause investment to be artificially high, but also cause "malinvestment"—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust.

rent-seeking behavior

The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.

rational ignorance

The decision not to acquire information because the marginal cost of doing so exceeds the marginal benefit.

Tullock: efficient market theory

The idea that asset prices reflect all available information. Only way to beat market consistently: luck, insider information, cheating, or special ability.

Tullock spikes

The idea that instead of mandating safety belts, it would save far more lives if the government required that large spikes were installed in the center of steering columns, because this would make drivers more acutely aware of the danger of driving too fast. Turlock states that we need to reimpose externalities to the causer of car accidents. The economic theory of risk compensation suggests that laws intended to increase safety, such as mandating safety belts in cars, can sometimes have the opposite effect by making people feel safer and therefore encouraging them to engage in riskier behavior. Moral hazard.

Duncan Black: median voter model

The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election. This means that as we get closer to the Election Day the candidates will be more moderate hoping to earn the support from the median voters.

Keynes on wages

The wage is equal to the marginal product of labor. Wage shall be equal to what you gave up.

Jevons on business cycles

Thought he could predict business cycles with sunspots. He attempted to correlate business cycle patterns with sunspot counts (on the actual sun) on the grounds that they might cause variations in weather and thus agricultural output.

Keynes wanted a trade clearing house

To punish country that takes advantage. Penalize countries that have a trade surplus. Then distribute the money to countries that have a trade deficit. Didn't happen because US was owning a trade surplus at the time.

Samuelson Stopler

Trade leads to an increase in the return to a country's abundant factor (ie capital and skilled labor in the USA) and a fall in the return to its scarce factor (ie unskilled labor in the USA).

Milton Friedman on Monetary Policy

Understood that there are lags with monetary policy, this limits its effectiveness. "No monetary and fiscal policies are immune to criticism."

Public Choice Theory

Using economics to analyze government behavior

Carl Menger

Value is subjective rather than objective. Goods acquire their value, he showed, not because of the amount of labor used in producing them, but because of their ability to satisfy people's wants.

Marx on Subsistence Wage

Value of a commodity is determined by the amount of labor that went into it. Labor supply is a commodity. Therefore, the price of labor is the amount of money needed to produce and maintain a human being: the subsistence wage.

Marshall on Unskilled labor

Very worried about poverty. Believed that unskilled labor is paid less because of unskilled labor. Wanted to limit family size amongst unskilled labor. Increase supply of unskilled labor, decreased demand with an increased supply will suppress wages. Future is bleak for unskilled labor.

Keynes on trade

Want to set up a world trade system to prevent WWIII. Set up US as the center of global trade: dollar standard.

Rules if Friedman is in power

Wanted flexible exchange rates so you can use monetary policy. Additionally, flexible exchange rates encourages trade. Flexible exchange rates prevent inflation from going to other countries.

Friedrich Hayek

Wanted limited government intervention. Disbelieved in the use of Keynesian economics. Defended free market capitalism - system could fix itself. His ideology was not accepted initially, however many countries practice this now.

US experienced inflation in the 1960's due to

War, space, and war on poverty

British government turned their budget over to Keynes

Way to pay the wars. 1) Bond issuance 2) Print money 3) Increase taxes

Keynes in contractionary gap

We need people to buy more stuff

Thinkers views on taxes

William Petty: in favor of progressive system. pay according to the interest in the Public Peace; that is, according to their Estates or Riches:" Adam Smith: taxes should be proportional, flat tax after subsistence wage Quesnay: Only on proprietors as they contribute nothing but land ownership and spending in an economy. Productive tax would tax away productivity. JS Mill: Advocate of a proportional tax, a proportional tax after subsistence wage level as poor people can't afford it. Was afraid that a progressive tax might discourage work. Hayek: Against progressive taxation. Believed it violates human law and a violation of self determination. Marx: progressive tax system

Leon Walras

Working to macro understanding, general equilibrium theory. He demonstrated that price and quantity were uniquely determined for each commodity.

Cost push inflation

a situation in which the overall price levels go up (inflation) due to increases in the cost of wages and raw materials. Cost-push inflation develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy. Since there are fewer goods being produced (supply weakens) and demand for these goods remains consistent, the prices of finished goods increase (inflation).

liquidity trap

a situation in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest."

Kenneth Arrow's Impossibility Theorem

an impossibility theorem stating that when voters have three or more distinct alternatives (options), no ranked voting electoral system can convert the ranked preferences of individuals into a community-wide (complete and transitive) ranking while also meeting a specified set of criteria: unrestricted domain, non-dictatorship, Pareto efficiency, and independence of irrelevant alternatives.

Milton Friedman on Phillips curve

asserted that the Phillips curve was only applicable in the short-run and that in the long-run, inflationary policies would not decrease unemployment. The long-run Phillips curve is now seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment.

Demand pull inflation

asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve.

James Buchanan

cofounder, along with Gordon Tullock, of public choice theory. Rational ignorance

Edgeworth Box

diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes

Tullock Paradox

refers to the apparent paradox, described by Tullock, on the low costs of rent-seeking relative to the gains from rent-seeking. The paradox is that rent-seekers wanting political favors can bribe politicians at a cost much lower than the value of the favor to the rent-seeker. For instance, a rent seeker who hopes to gain a billion dollars from a particular political policy may need to bribe politicians only to the tune of ten million dollars, which is about 1% of the gain to the rent-seeker. Firms spend money to generate profits in the future

Permanent Income Hypothesis

supposes that a person's consumption at a point in time is determined not just by their current income but also by their expected income in future years—their "permanent income". In its simplest form, the hypothesis states that changes in permanent income, rather than changes in temporary income, are what drive the changes in a consumer's consumption patterns.

Logrolling

the practice of exchanging favors, especially in politics by reciprocal voting for each other's proposed legislation. Leads to more political outcomes but creates more costs