Political Economics Midterm Quizlet – Flashcards
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-Adam Smith's conceptual model of capitalistic enterprise -explored the benefits of division of labor -specialization was also used to support the Invisible Hand (self-organization principle) -precursor of Marx's claims about the alienation of capitalist workers
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General Summary of the Pin Factory
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-even simple things are complex and profound to create -discusses Invisible Hand -Theme: Have faith that free people will respond to the invisible hand -by Leonard Read
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General Summary of I, Pencil
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-destruction does not create prosperity/ economic stimulus -fallacy doesn't take the unseen into account -throwing rocks through windows: basic Keynesian perspective -Bastiat's hypothesis is probably wrong
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What is the broken window fallacy?
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-what is seen= positive factor (happens immediately & what is not seen= negative factor (happens in succession) -the item's industry that was spent on gets encouragement (seen) -no benefit to industry in general or national employment *BASTIAT*
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What is "what is seen and not seen"?
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-satire of protectionist arguments -concentrated protectionist benefit and dispersed cost amongst everyone else
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What is a general summary of the Candlemaker's Petition?
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Institutions that reduce the transaction costs associated with impersonal economic exchange
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What are Markets?
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Institutions with a legal monopoly on the legitimate use of force in a certain geographic area
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What are states?
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In voluntary exchange, both parties are better off, no exchange without disagreement about relative values
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Mutual benefit
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Coordinates supply-demand, communicates relevant signals, direct resources toward higher- valued uses
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Price system
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Rule of law, with state taking only minimal actions to regulate exchange, focus on reducing costs of exchange
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Institutional & Public Policy
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a brain module that explains how we feel that we are being taken advantage of when someone charges a high price for something essential to us, once the essential thing is offered we can no longer imagine the option not being present
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Lifeboat module
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jacking up prices so that they're higher in states of emergency when people most need commodities
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Price Gauging
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the difference between the most you could pay and what you have to pay
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Consumer Surplus
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consumers to look for an alternative, lead entrepreneurs to try to find substitutes: therefore producers make more to serve that demand
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What do high prices lead to?
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cannot be an unreasonably excessive price under the circumstance of the situation
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What is an anti-gouging law?
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Lifeboat module relates to the example of when North Carolina had a hurricane and some people loaded up trucks with ice to sell to people and then sold it at a high price. The people who sold the ice were considered criminal because of the North Carolina Anti-Gouging Law and considered immoral because of our brains having Lifeboat Modules. Allowing high prices would have quickly resulted in low prices and a huge increase in supply.
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North Carolina Anti-Gouging Law, the lifeboat module, prices
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to have a low price you must allow a high price, example of the issue of price gouging laws
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What is the "paradox in economics"?
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Immoral to gain financially without actually creating something, specifically immoral to raise prices because a particular buyer had an urgent need for what was being sold
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Aquinas in relation to price
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Private ownership of the mans of production, profit maximization, consumer-household utility maximization
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Capitalism
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Public ownership of the means of production, central planning, production for use instead of for profit
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Socialism
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Welfare states, regulatory states
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Mixed Systems
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It isn't based on "greed" but that it best synthesizes such institutions as property, exchange, and prices, Its moral case rests on consequentialism and or natural rights premises
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What is Munger's case for capitalism?
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something is good if it leads to good consequences (however defined)
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What is consequentialism?
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What is political power? The right to make laws & enforce them at the penalty of death What is the appropriate end and objective of civil government? Establishment of penalties related to regulation of property & defending the commonwealth all for the public good
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John Locke- Two Treatises on Government (1690)
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Locke defines freedom as the property of a rational agent whereby he has the power to act or not to act according to the preference or discretion of his own mind (free will)
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Rational Agent Model (Locke)
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-Contrasts with Hobbes' view: war of all against all -though that the state of nature was a state of perfect freedom and equality -political and social structure arise naturally within humankind -coincidence of self and general interest
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State of Nature (Locke)
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-you own yourself and your labor: foundation of all other property -labor creates property, not transfer -limiting accumulation is only required if there is less than a superabundance -Locke's Proviso: enough and as good
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Right to Property (Locke)
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-must be limited -majority rule -separation of powers -there is no freedom where there is no law
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Political Power (Locke)
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1. encourages people and firms to produce 2. places producers in a position to want to trade 3. fosters "creative destruction" 4. Limits externalities (pollution & tragedy) 5. Limits transactions costs 6. enables producers to grow their business 7. conforms to moral intuitions about justice
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What does a fully evolved private property system encourage?
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the creation of value (utility) by means of a combination of factors (land, labor, capital, technology)
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What is production?
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in any production process, the assignment of different parts or stages of it to different people who specialize in the job with the overall goal of improving efficiency and productivity
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What is division of labor?
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the greater it is, the more any DoL and along with it: specialization, productivity gains, and global interdependence, as more people meet each other's needs
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What is the extent of the market?
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-Division of Labor would be powerful even if all human beings were identical buy key differences in productive capacities are learned, acquired -DoL gives rise to market institutions and expands the extent of markets; exchanges pushes beyond borders, expands range of cooperation; ultimately millions of others stand ready to "work for" each of us, with new production modes, ideas, and products, DoL causes markets, not the other way around
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What is included in Inquiry into the nature and causes of the wealth of nations?
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π = profit (revenues - costs) p = price (of product) F(K,L) = production function (K= capital, L= labor) r = interest rate (price of capital) w = wage rate (price of labor) π =pF(K,L)-rK-wL
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Coordinating the factors of production for profit equation & meaning of variables
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organizes. operates a business or businesses, taking on financial and operational risk to do so, for the purpose of profit
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What is Market Entrepreneurship?
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uses government funds or favors, which reduces business risk but at expense of taxpayers and or competitors
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What is a political entrepreneur?
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An exchange ratio, what's seen, explicit- value received and or paid for by sellers and buyers
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What is price?
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what's unseen, implicit- value of anything, or cost of any action, given up (foregone)
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What is opportunity cost?
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A medium of exchange, unit of account & store of value, where as gold, paper, or e-bits
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What is money?
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Intermediation of savings and investment
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What is banking?
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How government spending is financed: by taxes, borrowing, and money-creation
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What is public finance?
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the concept that it's possible to lay a burden on a populace that isn't felt (makes them think that government is less burdensome than it really is)
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What is fiscal illusion?
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A form of e-based money it's a unit of measurement but the unit depends solely on how people value its transaction
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What is Bitcoin?
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January 2009
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When was bitcoin founded?
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Not by an entity, peer to peer- decntralized
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How is bitcoin issued?
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Over the internet or over "feature phones"
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How is bitcoin traded?
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open source; there are owners, buyers, and miners
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What is the protocol like?
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People who transmit transactions
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What are the miners?
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21 million (highly divisible)
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What is the preplanned maximum number of bitcoins?
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1. Bitcoin owner signs in, using a public key and a private key 2. Owner sends X quantity of bitcoins to another bitcoin address 3. info in #2 is broadcast on sender's device and received by all active nodes in the bitcoin network 4. all active nodes add the pending transaction to the relevant block (ledger entry) divided into 10-minute intervals 5. the new block is subjected to a hash function by miners who create a unique character string identifying the transaction; each new (and approved) block is linked to prior blocks, creating a block chain
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What are the five basic steps of bitcoin transaction?
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US Dollar- US government Bitcoin- other users
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US Dollar vs. Bitcoin (backing)
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US Dollar- US Bitcoin-users
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US Dollar vs. Bitcoin (control)
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US Dollar-US only (primarily) Bitcoin-international
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US Dollar vs. Bitcoin (usage)
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US Dollar- government Bitcoin- based on work done
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US Dollar vs. Bitcoin (creation)
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US Dollar- controlled by politics Bitcoin- fixed by algorithm
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US Dollar vs. Bitcoin (supply)
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US Dollar- easy for muggers to steal Bitcoin-hard for muggers to steal
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US Dollar vs. Bitcoin (theft-muggers)
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US Dollar- hard for hackers to steal Bitcoin- easy for hackers to steal
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US Dollar vs. Bitcoin (theft-hackers)
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US Dollar- hard to transmit and trace Bitcoin- hard to transmit and trace
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US Dollar vs. Bitcoin (transmit and trace)
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US Dollar- non-refundable Bitcoin- non-refundable
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US Dollar vs. Bitcoin (refundable?)
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both
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US Dollar vs. Bitcoin (used for crime?)
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1) potential mutual benefit; 2) people have same stuff (endowments) but different preferences/utilities; 3) people have same preferences/utilities but different stuff (endowments). Case #2: Radford on the POW camp (1945); how can value be created with no new production?
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What are the origins of exchange?
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both parties are better off, or they wouldn't trade at all. Gifts, though nice, entail just one person (recipient) becoming better off (at least materially); if a gift giver expects a gift in return, that's an exchange!
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What is voluntary exchange?
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truly voluntary exchange - where things exchanged are owned, and exchange is free of coercion (see two types, below), duress, uncompensated externalities, and post-exchange regret (Munger)
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What is Euvoluntary exchange?
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when you're harmed by being forced to exchange (robber: "your money or you life!") or because you're in dire straits but unable to exchange
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What is coercion?
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states are defined as having a legal monopoly on the legitimate use of force in a particular geographic setting (Max Weber); political power, specifically, is the capacity of one person (or group) to impose his (or its) will on others by means of violence or the threat of it.
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What is political power?
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in markets, economic power is the disparity in outcomes that exists if no exchange is agreed upon; i.e., the disparity in welfare at the reversion points - a.k.a., the Best Alternative To a Negotiated Agreement ("BATNA"). If BATNAs are disparate or dire, an exchange is NOT euvoluntary
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What is economic power?
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Disparate BATNA: U(BATNAJ) - U(BATNAB)≥(Threshold1) Dire BATNA: U(BATNAB) < (Threshold2)
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BATNA equations
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what voters, leaders, and political actors want and prefer (ordinal), so as to maximize their utility. "Rational choice," but see also: "atavistic" attitudes, "moral intuitions" and "ideal points." Individuals have preferences, but groups, per se, do not.
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What are preferences?
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we can analysis the metrics and likely outcomes of majority-rule voting, depending on preferences, dimensions, voting rules, agendas, sincere versus strategic voting, etc..
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What are analytics?
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Euclidean distance between ideal points and policies/candidates/parties on a spectrum; the Median Voter Theorem, with one dimension, single-peaked preferences.
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What is spatial competition?
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1. Choosing how to choose how to choose (constitutional) 2. Choosing how to choose (voting, procedural rules) 3. Choosing
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What are the three levels of choice?
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Source of sovereignty, citizenship, citizen obligations, collective domain, decision rules, amendment, exit
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What are the key features of a constitution?
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some account of the source of state authority; it could be citizen consent, the Constitution itself (a contract), or an historical event/legacy
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What is source of sovereignty?
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rules for allowing (or denying) entry and membership into the group (immigration); either voluntary (initiation) or involuntary (annexation)
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What is citizenship?
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rules defining/limiting what members can demand of the group
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What are citizen obligations?
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rules defining/circumscribing what the group can demand of (or do to) members; limits on the powers of officials in the main branches of government
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What is collective domain?
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rules to decide on normal business, outcomes, public policies
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What are decision rules?
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rules to decide how to change provisions of the constitution itself
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What is an amendment?
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rules for allowing (or denying) members to leave the group (emigration)
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What is exit?
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If there are at least three options and at least three choosers who disagree as to preferences for the options, pairwise majority-rule decision processes can imply intransitive group choices, even if the preference orders of each of the individual choosers are transitive.
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What is Condorcet's paradox?
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option when paired against every other one will win
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What is a Condorcet Winner?
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if there are at least 3 choices, 3 choosers, & disagreement
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When is democracy indeterminate?
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confers power on political leaders, can be defeated by strategic voting through disguising preferences
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What does agenda control do?
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coalitions
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What can be formed to secure preferences?
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long standing coalitions/ preference packages
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What can political parties be thought of as?
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While systems based on constitutions and political parties can result in stable outcomes, "pure" forms of (direct) democracy are dangerously unstable
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What is dangerously unstable?
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France in 1790's; pre-Hitler Germany (1920s); recently, Russia, Egypt
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What are some examples of scary democracies?
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if it isn't difficult or expensive to keep people from using a good or to get them to pay for it (non-excludable: it is difficult or expensive, or can't get paid)
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Private versus Public Goods: Excludable & Non-Excludable
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when another person's use or consumption of a good necessarily decreases my use/consumption of it (non-rival: another's use/consumption does not decrease my use/consumption)
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Private versus Public Goods: Rival & Non-Rival
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Voter preferences, endogenous platform selection, predictions about outcomes
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What are the three aspects included in the spatial model of politics?
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represented by (weighted) distances; a voter prefers the candidate, policy, or party "closest" to her/his "ideal point"
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What are voter preferences?
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Candidates select their position on the political spectrum (and their policy positions) based on predicted voter preferences and choices
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What is endogenous platform selection?
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A political analyst can predict an outcome by relating voter preferences and candidate positions; also allows for an analysis of "counterfactuals"
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What are predictions about outcomes?
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Different from weak orderings approach Explicit utility function: distance Median voter determines election: Median Voter Theorem (MVT); voters at "edges" (extremes) can change positions but not influence outcome Outcomes are stable under some circumstances: under some conditions, candidates converge on the center, but under other conditions, the outcome is polarized or indeterminate
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What does spatial theory consist of?
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If political preferences are single-peaked, and if political conflict/choice takes place along one dimension, then: Political power lies at the center of the distribution of preferences which are effectively enfranchised by the institutions of society
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What is median voter theorem?
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A set of voters is decisive when their unanimous agreement is sufficient to make a decision regarding two alternatives, regardless of other group members' preferences
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The decisive set
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The only choice mechanism that is complete, transitive, and obeys Pareto's criterion is dictatorship.
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The paradox
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-Specify set of desirable characteristics for aggregation mechanism -Determine set of aggregation mechanisms that have these characteristics -Notice that dictatorship is the only aggregation mechanism with desired characteristics
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Outline of the impossibility theorem
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Unanimity, transitivity, unrestricted domain, independence or irrelevant alternatives, nondictatorship
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What are the desirable characteristics?
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if everyone prefers x over y x is chosen over y
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What is unanimity?
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if x preferred to y and y preferred to z, x is preferred to z
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What is transitivity?
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every preference ordering is possible for every individual
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What is unrestricted domain?
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pairwise comparisons aren't affected by ranking of other alternatives
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What is independence of irrelevant alternatives?
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There is no voter who always gets her/his way regardless of other voters
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What is nondictatorship?
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Every collective choice mechanism that satisfies the first four characteristics violates the last one.
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What is the impossibility theorem?
