Chapter 3: Defining Economics Flashcards
(32 cards)
Paradigm
School of thought.
Frames types of questions and phenomena that will be analyzed, and the approach or method a theorist will employ.
Ideology
Ideas, beliefs, subjective values, and prevailing world views that a person holds. Influences the way a person perceives what they believe is correct or incorrect about their social circumstance, or the larger world in which they live.
Economic Perspectives (3)
- Conservative
- Progressive
- Radical
Conservative Economics
- Markets work well on their own without interference
- Markets should be responsible for how society allocates resources
- Government involvement is disruptive to market performance, and should be limited
Progressive Economics
- Markets should generally be responsible for how society allocates resources
- Free Markets generate inequality
- Free Markets are unstable
- Government intervention is necessary
Radical Economics
- Market economies are class-based systems, based on one’s position (owner, laborer, etc.)
- Market economies empower the wealthy, owners of assets
- Market economies exploit labor
- Free Market capitalism is unstable and needs to be replaced
Negative Externality
A cost suffered by a third party as a consequence of an economic transaction. Represents an inefficient allocation of resources.
Neoclassical Economics
Broad theory that focuses on supply and demand as the driving forces behind the production, pricing, and consumption of goods and services
Mainstream/Orthodox Economics
Broadly used to describe schools of economic thought that are considered to be part of neoclassical economics
Heterodox Economics
Schools of economic thought outside of mainstream/orthodox economics
Primary Criticisms of Mainstream/Orthodox Economics
Absence of consideration of external factors. Assumes complete rationality of actors. Assumes individuals are selfish and will act in their best interests. No place for moral concerns or altruism. Does not recognize humans are emotional and may make irrational decisions.
Behavioral Economics
Seeks to utilize experiences and psychology to explain actual human behavior. Otherwise rational, optimizing people will deviate from standard orthodox economic actions because people can be influenced by non-economic factors such as religious beliefs and cultural norms.
Invisible Hand Theory
Mainstream/neoclassical economics theory that individual self-interest and freedom to produce and consume collectively maximize common good. Governments have little to no role to play in this theory, except for ensuring that the rule of law is followed
Criticism of the Invisible Hand Theory
Recent events, especially those relating to the Great Recession, have proved that common good is not always the end result of individuals pursuing profits
Rational Choice Theory
Underpinning of mainstream economic theory, that assumes individuals use rational calculations to make rational choices and achieve outcomes that are aligned with their own personal objectives
Criticism of Rational Choice Theory
Individuals do not always make rational utility-maximizing decisions (studied by behavioral economics). People are not always able to obtain all information they would need to make the best possible decision. Further, when people are anxious, they fail to make rational decisions (stressors that produce anxiety suppress parts of the brain in rational decision making).
Richard Thaler’s Mental Accounting Example (irrationality of Rational Choice Theory)
People behave irrationally by placing greater value on some dollars than others, although they are worth the same. Someone may drive to another store to save $10 on a $20 purchase, but not to save $10 on a $1000 purchase.
Brexit (example of what?)
Example against rational choice theory. Brexit proponents used promotional campaigns that were based on emotion rather than rational analysis. Financial markets responded to Brexit with wildly increasing short-term volatility.
Resources (Orthodox Economics)
Land, labor, and capital. Resources are needed for production, and resources are limited.
Wants (Orthodox Economics)
“Wants” are things produced by resources, individuals garner utility (happiness from consumption, Wants are unlimited (people have insatiable desires/are greedy)
Happiness Economics Results
People that focus on the goals of monetary gain and material benefits tend to be less happy than people who are less/not focused on those goals (people focused on interpersonal satisfaction like love, respect of peers, affection, family fulfillment, relationship fulfillment)
Heterodox Economics Critique of Orthodox Economics:
Unlimited Wants
Assumption of unlimited wants/scarce resources, and that happiness is derived from them. Anthropologists have noted hunter-gatherer societies that are viewed by industrial societies as deeply impoverished, but were actually affluent in happiness because their basic needs were met, and wants were easily satisfied. Happiness Economics has found that pursuit of monetary gain/material benefits are not correlated with contentment.
Heterodox Economics Critique of Orthodox Economics:
Facts/Values
Orthodox economists insist facts and values are to remain separate, implying that they do not make assumptions themselves (such as the desire to maximize acquisition, or that consumers make rational decisions). Ok to employ subjective assumptions and values, but cannot present them as “fact”.
Heterodox Economics Critique of Orthodox Economics:
Efficiency and Scarcity
Assumption that markets are efficient, and that unfulfilled wants and needs are the byproduct of scarcity and endless desire. A homeless man’s lack of housing is not the byproduct of scarcity, but the byproduct of misallocated resources. Malnourishment in impoverished countries is not due to lack of food in the world (World Hunger Education Service), but uneven distribution of the resource. There are actually more than enough resources to meet all humanities material needs, and many of their wants.
