ECONOMIC THINKERS Flashcards
(26 cards)
WHAT IS THE INVISIBLE HAND?
CONCEPT INTRODUCED BY ADAM SMITH WHICH ARGUED THAN WHEN PEOPLE ACT IN THEIR OWN SELF INTERESTS, VIA THE OPERATION OF THE PRICE MECHANISM, OPTIMUM RESOURCE ALLOCATION IS ACHIEVED AND THEREFORE THE BEST OUTCOME FOR SOCIETY.
WHY IS SPECIALISATION IMPORTANT TO ADAM SMITH?
- CREATES PRODUCTION AND WEALTH. BREAKING DOWN PRODUCTION INTO SMALLER SPECIALISED PARTS INCREASES PRODUCTIVITY AS THE PROCESS HELPS INCORPORATE SOME AUTOMATION INTO THE PRODUCTION PROCESS.
- ALSO LESS TIME IS SPENT SWITCHING BETWEEN TASKS AND THE REPETITION MAKES EFFICIENCY INCREASE.
WHAT R THE PROBLEMS OF CAPITALISM ACCORDING TO KARL MARX?
OBJECTIVE TO MAKE PROFIT IS ONLY ACHIEVED BY EXPLOITING WORKERS E.G WAGES LOWER THAN TRUE VALUE AND INCENTIVE FOR FIRMS TO REPLACE LABOUR WITH MACHINERY CREATING BOTH MONOTONOUS JOBS AS WELL AS UNEMPLOYMENT. HIGHER COMPETITON MAY ALSO MAKE FIRMS GO BUST LEADING TO MONOPOLIES AND MORE EXPLOITATION.
WHAT IS CAPITALISM?
SYSTEM WHERE SMALL MINORITY ARE THE RULING CLASS AND THE MASSES PROVIDE THE LABOUR TO PRODUCE GOODS AND SERVICES.
WHY DO WE NEED GOVT INTERVENTION ACCORDING TO KEYNES?
TO STABILISE MARKETS AND PREVENT ECONOMIC DOWNTURN. DEMAND DRIVES THE ECONOMY SO IF SPENDING STOPS, RECESSIONS CAN SPIRAL OUT OF CONTROL SO WITHOUT GOVT INTERVENTION, UNEMPLOYMENT CAN PERSIST INDEFINITELY AS SEEN IN THE GREAT DEPRESSION. ARGUED THAT IN A RECESSION, GOVT SHOULD SPEND MORE EVEN IF IT MEANS RUNNING A DEFICIT TO STIMULATE A POSITIVE MULTIPLIER EFFECT.
WHY SHOULD THE GOVT NOT INTERVENE IN THE ECONOMY ACCORDING TO HAYEK?
SPOTANEOUS RESOURCE ALLOCATION VIA THE OPERATION OF MARKET FORCES WOULD BE FAR SUPERIOR TO ANY STATE PLANNING SYSTEM. BEAUSE CONSUMERS HAVE THE BEST KNOWLEDGE OF THEIR SITUATION.
WHAT IS A FREE MARKET SYSTEM?
PRICES OF GOODS AND SERVICES R SET FREELY BY FORCES OF SUPPLY AND DEMAND WITHOUT GOVT INTERVENTION.
WHAT IS AN EXAMPLE OF A FREE MARKET SYSTEM?
USA
WHAT R THE ADVANTAGES OF FREE MARKET ECONOMIES?
- PROFIT MOTIVE AND COMPETITION MAY LEAD TO LOWER PRICES AND CREATION OF NEW GOODS
- FREEDOM FOR CONSUMERS TO BUY AND WORK FOR WHO THEY WANT
- INCENTIVE FOR LABOUR TO WORK HARD
- INVISIBLE HAND WILL ENSURE THE RIGHT QUANTITIES OF GOODS AND SERVICES ARE PRODUCED.
WHAT R THE DISADVANTAGES OF FREE MARKET ECONOMIES?
- IMPERFECT INFO TO MAKE CHOICES OR MAY CHOOSE TO BE IRRATIONAL
- OVER PROVISION OF NEGATIVE EXTERNALITIES
- UNDER PROVISION OF POSITIVE EXTERNALITIES
- POTENTIAL EXPLOITATION OF WORKERS AND CONSUMERS BY MONOPOLIES
- INEQUALITY
- NO PROVISION OF PUBLIC GOODS E.G STREET LIGHTS.
WHAT IS A COMMAND ECONOMY?
RELIES EXCLUSIVELY ON THE STATE. GOVT DECIDES WHAT IS MADE, HOW, HOW MUCH AND HOW DISTRIBUTION TAKES PLACE. RESOURCES ARE CONTROLLED BY THE GOVT AND PRICE LEVELS R FIXED BY THE GOVT RATHER THAN THE OPERATION OF SUPPLY AND DEMAND.
WHAT IS AN EXAMPLE OF A COMMAND ECONOMY?
NORTH KOREA
WHAT R THE ADVANTAGES OF COMMAND ECONOMIES?
- GREATER INCOME EQUALITY AS RESOURCES R DISTRIBUTED BY GOVT
- EXTERNALITIES ELIMINATED AS GOVT CONSIDERS TOTAL BENEFITS AND COSTS TO SOCIETY
- WITH 1 PRODUCER, THERE SHOULD BE INCREASED EFFICIENCY THROUGH ECONOMIES OF SCALE E.G LONDON UNDERGROUND.
WHAT R THE DISADVANTAGES OF COMMAND ECONOMIES?
- PRICES OFTEN KEPT LOW LEADING TO SHORTAGES AND QUEUES
- WITHOUT PROFIT INCENTIVE, LESS NEED FOR GOVT TO CREATE NEW PRODUCTS
- LITTLE ECONOMIC FREEDOM AND CHOICE FOR CONSUMERS
- HIGH LEVELS OF BUREAUCRACY.
WHAT IS A MIXED ECONOMY?
RESOURCES R PARTLY ALLOCATED BY THE PRICE MECHANISM AND PARTLY BY THE GOVT
WHAT IS AN EXAMPLE OF A MIXED ECONOMY?
UK
WHAT IS ADAM SMITH’S FAVOURED SYSTEM?
FREE MARKET / MIXED
WHY IS A FREE MARKET / MIXED MARKET ADAM SMITH’S FAVOURED SYSTEM?
INVISIBLE HAND GUIDES THE MARKET TO AN EFFICIENT OUTCOME BUT THIS RELIES ON NO MONOPOLIES SO GOVT NEEDS TO ENSURE LOW BARRIERS TO ENTRY AND OTHER INTERVENTIONIST POLICIES TO CORRECT MARKET FAILURE.
WHAT IS KARL MARX’S FAVOURED SYSTEM?
COMMAND ECONOMY
WHY DOES KARL MARX FAVOUR A COMMAND ECONOMY?
CAPITALIST SOCIETIES EXPLOIT WORKERS AND R UNSTABLE SO A COMMUNIST SYSTEM IS PREFERABLE.
WHAT IS FREDERICK HAYEK’S FAVOURED SYSTEM?
FREE MARKET
WHY IS A FREE MARKET HAYEK’S FAVOURED SYSTEM?
DUE TO COMPLEXITY OF ECONOMIC PRODUCTION, THE FREE MARKET SHOULD PROVIDE ALL GOODS EXCEPT PUBLIC GOODS.
WHAT IS KEYNES’ FAVOURED SYSTEM?
MIXED ECONOMY
WHY IS A MIXED ECONOMY KEYNES’ FAVOURED SYSTEM?
FREE MARKET IS NEEDED TO ALLOCATED GOODS AND SERVICES BUT THE GOVT NEEDS TO INTERVENE TO STEER THE ECONOMY.
