NPV Flashcards
(34 cards)
Schumpeter’s Circular Flow finances…
innovation and sustains a process of “creative destruction”
Western countries adopted free markets and were able to…
escape Malthusian equilibrium and develop middle income levels by utilising financial systems while also boosting innovation.
Western countries over time developed a trust to
strangers. Which is believed to facilitate business and economical growth.
2 types of competition according to Schumpeter:
1 - To cut prices, pushing NPV and prices to 0. Does give consumers the best price.
2 - Innovate. Profits above 0 until something better comes out.
3rd type of competition/way of creating positive NPV:
Lobbying corrupt politician that leads to higher positive NPVs (political rent-seeking). Negative Externality: Whole country is poorer.
If more political rent-seeking projects happen instead of creative destruction, then a country’s growth will be smaller
What is the Tullock’s Paradox?
It is that the NPV of political rent seeking is usually very high because the corrupt politicians “work” for cheap (to large scale companies).
Big government problems?
Corruption increases as the NPV of corruption increases with more government power
What is Wagner’s Law?
Per capital GDP (Y/P) & size of govt (G/Y) rise together. A welfare state expands and develops in a free market economy. Government spending as a fraction of GDP rises as living standards (per capita GDP) rise.
2 explanations for Wagner’s Law:
1 - Demand for government: rises as people’s income increases. Richer people want better infrastructure, government enforced restraints on negative externalities, less risk.
2 - Supply of government: govt. gets bigger easily, gets smaller only with difficulty (hysteresis). Once the state is big, and lobbying exists. They want it to stay big to keep benefiting. Politicians and their staff have great job security. Civil service: the way you get promoted is to avoid being blamed for anything. Therefore, unless there’s a need to do something, inaction is better than action.
What is the govt. club theory or clientele theory of govt. (competition)?
Better countries attract taxpayers. Population and companies from all over the world pick countries in which they believe are best.
What is government competition according to Tiebout?
Countries, provinces, cities compete amongst each other to get taxpayers (companies/individuals). And, use taxes for public services and their own living wages. For the lowest price (tax)
Thiebout hypothesis: Immigration and migration happens with globalization. It matters on a country level. Best deal on a country basis attract immigrants.
Mancur Olson - why are people in some countries rich and people in other countries poor?
Mancur Olson says that there is no “free money” (no arbitrage) to be there because there are countries that could improve their institutions but they don’t.
Socially efficient Institutions allow for more prosperity and individual’s potential income.
Immigration from poor countries means higher supply of labour and lower wages. Immigration of creative people increases the pace of innovation and wealth creation.
Higher general levels of income are socially efficient.
Is the Tiebout Hypothesis true?
Why hasn’t everybody moved from poorer and more corrupt countries to better ones?
Some people don’t have money. Illegal. Many other barriers put on by governments. Desire to prevent movement of innovative people into a country if its elite relies on old technologies, industries, etc.
What is the Curly effect?
Politicians want power more than tax revenue and enact policies to drive away their opponents, even if includes the best taxpayers
What is Mercantilism?
1 - Only artists, musicians, philosophers & others at court can create higher culture & only the elite nobility can appreciate higher culture (supporting theses elites costs a lot of money)
2 - War is grand and uplifting, the nobility are warriors, wars costs money
3 - The reason nation exists is to support its elite in these higher pursuits (war & culture)
What is the goal economic policy in a mercantilist economy?
Policy objective of mercantilism is to allow the Royal Court to accumulate as much gold as possible to advance the glory of the nation. In other words, mercantilism economy organized to maximize NPV/profit of political rent-seeking by an elite.
Tiebout competition fails because the taxpayers (peasants & tradespeople) can’t move to a better country or change the rules
How does the economic policy in a mercantilist economy?
1 - Maximise taxes for everyone, except the elite, who pays zero taxes
2 - Entire economy cartelised (one monopoly in each sector)
3 - High trade barriers (imports are bad and exports are good)
4 - Laws & government offices auctioned off to the highest bidder
5 - Venal: hereditary property
What are Adam Smith’s view on mercantilism?
Argued that it was fundamentally misguided. The drive for national glory caused ordinary people to make the elite rich and richer.
He believed governments should instead make as many ordinary people as prosperous as possible.
What was the Enlightenment movement for reform?
1 - Most leaders were from Scotland in the late 1700s
2 - Adam Smith was one of those leaders pushing against political rent-seeking
What are the main consequences of political rent-seeking?
It is very effective at slowing and stopping economic growth because:
- Once firms pay to gain corrupt political connections, reusing them is easier
- Experience in lobbying makes future lobbying cheaper and more effective
- Firms grown large because of past rent-seeking are far better lobbyers than other small firms with little to no lobbying experience
Why is it hard to stop once political rent-seeking has started and been established?
- The most effective lobbyers are past lobbyers
- Lobbying can become a large firm’s highest NPV investment
- As their lobbying intensifies, other investments fall off (as lobbying is just way more profitable)
- Economies of Scale is present
How come China invented much more advanced technology than the western world but was never able to apply it in their economy?
Baumol argues political rent-seeking was always an easier and surer way to become wealthy and powerful (becoming an imperial civil servant was the path to wealth due to the bribes to protect the elite - in Imperial China)
What is Baumol’s thesis about the Western World?
Only in the Western world, and only after 1600s, did institutions started improving and becoming capable of limiting the profitability of political rent-seeking, consequently, sustaining on-going innovation. (LARGELY BY ACCIDENT)
