NPV Flashcards
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
