Recitation: 04/03/2015 Flashcards Preview

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What did Chung Ju Yung know was the best way to solve your problems?

By not solving your problems! Instead, it is better to join an association of problem solvers in which you dedicate yourself to solving other people's problems and in which you trust other people to solve your own problems.


What does every successful problem solving association need to have?

1. Adequate knowledge for others to solve your problem
2. The problem-solvers must have adequate incentives to solve your problem


Why is it better for locals to solve their problems instead of experts?

It would be hard for the outside expert to access the complex history of trial and error. Blank slates just don't work folks.


Success is often what?

A SURPRISE! It is often hard to predict what will be the solution. It is even harder to predict who will have the solution and when and where. Especially if all of these variables keep changing.


Solving knowledge problems is a lot of work. What does this mean?

A lot of work requires a lot of rewards, so a successful problem solving system must hand out such rewards to the problem solver.


What is Adam Smith's Invisible Hand?

Adam Smith saw the market in privately supplied goods as "invisibly" providing this "hand" to guide the solving of many of our problems. The suppliers who provide any goods that are profitable in the marketplace do so only to get the profit, but they wind up unintentionally meeting many of our most pressing needs. It is the force of consumers self-interest.


What makes goods the most profitable?

Our need to get our most urgent needs met.


What is a synonym for the invisible hand?

Spontaneous order


Smith's idea of a free market was what?

Not to enrich the existing merchants but to make them less rich through the loss of their monopoly rights and privileges. His free trade agenda would actually lead to cheap food imports for the poor that would undercut these large landowners.


Did Adam Smith like monopolies?

He wanted to abolish special privilege and monopolies over domestic and foreign markets


Did Adam Smith believe the invisible hand was a failsafe for all problems?

No. He understood that governments can solve some problems and that it may need to intervene in some malfunctioning markets such as public goods that do not deliver enough of a private return.


What three things did Smith say made the invisible hand so effective?

The division of labor, gains from specialization, and gains from trade.


What is the division of labor?

How much a worker performs all the necessary tasks to produce something versus how much the work is divided into more specialized tasks among workers


What is gains from specialization?

All of us are much better at some things than others, and specialization allows us to do what we do best and workers get even better at their best area of expertise.


What are gains from trade?

The payoff to the division of labor and gains from specialization. We all want to buy as cheaply as possible so we buy from the most efficient supplier - who got to be most efficient through gains from specialization


What do gains from trade not necessarily imply?

Losses for everyone. It can be mutually beneficial.

It also doesn't automatically mean international trade.


Freedom of choice is what decides ________

Who is best at solving problems. It rewards the world's best problem solvers while getting ride of the inept ones.


How are monopolies self correcting?

Monopoly means high profits which sends out a signal heard around the world by other suppliers that here are some easy profits to be made by coming in and underselling the monopolist.


Potential problem solvers only need to know one thing. What is that?

The market price of X.


What are the key requirements to most problem solving systems?

1. Social payoffs
2. Individual rights


What is a private payoff?

Individuals profits.


What is a social payoff?

That the individuals private payoff to his problem solving must be the same as the benefit of his problem solving to others.


Explain the Invisible Hand in your own words.

Everybody must have the right to choose which problems they will solve. Then, there is a whole society of problem solvers seeking the most fanatically efficient solutions possible for each other. This system has nobody in charge yet finds the best solution for your problems and helps you find your own best role as a problem solver for others.


Do monopolies have good social payoffs?

No. Their extra private payoff is just a redistribution from consumers to producers. The producers are self-restricting their problem solving for consumers and getting rewarded for doing so.


What are market failures?

Unintentional spillovers of solving one problem that creates new problems. It can also include public goods where individuals cannot be excluded from the general benefits, from which it is usually not possible to make a private profit. This is when government intervention is required.


What is one way to individual government actors have their private payoffs align with social payoffs?

Democratic accountability.


Market vs government is the wrong debate. What is the right one?

Individual rights vs state power. A unified vision on individual rights (political and economic) is about holding private and public suppliers accountable for their actions.


How would major gains in well being come about? How will these gains never happen?

Would be possible by moving funds from problems with low benefit-cost ratios to high benefit-cot rations. These gains will never happen when the goals are set inflexibly from the beginning.


The success of a country at specialization is really what?

The success of a firm and that success is really the success of an individual


Exporters specialize not only in product but also in ______. What does this specialization mean?

Destination. Specialization means focusing on fewer opportunities. To work the large share of one countries exports have to be a large share of another countries imports.