Chapter 3: Defining Economics

Question 1

Paradigm

Answer 1

School of thought.

Frames types of questions and phenomena that will be analyzed, and the approach or method a theorist will employ.

Question 2

Ideology

Answer 2

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.

Question 3

Economic Perspectives (3)

Answer 3

1. Conservative
2. Progressive
3. Radical

Question 4

Conservative Economics

Answer 4

1. Markets work well on their own without interference
2. Markets should be responsible for how society allocates resources
3. Government involvement is disruptive to market performance, and should be limited

Question 5

Progressive Economics

Answer 5

1. Markets should generally be responsible for how society allocates resources
2. Free Markets generate inequality
3. Free Markets are unstable
4. Government intervention is necessary

Question 6

Radical Economics

Answer 6

1. Market economies are class-based systems, based on one’s position (owner, laborer, etc.)
2. Market economies empower the wealthy, owners of assets
3. Market economies exploit labor
4. Free Market capitalism is unstable and needs to be replaced

Question 7

Negative Externality

Answer 7

A cost suffered by a third party as a consequence of an economic transaction. Represents an inefficient allocation of resources.

Question 8

Neoclassical Economics

Answer 8

Broad theory that focuses on supply and demand as the driving forces behind the production, pricing, and consumption of goods and services

Question 9

Mainstream/Orthodox Economics

Answer 9

Broadly used to describe schools of economic thought that are considered to be part of neoclassical economics

Question 10

Heterodox Economics

Answer 10

Schools of economic thought outside of mainstream/orthodox economics

Question 11

Primary Criticisms of Mainstream/Orthodox Economics

Answer 11

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.

Question 12

Behavioral Economics

Answer 12

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.

Question 13

Invisible Hand Theory

Answer 13

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

Question 14

Criticism of the Invisible Hand Theory

Answer 14

Recent events, especially those relating to the Great Recession, have proved that common good is not always the end result of individuals pursuing profits

Question 15

Rational Choice Theory

Answer 15

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

Question 16

Criticism of Rational Choice Theory

Answer 16

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).

Question 17

Richard Thaler’s Mental Accounting Example (irrationality of Rational Choice Theory)

Answer 17

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.

Question 18

Brexit (example of what?)

Answer 18

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.

Question 19

Resources (Orthodox Economics)

Answer 19

Land, labor, and capital. Resources are needed for production, and resources are limited.

Question 20

Wants (Orthodox Economics)

Answer 20

“Wants” are things produced by resources, individuals garner utility (happiness from consumption, Wants are unlimited (people have insatiable desires/are greedy)

Question 21

Happiness Economics Results

Answer 21

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)

Question 22

Heterodox Economics Critique of Orthodox Economics:

Unlimited Wants

Answer 22

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.

Question 23

Heterodox Economics Critique of Orthodox Economics:

Facts/Values

Answer 23

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”.

Question 24

Heterodox Economics Critique of Orthodox Economics:

Efficiency and Scarcity

Answer 24

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.

Question 25

Heterodox Economics Critique of Orthodox Economics:

Needs and Wants

Answer 25

Absence of acknowledgement of wants vs. needs, producing potentially misleading insights. Or, assumption in the application of orthodox economics that needs are already met (not true!). Needs are food, water, shelter, and safety. Wants are desired, but not necessary for an individual to function in society. If needs are not being met, can orthodox economics be trusted to prescribe a solution that might ease human suffering?

Question 26

Heterodox Economics Critique of Orthodox Economics:

Individual vs. Social

Answer 26

Assumption that the social element of economics is secondary to that of the self-interested individual, making the role of larger society unclear. Ignores influence of social institutions on individual behavior, such as cultural norms that encourage concern for the well-being of others instead of maximizing individual acquisition.

Question 27

Enlighted Self-Interest (Orthodox Economics Concept)

Answer 27

the idea that it can be in one’s self-interest to act to benefit others (when society is better off, the individual benefits), and that this is a type of utility. Example: charitable giving

Question 28

Heterodox Economics Critique of Enlightened Self-Interest

Answer 28

1. Enlightened self-interest is contradictory and inconsistent with the basic premise of orthodox economics (that want fulfillment is attained by product acquisition). For example, charitable giving is not product acquisition but product dissipation.
2. If orthodox economics is updated as the study of utility maximization (where utility can include the dissipation of product), then any action can be said to be utility maximizing, otherwise the person would not engage in the action. Then any action taken is by definition in one’s best interest, and there is no empirical function left in this economic theory.

Question 29

Heterodox Economics Critique of Orthodox Economics:

Endless Growth

Answer 29

Assumption that unless growth is unquestionably desirable, even as it is also assumed that resources are finite. Disregards the implications for the future of humanity on a finite planet with finite land, atmosphere, water, and other natural resources. Emphasizes desirability of endless happiness being derived from the endless consumption of products.

Question 30

Orthodox Economics Solution to Negative Externalities

Answer 30

Development of institutional mechanisms that assign penalties to those that create negative externalities (example: tax on polluters)

Question 31

Heterodox Economics Critique of Orthodox Economics Solution to Negative Externalities

Answer 31

Failure to properly tax negative externalities results in economic efficiencies. A large government bureaucratic structure would need to exist to tax all externalities. A regulator cannot precisely calculate the tax to correct for costs of negative externalities.

Question 32

Economics (Revised definition suggested by textbook)

Answer 32

Study of social provisioning, in which an understanding of the development of political economies is rooted in social, political, natural, and cultural processes