Final Flashcards
Briefly describe the method of economics according to Mises and Rothbard: In what way is their method different from that of other schools of economics?
Using praxeology, and uses logic: Assert A, if A then B; if B then C, and so on.
use of scarce means for satisfying the most urgent wants
relations between ends and means, and not their specific contents.
A scale of values or preferences: how is that implied by any action we choose to perform?
actor makes a choice to take action they have essentially ranked all possible ends they can achieve given their scarce means since they have decided that the end they are taking action to achieve is ranked the highest in value to the actor.
Explain the origin of money according to Austrian economists. What problems does the introduction of money solve?
medium of exchange, coincidence of wants, indivisibility, the fact that you can’t trade ¼ of a horse.
Briefly outline Mises’s argument against central planning.
Calculation problem: Prices can’t be calculated because of complexity.
Only a free market can find these out through trial and error. With no market prices, profit opportunities can’t be discovered and scarce resources can’t be used effectively
Why would it be impossible for central planners in a society where the means of productions are owned by the state to solve the problem of allocation of scarce resources?
No market prices in order to alert of profit opportunities
Economic planners have no means by which to perform economic calculation
Briefly outline Hayek’s argument against central planning
Prices act as a way to coordinate activities of people with different knowledge and reflect estimate of usefulness
In central planning this can’t happen
What kind of knowledge is relevant to Hayek’s knowledge argument against central planning?
Knowledge of the specific circumstances of time and place.
Knowledge of the relevant facts
Each person has unique knowledge
In what way, if any, is Mises’s calculation argument against central planning different from Hayek’s knowledge argument?
Hayek: Knowledge of what customers want allows entrepreneurs to offer at a certain price.
Mises: No way of calculating econ efficiency
Describe the relation among time-preference, saving, investment, and consumption in a one-person economy, i.e., in Crusoe’s economy
Those with less time-preference are okay with giving up something in the near-term in order for payoff in the future. With investment in Crusoe this means that they are willing to put in work/capital/resources into something now for a payoff in the future. Someone with high time-preference would want something right away and wouldn’t be willing to put in much effort/capital/etc into a future payoff. For consumption, similar, low TP means they are willing to consume something later in order to gain more utility from it.
The early nineteenth-century economist Bastiat tried to explain how the government’s increase of the money-supply affects the borrowing of scarce resources, with the example of a plow. How is this example relevant to the Austrian theory of the business cycle?
Money is only a means of exchange.
Credit inflation distorts this and makes it seem like there is more means of exchange than there is
How does Garrison use the production possibility frontier to explain economic growth? What kind of trade-off does the production possibilities frontier represent?
to compare consumption and investment. When the economy can put more into investment and consumption the economy is growing (frontier is moving outwards). When people save more and become more future oriented, investment increases at the expense of consumption and the PPF increases at a faster rate
How can you represent a market for loanable funds, according to Garrison?
Saving = supply of loanable funds
Willingness to borrow = demand
Interest rates = Prices
Amt of loanable funds = quantity
Graph
What is a “Hayekian triangle”? Explain how this diagram can be used to relate investment, stages of production, and consumption.
Consumable output is produced by a sequence of stages of production. As the PPF moves outwards so does the Hayekian triangle, representing growth in the economy
Increased investment = wider
Increased consumption = taller
What is the “derived demand effect”? What is the “time-discount effect”(or “interest rate effect”)?
Derived demand: A decreased demand for consumption goods dampens investment activities in the late states of production, reducing the height of the Hayekian triangle
Time-discount: A reduced rate of interest stimulates investment activities in the early stages of production, increasing the base of the Hayekian triangle.
What is Keynes’s “paradox of thrift”
reduction in consumer spending -> excess inventories -> production cutbacks, worker layoffs, and a spiraling downward of income and expenditures ->recession, and less investment.
What are the effects on the labour market of the derived demand effect and the time-discount effect?
Late stages: derived-demand effect > interest-rate effect. Lower wage, less demanded.
Early stages: interest-rate effect > derived-demand effect. Higher wage, more demanded.
Try to explain as clearly as possible the Austrian theory of the business cycle.
Excessive growth from instituted interest rates.
Low interest rates -> stimulate borrowing from Banks -> increase in capital spending from new credit. -> widespread “malinvestment”. -> correction/”credit crunch”/”recession”/”bust”, -> money supply contracts -> resources reallocated