(L7) Sandmo Chapter 14

Question 1

Market Equilibrium & Resource Allocation

Answer 1

Market equilibrium in a perfectly competitive economy is believed to lead to efficient resource allocation. Pareto’s welfare theory, not widely known at the time, also suggests efficient societal resource use.

Question 2

Socialist Alternative & Economic Theories

Answer 2

The socialist alternative became prominent, questioning if real market economy’s imperfections reflected theoretical models. Barone and others discussed Pareto efficiency in socialism.

Question 3

Efficiency Conditions

Answer 3

There are three efficiency conditions: consumption (no one worse off), production (no increase without another’s decrease), and product mix (composition change shouldn’t make anyone worse off).

Question 4

Lange & Lerner’s Contributions

Answer 4

Lange and Lerner contributed to economics by discussing efficiency under market socialism and the reflective price system of production costs. Lange also considered industry control by trusts and central planning.

Question 5

Challenges of Central Planning & Market Power

Answer 5

The debate focuses on the feasibility of rational economic calculation in socialist economies versus market systems and the role of prices in resource allocation.

Question 6

Mises’ Argument Against Central Planning

Answer 6

Mises argued that rational economic calculation in a socialist economy is unfeasible without a price system that reflects scarcity and individual valuation.

Question 7

International Debate on Economic Systems

Answer 7

There was an international debate on the viability of socialist systems, with economists like Lange addressing concerns about market power and economic instability.

Question 8

Friedrich von Hayek

Answer 8

Hayek critiqued centralized planning and defended free-market capitalism, emphasizing the link between economic and political freedom and authoring ‘The Road to Serfdom.’

Question 9

Joseph Schumpeter

Answer 9

Schumpeter analyzed the evolution of capitalism, coined ‘creative destruction,’ and recognized inevitable socialist characteristics in capitalism’s future.

Question 10

Oskar Lange

Answer 10

Lange, a socialist economist, believed in the feasibility of a decentralized socialist system and compared it with market uncertainties in capitalism.

Question 11

General Themes

Answer 11

The debate revolves around which system better allocates resources and freedom, with Hayek and Schumpeter emphasizing individual knowledge and Lange advocating for planned economy efficiency.