Test Two Study Cards Flashcards
How does the Wealth of Nations refute mercantilist wealth?
Wealth doesn’t equal amount of gold and silver. Wealth=#of consumable goods.
What is the sole end purpose of all production?
Consumption
According to Smith, whose wealth counts?
Everyone's consumption counts: cannot negate a class of individuals. Cannot ignore the poor. If there is a large impoverished class, then the nation is not rich. Smith refutes the rise of utility of poverty theory. (radical)
What did Smith believe about the equality of man?
All men are created equal: “by nature a philosopher is not…half so different from a street porter.” (WN)
We have different preferences, but that benefits society.
When we imagine ourselves in each other’s shoes, all men must be equal.
Why is natural liberty so important to society?
Encourages spontaneous order in which society becomes better off.
What is the assumption about capitalists?
That free market means that we just support the rich/elite businessmen.
Capitalists encourage business competition so that society can benefit as a whole
Why was Smith anti-business?
Because he thought businessmen always looked for monopolies and privileges. He instead favored pro-markets, pro-competition.
What did Smith say about regulation?
“When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.”
What are payments in kind?
Agreeing to be paid in money, but getting paid in corn instead. Smith emphasized the enforcements of law on contracts.
Did Smith’s main concern lie with the poor or the rich?
The poor
What was Smith’s legacy?
He created a moral philosophy of liberty and a legacy of concern, not for the privileged, but for the everyman (very different idea than that found in mercantilism)
What did Smith believe about wealth generation?
He believed in not just rearranding the pieces between two countries, but working together to mutually benefit. Very different from mercantilism. Discouraged reallocation of resources.
Who created the idea of comparative advantage?
David Ricardo
What is comparative advantage?
The total output of a group of individuals, an entire economy, or a group of nations will be the greatest when the out[ut of each good is produced by the person (or the firm) with the lowest opportunity cost of production for that good.
Gains through specialization.
Looking at a static picture (taking a snapshot of the economy)
What is the opportunity cost of production?
How much it costs to make the next good. Usually priced according to what the manufacturer must give up in order to make that good.
What is an absolute advantage?
Even if you are better at making everything, and I’m worse at everything, we can still gain from specialization and exchange.
As long as relative production costs of two goods differ between the 2 people, gains from trade will be possible.
What are relative production costs?
The fraction of the good it costs to make the other product.
Shows how much you are giving up to make a certain good.
Why do we not make the things we most love?
Not economically beneficial: it’s a bit odd and counterintuitive to not make the things that you most desire.
If I want more of something, I should do something else to get money and then buy the good from someone else.
Who thought of the gains of division of labor?
Adam Smith
What is division of labor?
The division of a complex production process into a number of simpler tasks, each one of which is undertaken by a different individual.
Observed throughout time, and is not static.
Even if we were all exactly the same (drones), we could still benefit from division of labor.(does not work in comparative advantage)
What is the lesson learned from the pin factory?
There are great increases in production through specialization in certain aspects of the process of production and division of labor.
What are the 3 dynamic gains from specialization?
- Economies of scale 2. Learning by doing 3. Technology gains from familiarity.
what are economies of scale?
Cost advantages that a business obtains due to expansion. A farmer can provide everything for himself and have crappy tools to work with, or he can specialize in one job and invest his capital into better technology. From this, he may trade.
What is learning by doing?
When you make a product, after a while, you get better at making it. Practice makes perfect. The extra productivity that comes from doing one thing over and over.
What are technology gains?
If you continually work on a process, you will be much more likely to find ways to improve it. If you specialize in one activity, you won’t be constantly be switching tasks. Sometimes corporate leaders refer to lower workers to get feedback on how to improve their technological process.
How can you incorporate comparative advantage with the division of labor?
First, one must apply the division of labor to increase production rates so that you have more to trade through comparative advantage.
Completely contrasts mercantilism.
Supports mutually beneficial exchanges.
When did Frederic Bastiat live?
1801-1850
What was Bastiat know for?
His writing
Was a politicisn, journalist, wrote witty essays and fables
Demolished protectionism and govt. subsidies thorugh his writing
Advocated the free market.
How long did Bastiat write economic essays for?
Only the last 6 years of his life.
Despite this short time, he still made an increadible impact on the world of economics.
What were his ad absurdum arguments?
He took the other side’s arguments and extended them to their ridiculous parallel conclusions.
Through this, he broke down the basics of arguments to show what they meant and how upsurd the logic was.
What was Bastiat’s book, Economic Harmonies about?
1850
Discusses how natural it is for people within society to be in harmony with each other.
How did Bastiat impact the everyman?
He demolished the everyman’s misconceptions of economics
What was the broken window fallacy?
It points to the importance of notiving what is seen and what is unseen. An action has multiple effects
Immediate consequenses and subsequent consequences
Disproves the false belief that accidents such as a broken window will create and keep job alive
This is a trap that many economists fall into when a natural disaster occurs.
What was Bastiat’s petition of the candle makers?
Proved how protectionist policy doesn’t make sense
“If you shut off as much as possible all access to natural life, and there create a need for artificial light, what industry in France will not ultimately be encouraged?”
Said that competition creates tariffs
Tariffs are good for the producer, but bad for the consumer
The sun=the foreign market that floods our market with cheap goods
What was Bastiat’s negative Railroad?
When two countries sell goods between each other, a railroad is built to help exchange.
When we start having more exchanges with the other country, then the producer from one country calls for a tariff. This tariff is the same as destroying the railroad that connects the countries because it adds to the cost between the two exchanges.
What is the significance of Bastiat’s The Law?
Said the proper role of government is to defend the “God-given right to life, liberty and property” and to “prevent injustice from reigning.”
Focused on the enforcement of justice.
What do libertarians emphasize?
Believed to only emphasize wealth. However, they also emphasize peace, morals, and happiness.
the happiest places are the places in which the government interferes the least.
What are two causes that pervert the law?
Stupid greed and false philanthropy
What is stupid greed?
Slavery, tariffs, legalized plunder (govt. has a legitmate use of force.) in general: law has become an instrument of injustice.
What is false philanthropy?
Non-voluntary charity detaches individuals from societal needs: arrogance of what is best for all.
Just because people think something is the best way for the country does not mean that the government must implement it.
What is the conclusion of Bastiat’s The Law?
“Try liberty; for liberty is an acknowledgement of faith in God and His works.”
When did J.D. Say live?
1767-1832
What is J.D. Say’s background?
French Adam Smith Economist and businessman Classically liberal Macroeconomic theory: Say's Law Popularized Smith's idea: read WN
What was the difference between Say’s property rights vs. violation of property rights
Liberty vs. Coercion distinction
“The property a man has in his own industry, is violated, whenever he is forbidden the free exercise of his faculties or talents, except insomuch as they would interfere with the rights of third parties.”
If people are not using their property ina coercive manner, then we should allow them to use their property in their own way.
Trying to have coercion within the system usually causes more harm than good.
