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Economics, Mainstream Tradition
Economics is the study of the allocation of scarce resources to satisfy unlimited wants
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Economics, Heterodox Tradition
Economics is the strudy of how societies provide for material needs and wants
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Three tests of a model
1) Are the assumptions realistic?
2) Is the model consistent?
3) Can the hypotheses generated by the model predict future events or explain past events?
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Institutions
- 1) Reciprocity
- 2) Redistribution
- 3) Householding
- 4) Market
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Institution of Reciprocity
- - "Gift Giving"
- - Simple Give and Take
- - Ex: Offering rides to friends
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Institution of Redistribution
- - Goods are distributed to a central authority which then redistributes the goods according to some purpose or principle
- - EX: Government or Non-Profit Organizations.
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Institution of Householding
- - Producing goods for one's own use.
- - Self-Sufficiency
- - EX: Indigenous populations hunting for food.
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Market
- -A place where buyers and sellers come together to exchange goods and services.
- -Each person looks to his own interest.
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Consumer Sovereignty
- -Individuals vote with their dollars to decide what goods to produce, how to produce them, and for whom to produce them for.
- -The market system represent the preferences of those who have votes.
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Microeconomics
The study of how individuals, firms, and society as a whole allocate their scarce resources to achieve their objectives.
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Macroeconomics
- -Concerned with the economy as a whole
- - The study of the determinants of national income, the price level, and unemployment
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Deduction
- -From the whole to the part.
- -Models are based off of deduction because it goes from the vision, to the set of the assumptions to generate a deduction or conclusion.
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Induction
From the part to the whole.
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Post Hoc Ergo Propter Hoc
- - After this therefore because of this.
- - Relating two unrelated events.
- -Ex: I stepped on a crack, and my cat broke his back.
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Fallacy of composition
The notion that what is true for the part is true for the whole.
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Fallacy of misplaced concreteness
Refers to treating the "picture" as though it is real.
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Opportunity Cost
The value of the next alternative forgone.
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Production Possibilities Frontier
The different combinations of goods that society is capable of producing given that its resources are fully employed.
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Law of Increasing Relative Cost
- -In order to obtain equal increments of one good, society must give up increasing amounts of the other good.
- -The reason is specialization and division of labor.
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Efficiency in production
You cannot increase the production of one good without decreasing the production of another good.
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Efficiency in distribution
Society cannot increase the happiness of one person without reducing the happiness of another.
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Equity
Fairness, treating two or more individuals relatively the same.
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Market Economy
- -Subjecting human relations to market forces.
- -Requires transforming nature and people into commodities into something for purchase and sale.
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Extending the market system to traditional people always leads to conflict because... ?
People seldom forego the certainty of their previous life to engage in the uncertainty of another.
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Feudalism
- -Traditional economic system in which the rules for conduct are reflected in the traditions and customs of people.
- -Rules are based off of serving God, prepping for war, and general survival.
- -Making money was sinful
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How was feudal society divided?
- Into two classes:
- -The feudal lords, priests, and knights
- -The serfs
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Feudal society can be compared to what?
- A stick figure.
- -Head: Feudal Lords
- -Arms: Knights
- -Feet supporting the structure: Serfs
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Factors involved in the decline of feudalism
- 1) The Crusades:
- The ensuing wealth that poured into the cities helped finance the Renaissance.
- 2) The Renaissance:
- Helped decline religious affluence
- 3) The Discovery of the New World:
- -Europenas pillaged the temples of the Aztec civilization, sending precious metals back to spain.
- -Contact with the Spanish decimated the Indians
- 4) Protestant Reformation
- -Doctrines took hold because they allowed accumulation of wealth (it was no longer a sin)
- 5) The Enclosure Movement:
- -Landowners kicked the serfs out because they were no longer an estimate of wealth. The enclosed their land to raise sheep because it was the new estimate of wealth.
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Poor Laws
- -Represent Britain's efforts to deal with poverty.
- -If poverty can't be abolished, at least make it profitable.
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Luther
- - It is not by doing good deeds that one achieves salvation.
- -Created Religious Individualism: Each person is responsible for his or her own salvation.
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John Calvin
- -The Doctrine of Predestination
- -The Doctrine of the Calling
- -The Doctrine of Wordly Asceticism
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Capitalist Ethos
The idea that each individual has a duty to increase his/her wealth
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The Doctrine of Predestination
- -The idea that God has already predetermined one's fate: Salvation of Damnation.
- -An indication of wether one has received God's grace is material prosperity.
- -Wealth and Poverty became a measure of character.
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The Doctrine of the Calling
- -The idea that one has been called by God to do one's own work.
- -You now have a moral obligation to do your job well.
- -Making money is no longer a sin, but it is a duty to God.
- -THE ORIGIN OF PROTESTAN WORK ETHIC
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The Doctrine of Worldly Asceticism
- -The idea is that to consume is to enjoy life inspired by the devil.
- -One needs to deny pleasures in life and SAVE.
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Mercantilism
The first stage of capitalism
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What was wealth in mercantalist?
Gold and Silver.
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Zero Sum Gain
One country's gain is another country's loss.
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Laissez Fair or Market Capitalism
Business interests need to be set free.
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Malthus
- - Evil exists in the world to create activity.
- -The poor are responsible for their poverty, nor society. Poverty results from immorality. (Solution: Do nothing)
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Smith's Invisible Hand Doctrine
Each individual pursuing his own self interest unintentionally helps others achieve their interests.
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Smith's Value Theory
The real price of everything is the toil and trouble of acquiring it.
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Smith's Law of Accumulation
Capitalists save -> use their money to buy machines -> machines increase the division of labor -> d of lab increases productivity -> increases wealth, and benefits everytone.
- Accumulation ensures suffieicent workes through the law of population.
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Smith's Law of Population
Fewer workers causes accumulation bids to up the wage rate -> High wages enable workers to better feed and clothe their families -> Reduces mortalities -> Increases the supply of labor -> Allows accumulation of continue.
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Malthus Theory of Population
-Nature increases at arithmetic rate, population at a geometric rate. Population growth will be checked by the lack of food.
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Ricardo's Theory of Economic Growth
- -Growth depends on the distribution of income.
- -Profit Rate: The ratio of profits to wages.
- -Rents: The difference between the most and least fertile land in cultivation.
- -Corn laws made unprofitable land profitable -> Increase competition among capitalists for fertile land -> Increased rents -> Reduced profits.
- -As population rises -> Farmers cultivate inferior land -> rents rise -> profit falls -> falls to zero -> The end of capitalism.
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Corn Laws
- -A tax that Parliament had leviend to discourage imports and keep rents high.
- -Made unprofitable land profitable.
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How do wages tend to subsistence? (Malthus)
- -Workers are inferior to capitalists and landowners, this means that they can't control their passions.
- -Wages above subsistence lead to more children; wages below subsistence leads to death.
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Jeremy Bentham
- Human beings are psychological egoists motivated by pleasure and pain.
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