All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Introduction Questions of the Day
Introduction

1. How does society make the choices necessary to solve the three basic questions imposed on it by the existence of scarcity?

2. What is mercantilism?

3. Devise a solution for the parking problem at University.

4. What did Smith mean when he said "The sovereign is completely discharged from, a duty, in  attempting to perform which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society?"

5. How do economists explain the choices made by decision makers?

6. Work through the logic of what would happen to petroleum engineers if there was a new oil-price crisis triggered by the shut off of oil supply by one of the world's oil cartel (OPEC).

7. What did Keynes mean when he wrote in The General Theory: "In the long run we are all dead?"

8. Find a newspaper article that has either a conservative or liberal ideological perspective. Be sure to identify what it is about the article that makes you specify the ideological bias. 

More Questions

Answers for the Day
Introduction

1. What did Keynes mean when he wrote in The General Theory: "In the long run we are all dead?"

Keynes was writing in the 1930s when the industrialized world was in the midst of a The Great Depression.  At that time the prevailing view was that the massive unemployment that the US was experiencing would be eliminated if we simply waited for the markets to work.  Keynes looked at the situation and indicated that while this might be true in the long-run, it was unlikely that the nation could wait for the market system to work and eliminate unemployment.  In the summer of 1998 we could see in the riots in Indonesia one possible outcome of waiting too long as the people took to the streets to protest the economic collapse of the Indonesian economy. 

2. What did Smith mean when he said "The sovereign is completely discharged from a duty, in the attempting to perform which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society."

The question is how do we best organize society to maximize the welfare of its people.  According to Smith, the role of the government in determining the proper allocation of resources is quite limited.  The government is unlikely to possess neither the ability to identify what is right to do nor the tools to achieve its goals, but this is not a problem since the market system will solve the allocation problem efficiently.   In Smith's world, the government is freed from the task of guiding the "industry of private people, and of directing it towards the employments most suitable to the interest of society."

3. What is mercantilism?

The following answer appears on the History of Economic Thought web site.  The bottom line: under mercantilism the goal was to maximize wealth.

"The "Mercantilists" refer to a group of thinkers which emerged largely in Britain, France and Holland in the 17th Century. In that "most horrible century" engulfed with recurrent national, religious and civil wars throughout Europe, the first concern of sovereigns was the raising of taxes to finance their wars and weaken the enemy; the second concern, given the sudden explosion of overseas trade after the discovery of the Americas and the sea- routes to Asia, was the impact of trade on the national economy and the competition for exclusive trading privileges. Thus, the question that the most prominent policymakers asked their advisors was how to generate taxable wealth in the national economies and the nature of the link between trade and wealth (and also the form of trade - recall that during this period charter companies with monopolies over trading areas such as the East India Company were prominent). These advisors were joined by merchants, company officials, politicians, bankers, scholars, soldiers, clergymen, physicians and even poets in lively debates put forth in polemical sixpenny tracts and public pamphlets. It is this assortment of not-very-impartial people who constitute the "Mercantilists".

The Mercantilists tended to equate wealth with money (the concept of taxation arising from circular flows of "income" and not stocks of wealth being largely alien to them). Thus, they argued that to increase the wealth of a nation, governments should actively seek to ensure that money (specie or bullion) be attracted to that country. The means by which they promoted this included alternatively restricting the export of bullion, ensuring a favorable trade balance by restricting imports and promoting exports, lowering interest rates, etc. The "liberal" offshoot of the Mercantilist school was more flexible towards free trade, but failed to achieve the insights necessary to move away from equating wealth to money."

4. Devise a solution for the parking problem at University.

Over the year's students have been real creative on this one.   Many of the suggestions have involved restrictions of the spaces to certain groups.   The groups  identified as having 'special' status have been: juniors and seniors, freshman and sophomores, commuters, dorm students, faculty (my suggestion).    Others have proposed building new parking lots, a new garage, and moving to angle parking on Flagg Road.  And then there is always the standby favorite - establish parking fees and let the spaces go to the highest bidder.  What has been interesting has been that almost without exception, each proposal has been justified based on the grounds that it was fair.  What you can be certain of is that under every allocation scheme someone will be left out so it is unlikely that you will ever find unanimous agreement on a solution.

5. Work through the logic of what would happen to petroleum engineers if there was a new oil-price crisis triggered by the shut off of oil supply by one of the world's oil cartel (OPEC).

The "shock" will hit he output market first where the reduction in supply will cause the price to rise.  This will prompt firms to search for new supplies which will increase demand for petroleum engineers.  The result of the increase in price (wages) will trigger an increase in the number of students who go into petroleum engineering...

6. How does society make the choices necessary to solve the three basic questions imposed on it by the existence of scarcity?

It must devise an economic system and there are three general types of solutions - tradition, command, and market.  This course will be focused on the latter system. 

7. How do economists explain the choices made by decision makers?

Economists begin their analysis by making some assumptions about decision makers - both firms and individuals.  Most economists have begun from an assumption that few modern psychologists would endorse - that human beings are highly rational and self-interested. When it comes to firms economists take a similarly narrow view and assume that firms maximize profit.  In both cases we would describe the decision makers as being rational which simply means that they make choices that are consistent with their goal.

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