159b final flashcards

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Neoliberalism

Favors a strong state that creates markets/ensures its survival. Emphasizes free markets and free trade as a foundation for human flourishing and wants personal control of economics rather than government. Believes government interference with market systems promotes waste, inefficiency, and stagnation. Reject regulations on industries, high taxes, public services that aren’t subject to market competition. Shrinking size of government/restricting its functions to protect private property. Policies include supply-side economics (trickle-down) and tax cuts.

Classical political economy

Value is created by labor; labor shares wealth with capitalists and landlord

Keynesian economics

An economic theory of total spending in the economy and its effects on output and inflation. ____ economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression.

1. Full employment is not natural

2. Equilibrium can be achieved with high unemployment

3. Unemployment is the result of deficiency in demand, could be corrected by expansionary fiscal policy.

• Government spending is needed during a recession

• Has a trade-off, many economists agree that Keynes' policies of increasing government spending during the financial crisis significantly reduced the depth/length of the great recession. Was it worth it?

Multiplier effect

Coined by Richard Kahn. Refers to consistent increase or decrease of final income that comes from injection/withdrawal on capital. Focuses on consumer spending. If it falls, the government can stimulate the economy by spending money. If the government spends money, it becomes someone’s income and they save a portion while spending the rest. The spending becomes someone else’s income and they save/spend some, which eventually leads to more spending.

Neoclassical

A school of thought that emphasizes the role of supply and demand in determining prices, allocation of resources, and the distribution of income. _____ economics builds on classical theories, focusing on individual decision-making and market equilibrium. Abandoned the label “political economy” in favor of economics/production factors. Classes disappear in this school of economics

Volcker Shock

Federal chairman Paul Volker increased interest rates to 20% between 1979-1981. Inflation subsequently declined, but at the price of an economic recession and increasing unemployment, reaching 10% in the early 1980s

Rationality

• The opposite of mysticism, traditionalism, speculation, adventurism, despotism, etc.

• Based on calculation (of perceived profits and losses) rather than instinct, intuition, tradition, or other motivations

Formal rationality

• Defined by Max Weber

• Techniques and institutions that allow for rational economic calculation

• Money (as unit of account), the company form (as separated from the household) and bookkeeping play an important role

• Capitalism is all about profit calculation

Substantive rationality

• Rational value system/related code of conduct

• People act rationally NOT based on rational calculation (as the utilitarians and marginalists argue) but because they believe certain behavior is rational. Social norms, standards, traditions, religion, culture, and law establish values/affect individual behavior

Hedge financing

• Relatively low risk financing strategy where having a return from assets/dividends/other financial streams that originate from financial assets are enough to pay back principle + interest of credit that was taken out to purchase

  • Other definition: Involves engaging in a financial transaction that offsets a long position by taking an additional short position and vice versa

  • Uses a lot of leverage (multiplying trade by taking on debt, borrowing money to maximize returns)

Speculative financing

• Considerable risk

• Investment of capital into assets with considerable risk of short-term price fluctuations and potential for significant gains or losses, often based on market trends and predictions rather than fundamental value.

Ponzi financing

Defined by Minsky as high risk. An investment fraud that pays existing investors with funds collected from new investors. Organizers often promise to invest your money and generate high returns with little or no risk. But in many of these schemes, the fraudsters do not invest the money. Investors believe they’re getting something legitimate because they think they’re getting returns, but in reality they were using money from members to pay existing ones

Business cycle

The finance regime moves from mostly hedge to increasingly speculative to ponzi financing. Speculative and ponzi financing greatly increase the risk of an economic crash 

Pareto optimality 

• Equilibrium based on ordinal values

• A distribution is optimal when it is impossible to make one individual better off without making another one worse off

• 80/20 ratio

• increasing production of one good sacrifices production of another, does not factor in fairness or equality

Friedrich Hayek

From the Austrian school of economics, argues that the market is spontaneous without a collective purpose. The market order doesn’t distribute equally and the theory of supply/demand is fundamentally unsuitable for recessions and inflations. Disagreed with Keynes about full employment, argued that full employment would require governments to keep increasing money supply, which would create inflation. Did not believe that individuals can make rational decisions to solve economic problems due to lack of information.

Milton Friedman

Criticized Keynesianism. Argued that crisis happens due to inadequate monetary policies. Great Depression happened because of a reduction of money supply. Demand-side policies are ineffective and disagreed with the Phillips Curve. Supported Volcker Shock, argued that central banks should focus on steady money supply that guarantees price stability.

Gary Becker

Neoliberal economist that attempted to measure return on human capital. Argued that an investment in an individual’s education and training is similar to business investments in equipment. Returns are due to college education and private rate of return to a college graduate is more than 10%. Private gains outweigh social gains, and because of that, the public shouldn’t need to be paying for it (college graduates make more than those usually paying for their education)

Hyman Minsky

Post-Keynesian economist that aimed to explain economic fluctuation. Instability and uncertainty related to fragile financial structures that occur normally in capitalist economies. Big government is largely responsible for preventing a fragile/unstable financial system. Created the financial instability hypothesis, which claims the economy is unstable because of capitalist finance. Interest rates increase due to a boom, which gives way to crisis in a cycle.

Michael Kalecki

Keynesian economist who argued full employment was unlikely in a capitalist system due to political resistance from big businesses. Big businesses have a general dislike of government interference and spending. Additionally, there is a dislike of social/political changes that result from maintaining full employment. A threat to an economic existence is crucial in maintaining the capitalist discipline in a worker. During an economic crisis, the government is forced into deficit spending in funding major investments to limit unemployment. In a boom, big businesses oppose/cut spending, leads to inflation, following austerity-- the boom leads to a slump (cyclical process)

John Maynard Keynes

Argues that 1) supply does not automatically create demand, 2) interest rate does not = savings/investments, 3) cut in wages does not necessarily increase employment, 4) an economic equilibrium does not guarantee full employment. Full employment depends on expectations (depends on the existing situation). In a recession, the government has to interfere and bolster demand through public works (which end up paying for themselves during severe unemployment)

Joan Robinson

Keynesian economist holding influence in macroeconomics. Argued that wages are not fixed and having too low wages → lack of demand. If they are too high → fall in profits/investments, which leads to inflation. Wage increases with productivity and trade unions, who are necessary as part of capitalism’s mechanism. Strong unions can enforce wages that are too high and the cost of living has to account for wages. 

Alfred Marshall

Founding father of Neoclassical economics that sought to join together influences of cost production/consumer utility. Created the theory of entrepreneurship, which claimed that entrepreneurship is the driving element behind organization. Heavily emphasizes the concept of utility based on how much a customer is willing to pay for a good. Created a supply/demand curve, where the production side diminishes marginal productivity, while the demand side diminishes marginal demand price. A consumer surplus is when the demand price is higher than supply price. Producer surplus is when supply price is higher than demand price.

Vilfredo Pareto

Neoclassical economist, developed Pareto optimality and emphasized that distribution is optimal when it is impossible to make one individual better off without making another one worse off. Comparison of utility/desirability of goods can lead to the development of an index of rankings of said desirability. Created ophelimity to account for desirability, argues that it cannot be measured quantitatively, but it can be ranked in ordinal numbers (ordinal ophelimity/utility)

W.E.B. Dubois

Sociologist that analyzed capitalism during the Reconstruction era in a racial lens characterized by discrimination, exclusion, and exploitation of black people. Asserted that capitalism benefited the slave economy and that black labor was fundamental for the Southern social structure. The nature of the civil war changed slavery with reconstruction. White capitalists were responsible for oppressing/exploiting black labor and pushed them into a color caste. Developed a version of capitalism where the imperialist center used colonies to “dump” commodities. Overall argued that capitalism benefited from racism, since it allowed them to pay lower wages to racially defined groups of workers.

Ellora Derenoncourt (et. al.)

Compared accumulated wealth between white/European Americans and African Americans. Defined wealth as value of assets (real estate, stock, businesses, etc.). Studies showed that at the start of the Civil War, white Americans owned 56x more than Black Americans and after Emancipation, the wealth gap shrank rapidly from 1870-1930. African Americans’ main asset is their houses and the main difference to white Americans is lack of stocks, businesses, fixed income securities.

Max Weber

Argued that in substantial rationality, there was no counterweight from marginal-utility theory. Rationality had to be learned by people to accept it as the greater rationality they should orient their work/living towards. People are not naturally rational, it is learned behavior. Wrote The Protestant Ethic and the Spirit of Capitalism, arguing that modern capitalism did not emerge in Western Europe because of formal rationality like through bookkeeping, but because of substantial rationality. Western capitalism emphasized asceticism, work as calling, hard work as a religious duty, and profit-making as a religious virtue. Man exists for the sake of his business instead of the reverse.

Otto Neurath

Developed Theory of the War Economy, which asserts governments do not rely on markets and instead measure in terms of money. They develop plans that start with raw materials and the end-products needed to win the war. Production of material goods (e.g. weapons) takes precedence over profit considerations. Necessity > highest profits. Measurements should be based on physical units rather than monetary values.

John Bates Clark

Neoclassical economist that developed a theory/natural law to explain the distribution of wealth. Classes become production factors (capitalists, landlords, workers become capital, land, labor). Capital becomes permanent fund, land becomes capital. Rent becomes interest/profit disappears. Capital receives interest/labor wages. Applied law of diminishing returns to production factors (Output per production factor increases then decreases.) Rejected classical political economy, believed that companies optimize production based on marginal productivity of capital/labor.

James Buchanan

Neoliberal economist that argued public choice applied paradigm of the rational, utility-maximizing individual to politics, governance, and government. Public chice focused on elections/democratic decision-making processes and government bureaucracies. Voters are ill informed and care little about issues that don’t directly affect them and are receptive to special interest policies. Politicians only care about being re-elected so they focus on promoting special interest policies instead of general interests. Special interest coalitions push through policies that don’t reflect the general interest/promote public welfare. Ultimately created a solution of making important issues constitutionally matter that need a bast majority to be changed while smaller issues are left to majority rule. Argued that bureaucracies are not neutral and are growing to be increasingly more expensive/inefficient. Advocated for reducing government, market expansion.

Friedrich Hayek associated words

Neoliberalism, spontaneous order, social justice, market order

Milton Friedman associated words

Neoliberal economics, monetarism, steady money supply, price stability

Gary Becker associated words

Neoliberalism, human capital, education, private vs. social gain

Michael Kalecki associated words

Marxian, Keynesian, full employment, government resistance

John Maynard Keynes associated words

Economic leaks, Keynesian Revolution, employment, full employment, government spending

Joan Robinson Associated Words

Keynesian economics, accumulation, full employment, wages, trade unions

Vilfredo Pareto associated words

Pareto optimality, equilibrium, index rankings, ophelimity

W.E.B. Dubois associated words

Slave economy, color caste, imperialism, racial capitalism, Black Marxism

Max Weber associated words

Rationalism, formal rationality, substantive rationality, sociology, protestantism

Otto Neurath associated words

Neoclassical, War Economy, infographic (isotypes), in natura calculation, measurements

John Bates Clark associated words

Neoclassical, distribution of wealth, law of diminishing returns

James Buchanan associated words

Neoliberalism, public choice, politicians, government reduction, market expansion, voters

Philip’s Curve

An economic theory that inflation and unemployment have a stable and inverse relationship. Developed by William Phillips, it claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.

Keynesian economists

Joan Robinson, Michael Kalecki, Hyman Minsky

Neoliberal economists

Friedrich Hayek, Milton Friedman, Gary Becker, James M. Buchanan

Neoclassical economists

Alfred Marshall, John Bates Clark, Vilfredo Pareto