Unit 2 Economic Philosophers

Honors Economics

Adam Smith and Wealth of Nations

Believed in free markets and the “invisible hand” guiding the economy. People acting in their own self-interest unintentionally help the economy.

Specialization

Individuals focus on specific tasks to increase efficiency and output. For example, a butcher only cuts meat, a baker only bakes, etc.

Rational Self-Interest

People make economic decisions that benefit themselves, which leads to mutual benefit in a free market.

Karl Marx and Das Kapital

Criticized capitalism, believing it exploited workers and created inequality.

Labor theory of value

The value of a product comes from the amount of labor required to make it.

Surplus value

Capitalists profit by paying workers less than the value they produce—this difference is the surplus.

Asymmetric information

When one party (usually the seller) has more info than the other. Can lead to unfair or harmful transactions. Government regulations or transparency rules can help.

Business cycles

Natural ups and downs in the economy (expansions and recessions). Governments can help stabilize through fiscal or monetary policy.

Externalities (positive and negative)

Costs or benefits that affect others outside the transaction. Pollution is a negative externality; vaccines are a positive one. Governments may tax, subsidize, or regulate.

Inequity

Unfairness, quality of oppurtunity

Public goods

Goods like national defense or streetlights that aren’t profitable for private firms. Government usually provides these.

Lack of competition

Monopolies or oligopolies reduce consumer choice and raise prices. Antitrust laws or regulation can fix this.

Pure or perfect competition

Many sellers, identical products, no control over price. (Not a market failure.)

Monopolistic competition

Many sellers with similar but not identical products. Some price control exists.

Oligopoly

Few large firms dominate. May lead to less competition.

Collusion

Firms secretly agree to raise prices or limit production—illegal in many countries.

Monopoly

One firm dominates the market with no competition. Can lead to high prices and limited choices.

John Kenneth Galbraith “Uncle Kenny”

Believed large corporations have social responsibilities beyond profit. Criticized inequality and lack of government control.

Position and Critiques (Galbraith)

Argued capitalism led to imbalance and power held by corporations.

Role of Large Corporations and “Social Responsibility”

Firms should contribute to social good, not just profits.

Milton Friedman “Uncle Milt”

Free-market advocate. Believed the government's role should be limited.

Position and Critiques (Friedman)

Criticized too much government control. Advocated deregulation and privatization.

Creative Destruction and the Business Cycle

Old industries die, new ones grow. Recession is natural and necessary for progress.

Economic efficiency

Using resources to maximize output and minimize waste.

Market failure and government failure

Market failure = when the free market doesn’t work well. Government failure = when government intervention makes things worse.

Public sector v. private sector

Public = government-run (schools, roads). Private = business-run (stores, companies).

Circular Flow of Economic Activity (including government)

Shows how money, resources, and goods/services move between households, businesses, and government. Government collects taxes and provides services.

Liberal v. conservative economic outlooks

Liberal: more government involvement and regulation. Conservative: less government involvement, belief in free markets.

Supply side economics

Lower taxes and less regulation will increase production and grow the economy.

Government’s role in the economy

Provide public goods, correct market failures, regulate businesses, collect taxes, and manage monetary/fiscal policy.

Conspicous Consumption

Complaint by Galbrieth, corporations will create stuff and advertise it to us and we are forced to buy these new items that are unnessary.