ECON1401 Week 3: What Should the State Do?

Comprehensive set of 50 vocabulary flashcards covering ECON1401 Week 3 lecture topics on the direction of innovation, the welfare state, political philosophy, and state implementation failures.

Direction of Innovation (Lesson from Luddites)

The concept that the direction of innovation matters because labour-saving innovation generates unequal gains, leaving specific groups devastated.

Power Loom and Handloom Weavers

An 1800s British technology that made textile production vastly more productive, while skilled handloom weavers saw real wages fall \text{\approx 60\%} and their job nearly vanished by 1850.

Luddites

Displaced handloom weavers in 1800s Britain who, lacking democracy and unions to voice grievances, turned to violence and smashed machines.

Institutions

The laws and 'rules of the game' that determine what individuals can and cannot do in a society, shaping whether grievances turn into violence or peaceful change.

Task-Based View of Jobs

A framework viewing a job as a bundle of individual tasks rather than a single label, where technology automates some tasks and enhances others.

Job Labels

Titles (e.g., 'professor') that stay the same for decades while the underlying bundle of tasks changes completely.

AI Diffusion Speed and Scope

The high speed and broad scope at which modern AI spreads across sectors, differing from the slow S-curve of historical technologies like electricity.

Power and Progress Thesis (Acemoglu & Johnson, 2023)

The core thesis that innovation does not guarantee shared prosperity; whoever controls capital directs innovation toward their own benefit, which can reduce growth or cut labour's share.

Determinant of Innovation Direction

Who controls the key financial resources—mainly big business owners and the government—whose incentives decide what gets invented.

Enshittification (Doctorow, 2023)

The decline in platform quality after market power is secured, shifting value from users to advertisers, and extracting rents once users are locked in.

Network Effects

The phenomenon where a product becomes more valuable as more people use it, locking users in and killing competitive pressure.

Causes of Weak Competition

Three market factors that cause weak competition: large fixed costs of entry, network effects, and regulatory capture.

Welfare Impact of the Early Industrial Revolution

Historical evidence showing that the first 1–2 generations of the Industrial Revolution experienced falling heights, malnutrition, and rising disease.

Policy Intervention (Insurance)

A state intervention role focused on insuring workers during structural change through income support, unemployment insurance, retraining, and wage subsidies.

Representation (State Role)

A state intervention role focused on ensuring workers and citizens have a voice in adjustment decisions through democracy and representation.

Coordination (State Role)

A state intervention role focused on pooling tax resources to provide public goods that private markets under-provide, such as roads, railways, and bridges.

Direction (State Role)

A state intervention role using public funding to steer which direction of innovation is encouraged and invented.

Speenhamland / Poor Laws (1795–1834)

An early wage-supplement system in southern English parishes designed to cushion adjustment during structural change, which suffered from local financing, incentive distortion, and fragmentation.

Incentive Distortion Problem

The issue where generous support relative to available jobs weakens work incentives; addressed in modern systems by tapering benefits over time and requiring job applications.

Beveridge Welfare State

The post-WW2 UK shift from fragmented local relief to broad national risk-pooling to protect citizens against systemic social risks.

Five 'Giant Evils' (Beveridge Report)

The five core societal problems targeted by the Beveridge welfare state: want, disease, ignorance, squalor, and idleness.

Beveridge Institutions

Key institutions built in post-WW2 UK, including Family Allowances (1945), National Insurance (1946), the NHS (1948), and National Assistance (1948).

Public Health as Growth Policy

The principle that clean water, clean air, and sewage systems act as growth policy because sick workers cannot work and health shocks lower human-capital accumulation.

Information Aggregation (Democracy)

The democratic mechanism where voting pools dispersed local knowledge into decisions, solving a central weakness of autocracy where central rulers lack information.

Legitimacy (Democracy)

The political principle where decisions made collectively (one person, one vote) are accepted even by those who disagree, reducing backlash and unrest.

Spending Shift in Broadened Democracies

The reallocation of government spending away from elite and military priorities toward ordinary voters' needs as suffrage expands.

Arguments Against Pure Democracy

Critiques noting that democratic decision-making can be slow and indecisive, susceptible to populism, and unsuitable for choices requiring secrecy or deep expertise.

Coordination Problem

A situation where an infrastructure project (like the Harbour Bridge) benefits everyone but is too expensive for any single person to build, requiring the state to pool tax funds.

Externality

An action creating costs for third parties that the actor does not pay for (e.g., pollution), which can be fixed by a proportional tax that internalizes the damage.

Property Rights and Contract Enforcement

The state function guaranteeing contracts through its monopoly on violence (police, courts, jails), without which trade and economic growth are virtually impossible.

Complementarity (Public + Private)

The concept that long-run growth requires BOTH private invention/investment AND state support (representation, public goods, insurance, property rights).

Fairness (Policy Goal)

The policy objective focused on social redistribution and reducing inequality, such as through unemployment insurance and social security.

Efficiency (Policy Goal)

The policy objective focused on maximizing total economic growth and welfare by subsidizing or directing innovation usefully.

Freedom (Policy Goal)

The policy objective focused on protecting individual rights, which state interventions like taxation can impinge upon by taking earnings.

Policy Trade-Off Triad

The inherent conflict among fairness, efficiency, and freedom, as fair policies usually require taxes that create deadweight loss and restrict individual freedom.

Deadweight Loss of Taxation

The efficiency cost of a tax that distorts behavior (e.g., causing people to work less), resulting in a loss of economic value beyond the money transferred.

John Rawls (A Theory of Justice, 1971)

Philosopher who prioritizes FAIRNESS, arguing that society's structure should be designed from behind a 'veil of ignorance'.

Veil of Ignorance

A thought experiment requiring individuals to design society without knowing their place in it (rich/poor, male/female), leading to protection for the worst-off.

Maximin Principle

Rawlsian decision rule stating that society should maximize the position of the worst-off person, permitting inequalities only if they benefit the least advantaged.

Utilitarianism (Bentham, J.S. Mill)

Philosophical tradition prioritizing EFFICIENCY by striving to maximize total welfare (well-being) summed across all individuals.

Diminishing Returns to Income

The principle that an extra $1 gives more utility to a poor person than a rich person, providing a utilitarian rationale for wealth redistribution.

Libertarianism (Robert Nozick, 1974)

Philosophical perspective in Anarchy, State, and Utopia prioritizing FREEDOM, maintaining that taxing justly-acquired wealth is unjust.

Nozick's Three Conditions

The criteria determining that taxation is unjust ONLY IF there was (1) just acquisition, (2) just transfer, and (3) rectification of past injustice.

Hayek's Information Argument

The insight that free markets are superior to central planners at aggregating dispersed economic information, preventing state knowledge failure.

Voter-Politician Misalignment

An implementation failure where self-interested politicians prioritize re-election via visible local benefits while neglecting non-voting future generations.

Pork-Barrelling

The practice of politicians directing public funds to narrow local projects to win votes rather than maximizing overall national efficiency.

Rent Seeking (Niskanen)

The tendency of bureaucracies to leverage information advantages to expand their budget, size, and prestige, creating inefficiency without explicit corruption.

Bureaucratic Capture

The process by which a regulatory agency is influenced by an interest group, shifting policy to benefit that group instead of intended beneficiaries.

Corruption (Definition)

The sale by a government official of government property or authority for personal monetary gain (e.g., bribes for passports, visas, or permits).

Shleifer & Vishny (1993) Corruption Model

A framework contrasting efficient corruption (a single coordinated agency where one bribe secures service) with inefficient corruption (multiple uncoordinated agencies creating uncertainty that collapses production).