WOB Midterm 1 Study Guide

What problem is F.A. Hayek trying to solve?

How to use scarce resources efficiently to satisfy people's different wants and needs.

What three conditions would be needed for a rational economic order?

Complete relevant information, knowledge of everyone's preferences, and complete knowledge of available resources and methods.

Why does Hayek believe centralized economic planning is impossible?

No single person or group can know all relevant information, preferences, and available resources.

What is expert or scientific knowledge?

Organized knowledge held by experts in particular fields.

What is circumstantial knowledge?

Individual, decentralized knowledge of specific circumstances of time and place that others may not possess.

Why is circumstantial knowledge important to a market economy?

It allows individuals to make decisions using specific information that no central planner could fully possess.

What does Hayek mean by "no single mind"?

Knowledge is dispersed among individuals and cannot be collected completely by one person or organization.

What is a market economy?

An economic system in which individuals and firms control resources and coordinate activities through prices.

What is decentralized planning?

Individuals and firms independently make economic decisions rather than following one central plan.

What is a decentralized spontaneous order?

An economic order that emerges from individuals' independent decisions without centralized direction.

What is the price system?

A system that communicates information about scarcity and coordinates economic activity through prices.

How do prices communicate information?

Price changes signal changes in scarcity and demand, allowing people to adjust without knowing everything about the economy.

How do prices provide incentives?

They encourage consumers to conserve scarce goods and producers to supply more or innovate when prices rise.

What are the two problems the price system solves, according to Hayek?

The information problem and the incentive problem.

Why is centralized planning difficult?

Planners must know the value of resources in different uses, consumer preferences, substitutes, and how to motivate people to provide accurate information.

What is arbitrage?

Buying an asset in one market and selling it in another to profit from price differences.

Why does Hayek accept arbitrage?

It uses special knowledge of changing circumstances and helps coordinate markets.

How does a concert-ticket resale market illustrate scarcity and prices?

Limited seats and high demand can lead resale prices to signal scarcity and redirect tickets toward buyers willing to pay more.

What is the role of property rights?

To allocate scarce resources by establishing who can use, benefit from, and exchange them.

What are the three key attributes of private property rights?

The right to choose how a resource is used, receive its services or benefits, and exchange it on mutually agreeable terms.

How can property rights replace violence with peaceful competition?

Well-defined and protected rights allow people to compete through voluntary exchange rather than force.

According to Bethell, how can private property promote peace, prosperity, freedom, and justice?

It encourages peaceful competition, work and investment, independence, and consistent rules for exchange.

What is Locke's view of acquiring property?

People have a natural right to acquire property, and labor can make something privately owned.

What is Locke's view of government?

Government exists to protect rights, including the right to acquire property and use it productively.

Why does Locke believe a social contract is needed?

Money does not spoil like goods do, so property accumulation can exceed natural limits and requires agreed rules and protection.

Did Locke necessarily view scarcity as humanity's default condition?

No. The notes state that Locke did not necessarily see scarcity as the default condition of humanity.

According to Oxenberg, are natural property rights absolute?

No. Natural rights to property are neither absolute nor unlimited.

What is the contractarian perspective on property rights?

Property rights are justified by a social contract among community members under fair conditions.

How do capitalism and socialism differ in property rights and allocation?

Capitalism emphasizes private property and decentralized prices; socialism emphasizes public property and central planning.

What is artificial scarcity according to Robin Cox?

The idea that scarcity can be created or maintained by capitalism rather than simply reflecting genuine limits on resources.

According to Cox, what do markets measure, and what does the price system communicate?

Markets measure profit, while the price system communicates wants rather than necessarily reflecting needs.

What are artificial needs according to Cox?

Wants beyond basic needs that people are encouraged to believe they need.

What is socially useless production according to Cox?

Activity that does not satisfy real human needs but instead serves the needs of the economic system.

What is surplus value according to Cox?

The difference between the wealth workers create and what they are paid; it is a source of capitalist profit.

How does Cox interpret private property?

He connects it to deprivation and the human desire for self-worth, identity, power, freedom, and social status.

What is allocative efficiency?

When resources are allocated to the uses that people value most.

Why can rising prices improve allocative efficiency?

Higher prices signal scarcity, encourage consumers to reconsider purchases, and incentivize producers to increase supply.

What is price gouging according to the D.C. example in the notes?

A price increase of more than 10% during a state of emergency.

Does the United States have a general federal anti-gouging law, according to the notes?

No. The notes explain that anti-gouging laws can operate at state or local levels.

What is Cowen's argument about price gouging during disasters?

Higher prices can help attract supplies, but they may also leave critical resources concentrated among wealthier buyers.

What is Thaler's argument about anti-gouging norms?

Consumers view price increases as unfair, but keeping prices low during shortages can cause goods to run out.

What is Munger's argument about price-gouging laws?

Prices should be allowed to rise to reflect scarcity, encouraging consumers to buy less and producers to supply more.

What is the main debate in Module 1?

Whether markets and strong property rights allocate scarce resources best, or whether scarcity and market outcomes require greater social or government intervention.

What is equality?

An objective measure of sameness in status, quantity, or value.

What is fairness?

The characteristic of being just and free from bias; it is subjective because people disagree about what is fair.

What is communal reciprocity according to G.A. Cohen?

People serve one another out of commitment to fellow human beings and a desire for mutual well-being.

What is market reciprocity according to Cohen?

People provide goods or services to obtain something they want or avoid something they fear; exchange is motivated largely by greed or fear.

What is bourgeois equality of opportunity?

Removing socially created status restrictions, such as discrimination based on race, gender, or caste.

What are examples of bourgeois equality of opportunity?

The Civil Rights Act and the 19th Amendment.

What is left-liberal equality of opportunity?

Removing formal discrimination and adjusting for social circumstances so outcomes depend on native talent and choices rather than social background.

What is social equality of opportunity?

Correcting for unchosen disadvantages, including social disadvantages and natural differences in ability.

How does social equality of opportunity go beyond left-liberal equality of opportunity?

It also considers unchosen natural differences, such as disabilities.

What is option luck according to Cohen?

The results of calculated gambles and risk-taking choices.

What is luck?

Random events or circumstances outside an individual's control or choice.

What are preferences?

An individual's underlying desires, tastes, and choices about how to live.

Why does Cohen criticize option luck in a market society?

He argues that market gambling can create unfair inequalities and erode the community needed for socialism.

What are Cohen's concerns about inequality and community?

Insurmountable inequalities can weaken social solidarity and make community difficult to sustain.

What does Cohen argue about market motivations?

Markets recruit self-interested motives, such as greed and fear, to produce desirable ends, but they can also produce inequality.

What is Milton Friedman's principle of payment in accordance with product?

People should be paid according to their productivity or contribution; different jobs can justifiably receive different pay.

Why does Friedman oppose equality of income as a social goal?

He argues that market-based differences in pay help allocate resources efficiently without coercion.

What kinds of differences does Friedman believe can justify inequality?

Differences in ability, inheritance, preferences, job conditions, and willingness to take risks.

What are equalizing differences in Friedman's argument?

Pay differences that compensate people for difficult, dangerous, or undesirable job conditions.

Why does Friedman believe preferences can lead to acceptable inequality?

People choose different jobs and conditions, and higher pay for unpleasant work can benefit society.

Why does Friedman believe luck can lead to acceptable inequality?

Risk-taking can produce unequal gains, but these potential gains encourage people to take risks and innovate.

Why does Friedman oppose excessive redistribution?

He believes it can be coercive and reduce incentives to work hard, take risks, and innovate.

How can government reduce inequality according to Friedman?

By widening educational opportunities and removing special privileges, monopolies, tariffs, and laws that favor particular groups.

What is Cohen's view of unequal wages?

Unequal wages can be unfair when people benefit disproportionately from morally arbitrary talents or circumstances.

What is Friedman's view of unequal wages?

Unequal wages are often fair and necessary because they reflect productivity and incentivize innovation.

How do Cohen and Friedman differ on redistribution?

Cohen supports redistribution to reduce unjust inequality; Friedman warns that excessive redistribution restricts freedom and weakens incentives.

What is Albert Einstein's central criticism of capitalism?

It rewards competition and selfishness, weakens social solidarity, and can undermine political freedom while creating unemployment and poverty.

What solution does Einstein propose?

A socialist economy with jobs for those willing to work and an educational system oriented toward social goals.

What are institutions?

Legal systems, political structures, economic systems, and other rules that shape a country's business environment.

What is a legal system?

The system through which laws are created and enforced.

What are three areas of law that affect business?

Property rights, contract law, and anti-corruption policies.

What are property rights in a legal system?

Legal rights to use an economic resource and derive benefits from it.

What is contract law?

Laws governing legally enforceable agreements between parties.

What are anti-corruption policies?

Laws that oppose, discourage, or punish abuse of entrusted power for private gain.

What is democracy?

A political system in which citizens elect political representatives.

What is totalitarianism?

A system in which one person or party has absolute political control.

What is a market economy?

An economy in which factors of production are privately owned and economic activity is coordinated through markets.

What is a command economy?

An economy in which the government centrally plans and controls factors of production.

What is capitalism?

An economic system in which the means of production are privately owned and markets coordinate activity.

What is socialism?

An economic system in which the means of production are socially or collectively owned.

What is communism according to the notes?

A political theory using an economic system in which the means of production are state-owned, typically associated in the notes with authoritarian government.

What is democratic socialism according to the notes?

A political theory supporting substantial state-provided services within a democracy.

What is social democracy?

A political theory combining a market economy with extensive state-provided services and protections, as in the Nordic model.

How does socialism differ from democratic socialism in the notes?

Socialism involves government control of property, markets, and basic services; democratic socialism supports basic needs and services without government controlling the entire economy.

What is Tyler Cowen's argument for high CEO pay?

CEO pay can be justified by extensive experience, education, job demands, rare skills, risk, and alternative high-paying opportunities.

What is Holmberg and Schmitt's argument against high CEO pay?

CEOs may be overpaid, boards may not discipline them effectively, and excessive pay can encourage risky short-term decisions and divert resources from other uses.

How does the market-power argument defend CEO pay?

CEO compensation can act as a market price signal for rare skills and reflect risk and responsibility.

How does Cohen's argument criticize high CEO pay?

Extreme wage differences can erode community and create excessive inequality.

How does Einstein's argument criticize high CEO pay?

Excessive rewards can encourage risky short-term behavior and impose costs on employees and society.

What is shareholder primacy?

The view that executives primarily serve the owners of a business and generally seek to maximize profits for shareholders.

What is stakeholder primacy?

The view that companies should consider employees, customers, suppliers, communities, and shareholders when making decisions.

What are examples of competing uses for money spent on CEO compensation?

Increasing shareholder distributions, raising worker wages, or reinvesting in the business.

What are the stated purposes of a corporation in the notes?

Deliver customer value, invest in employees, treat suppliers fairly and ethically, support communities, and create long-term shareholder value.

How does socialism define fairness in the notes?

Through equal treatment, with goals of community and well-being.

How does capitalism define fairness in the notes?

Through payment in accordance with product, with goals of freedom and economic growth.

What was feudalism?

A largely rural and agricultural system in which land-owning nobles controlled resources and peasants worked the land and paid rent or taxes.

What was mercantilism?

An economic system that treated global wealth as finite and sought to maximize exports, limit imports, and protect domestic producers.