Economics

This is the homepage for the Economics category, a subcategory of Thought.

Some general resources:

• Crash Course Economics YT Playlist
• Economics Explained YT Playlist (created by Anna Csiki-Fejer)
• SparkNotes Economics
• Khan Academy Microeconomics
• Khan Academy Macroeconomics

Kenneth Arrow

An American welfare economist that investigated the problems caused by asymmetric information in markets

Arrow replaced differential calculus with convex set methods in his proofs of the first and second welfare theorems.

In an article outlining Arrow’s “learning by doing” growth model, Arrow cited improved efficiency of airframe production and the Horndal iron works.

Arrow-Pratt securities are state-contingent claims which pay out a unit of commodity at a given date if state s is realized. Arrow-Pratt securities are used in analysis of security markets. They helped define measures of risk aversion.

Arrow analyzed land development under uncertainty with Claude Henry and Anthony Fisher.

Robert Lind’s work with Arrow proved that under certain conditions, risky public projects should be evaluated solely on their expected net benefit since the social cost of the risk tends to zero.

Along with Chenery, Arrow introduced a special case production function that applies when the substitution effect is continually elastic.

Social Choice and Individual Values

• Arrow Impossibility Theorem
  • the criteria of universal admissibility, unanimity, non-dictatorship, and irrelevance of independent alternatives cannot be satisfied by a rank-order voting system
  • an intransitive social preference could not be derived from a set of transitive preferences
  • implies that a preference ranking cannot be perfectly converted into a ranked voting system
  • showed the difficulty of a democratic social welfare function
  • extended by the Duggan-Schwartz theorem to a set of results
  • generalized by the Gibbard-Satterthwaite theorem

The Limits of Organization

• with Gerard Debreu
• proved the existence of a competitive equilibrium, the Arrow-Debreu economy, which is crucial for General Equilibrium Theory (GET)
• applied a fixed point theorem to prove that, if all agents have strictly convex preferences and endowments are strictly positive, there exists a competitive equilibrium
• also with Lionel McKenzie?

“Uncertainty and the Welfare Economics of Medical Care”

• argued lack of information and moral hazard made health care especially prone to market failure
• stated that the economic complexities of medical care can be explained as “adaptations” to ucertainty in disease prevalence and efficacy of treatment
• concluded that “the laissez-faire solution for medicin is intolerable”

Essays in the Theory of Risk-Bearing

• describes the fundamental paradox that exists in the determination of demand for information

Robert Barro

Revived Ricardian equivalence, the idea that a change in taxes does not affect consumer behavior

Peter Boettke

In a recent book on Hayek, Boettke emphasizes the role of the division of knowledge as part of his attempt to justify a cosmopolitan liberalism for the 21st century.

Guido Calabresi

Wrote an article setting forth similar thoughts about liability rules in automobile accidents. It was published a few weeks after Coase’s “The Problem Illustrated Anew”

Ronald Coase

A Nobel-Prize-winning Chicago-school economist. Coase and fellow professor James Buchanan were allegedly forced out of UVA because of their conservative politics.

“The Problem of Social Cost”

• first outlined the Coase Theorem
  • given no transaction costs, bargaining will efficiently deal with the problem of externalities
  • allows initial allocation of property rights to be ignored when arriving at mutually beneficial soultions
  • the efficiency of a company is independent of whether the party who created those externalities is liable for their costs
  • often exemplified by considering a train whose sparks damage crops in a farm
  • contradicted Pigou’s theory about the role of the government in the economy
  • posited that agents can internalize externalities through negotiation
  • in the absence of transaction costs, any distribution of property rights leads to optimal resourec allocation
  • named by George Stigler
• used an example from Sturges v. Bridgman
• noted that a cattle rancher who damages a farmer’s land will privately work out the most economically efficient recompense in the absence of transaction costs

“The Problem Illustrated Anew”

• redevelops the Coase Theorem
• also used an example from Struges v. Bridgman in which a confectioner’s mortars and pestles caused vibrations that prevented a doctor from using a stethoscope to examine patients
  • to illustrate how tort damages should be viewed as a bilateral problem
• published a few weeks before a Guido Calabresi article setting forth similar thoughts about liability rules in automobile accidents

“The Nature of the Firm”

• develops the Coase conjecture
  • monopoly cannot sell above marginal cost since consumers will usually wait for the lowest prices
• discussed the interplay between monopolies which lower prices of durable goods after selling at the monopoly price and consumers who know that the lower price is coming
• in a monopoly of durable goods, the seller will still have to lower their price to sell their product
• the formation of the firm occurred to reduce transaction costs

“The Federal Communications Commission”

• used Frank Stanton’s testimony to argue that the Supreme Court should allow the FCC to auction TV and radio bandwidth
• compared airwave bandwith to Rembrandts

“The Lighthouse in Economics”

• investigated Trinity House’s attack on the use of the lighthouse as an example of a public good

Robert Cooter

The “Cost of” Ronald Coase

• examines how one of Coase’s papers is misleading

Robert Ellickson

Wrote a paper about Ronald Coase “and cattle”, analyzing a famous example of farmers and ranchers Coase used in one paper. It concludes that the way tresspass disputes werer resolved manifested as social norms

Friedrich Engels

Co-author of the Communist Manifesto. Supported Marx through the profits from his industrial factory.

Engels analogized the phase transitions of water to explicate his law of “transition from quantity to quality” as a social evolutionary mechanism.

Engels used notes of a colleague on Lewis Henry Morgan’s Ancient Society to describe a four-stage development of the family, ending with “monogamous family”.

Engels labeled hunting and gathering as the last phase of political innocence.

The Communist Manifesto (see Karl Marx)

The Condition of the Working Class in England

• inspired by the high morality rates from disease in Liverpool and Manchester

Anti-Duhring

• expanded “Prussian Vodka in the German Reichstag” into a critique of Duhring’s “revolution in science”

“Prussian Vodka in the German Reichstag”

• polemical attack

Dialectics of Nature

• unfinished
• developed ideas about science first articulated in “Prussian Vodka in the German Reichstag”

“The Part Played by Labor in the Transition from Ape to Man”

• speculated that the human brain evolved in conjunction with the transtion from apes using their feet and hands for different purposes in an oft-excerpted section

Milton Friedman

One of the most influential economists of the last century. Friedman was a conservative neoliberal monetarist economist and a student of the Chicago School of economics.

After Richard Nixon took the dollar off the gold standard, he repeated Friedman’s earlier remark that “we are all Keynesians now”.

Friedman hosted the public Free to Choose TV series to respond to another thinker’s The Age of Uncertainty series.

Friedman coined the term “helicopter drop” for a policy response suitable to times of crisis.

Friedman taught the “Chicago Boys”, Chilean students of the Chicago school who implemented Friedman’s ideas with Pinochet in Chile. Protests broke out in 1976 when Friedman’s Nobel Prize was awarded due to the “Chicago Boys”’ work. Friedman coined the term of the resulting “miracle”.

During a congressional hearing, Friedman stated that multi-price auctions cost the treasury money and favor the dealer community which lead him advocating for uniforce price auctions. This viewpoint was largely invalidated by empirical studies conducted in the 1990s.

Friedman advocated for laissez-faire government policy.

Friedman criticized the Phillips Curve with Edmund Phelps because it did account for the natural rate of unemployment. See Edmund Phelps for more about Friedman and Phelps’ theory on the natural rate of unemployment.

Friedman’s “doctrine” is the argument that as long as companies remain within the rules, they should only work to maximise profits of shareholders.

In a paper with Leonard J. Savage, Friedman used Morgenstern and Von Neumann’s analysis of consumer units participating in both gambling and insurance to deevelop restrictions on an expected-value utility function, an early explanation of the increased risk-taking and increased wealth in the Friedman-Savage utility function. The curve of an individual’s utility function differs based on their wealth.

Friedman’s “twist” argument uses the analogy of asking an expert billiards player about their shots to argue that economic theories shouldn’t be tested by the “realism” of their assumptions.

In one paper, Friedman used the example of daylight savings time to argue for flexible exchange rates.

With Simon Kuznets, Friedman looked at the income levels of professionals like lawyers and dentists and concluded that the presence of licensing by the American Medical Association helped artifically boost the salaries of doctors.

Friedman criticized the Bretton Woods system, arguing that a floating exchange rate would be more effective.

Friedman’s non-parametric test involves ranking each item by subject and tallying the columns.

Friedman argued that economic freedom is a necessary step for political freedom.

Capitalism and Freedom

• 1962
• advanced some of his most notable these
• capitalism is a central aspect of American’s liberal society
• advocates for free market reforms to various aspects of society
• proposed an end to mandatory licensing for doctors
• proposed a flat negative income tax as an alternative to welfare payments
• proposed school vouchers

A Monetary History of the United States, 1867-1960

• written with fellow economist Anna Schwartz
• claimed the Great Depression resulted from the Federal Reserve’s monetary policies
• advocated for monetarism, a revised quantity theory of money, which states that the government can ensure economic stability by regulating the amount of money in circulation
• argued for the Friedman Rule
  • monetary policy
  • would set nominal interest rates to zero
  • the money supply should be increased annually at a fixed “k-perecent”

Free to Choose

• written with his wife Rose
• chapter “The Cure for Inflation”

A Theory of the Consumption Function

• developed the permanent income hypothesis
  • followed from his criticism of the Keynesian consumption function
  • Individuals spend money based on their estimate of their expected long-term average income
  • in contrast to Keynesian theory, which views consumption as dependent on after-tax income
  • if true, temporary/short-term increases in an individual’s income will not substantially change their spending habits

Essays in Positive Economics

• “The Methodology of Positive Economics”
  • proposed that the long-run Phillips curve is vertical at the natural rate of unemployment
  • states that the science of economics should be free of value judgements
  • used the example of cigarette firms’ response to price controls in WWII as a rare example of imperfect competition
• states that economic theories should not be judged by their tautological completeness but by their simplicity and fruitfulness

Bright Promises, Dismal Performance

• collection of newspaper columns by Friedman

For more information, see…

• this Qwiz5 article on Friedman
• this Slate article on Chile’s implementation of Friedman’s ideas
• this Daily Signal article on Friedman’s proposal for the military
• this Investopedia article on natural unemployment
• this Marginal Revolution University video on monetarism

John Kenneth Galbraith

He was a Canadian-American liberal economist. He was JFK’s ambassador to India.

Galbraith emphasized public service and limitations of the marketplace.

According to Galbraith, the belief that financial crises are normal occurrences is part of the “central tradition” of economics.

According to Galbraith, the protective purpose of the firm is survival, whereas the affirmative purpose of a firm is corporate growth.

In one work, Galbraith wrote about the tension between “managerialism” and “socialism”.

The Affluent Society

• originally titled Why the Poor are Poor
• warns of a widening income disparity within post-WWII America
• predicted that post-WWII consumerism would lead to increased private sector wealth compared to the public sector
• coined the phrase “conventional wisdom” for “ideas which are esteemed at any time for their acceptability”
• in Galbraith’s “revised sequence”, producers create consumers’ wants so that they buy certain goods
  • “dependence effect”
• advocated for a large increase in public works spending
• argued that previous economic theories explained economies based on poverty
• critiqued the use of GDP to measure prosperity
• advocated investment in public schools and the “New Clafss” in order to create an affluent society

The New Industrial State

• argued that advertising and vertical integration by large corporations has replaced supply and demand and made perfect competition impossible
• argued that shareholders are losing control of companies to upper-level “technostructures” that do not seek to maximize profit
• sections “The Technostructure” and “A Digression on Socialism”
• the US is not a fully free-enterprise based economy

American Capitalism

• described the role of “countervailing power” in allowing markets to find optimal solutions
• argued that organized labor and the federal government will replace free market competition as the primary check on corporate power

The Great Crash, 1929

• described how leveraged banks prevented investment by their subsidiaries, exacerbating the Great Depression

Henry George

A Progressive-Era economist.

George’s theories were the basis for Lizzie Magie’s “The Landlord’s Game”, which inspired “Monopoly”.

Progress and Poverty

• best-selling
• argued for the imposition of a single tax on land values

Protection or Free Trade

• contrasted “revenue reform” with “true free trade”
• the first book to be read into the Congressional Record in its entirety

Friedrich von Hayek

Austrian-born Austrian-School economist. He won the 1974 Nobel prize in Economics along with Gunnar Myrdal, primarily for his thesis tying central planning to social stagnation.

Hayek criticized “rationalist constructivism”, the belief that institutions must be “deliberately designed” for human purposes.

Hayek argued against positivism by arguing that a purely quantitative method is unsatisfactory for social science because we use limited numerical information to understand primarily group human action.

Hayek proposed that a “spontaneous order” he termed “catallaxy” developed through the adjustment of many individual economies to the world market.

In a letter to The Times, Hayek criticized the 1977 Lib-Lib Pact by stating “a party that keeps a socialist government in power has lost all title to the name ‘Liberal’”.

Hayek called himself an “unrepentant old Whig”.

The Road to Serfdom

• attacks central planning
• argued that Nazism and Soviet totalitarianism have their origins in socialism
• argues that every restrictive action a government takes reduces freedom
• “Two Kinds of Security” chapter
  • distinguished between minimum sustenance and standard of life
• popularized by a twenty-page version in Reader’s Digest that condensed the argument that central planning inevitably leads to totalitarian forms of government

The Fatal Conceit: The Errors of Socialism

• how the existence of spontaneous or extended orders shows that human-generated policy cannot be the most efficient
• “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”

“On the Use of Knowledge in Society”

• posited a “division of knowledge”
• noted that price is a mechanism of communicating information
• criticizes Oskar Lange’s ideas by claiming that resource coordination in a state of “dispersed knowledge” can only be achieved by the free market
• closes by disputing Joseph Schumpeter’s claim that consumers “ipso facto… evaluate the means of production” of goods

The Constitution of Freedom

• appendix “Why I am Not a Conservative”

Law, Legislation, and Liberty

• distinguished betwen “taxis” and “cosmos”

The Sensory Order

• human psychology favors “spontaneous orders”

Price and Production

• argued that increases in the money supply would cause “malinvestment” as businessmen receive distorted price signals

John Hicks

He invented the IS-LM model to create a mathematical model of Keynes’ macroeconomic ideas.

John Maynard Keynes

A liberal economist who believed that government fiscal policy was the key to a strong economy.

The Keynesian Cross is a diagram that shows aggregate income plotted across total spending, and identifies an equilibrium point between income and spending where the lines for spending and supply cross.

The General Theory of Employment, Interest, and Money

• judged most of classical economic analysis to be a special case, gave a general theory
• advocated for deficit spending to increase aggregate demand during prolonged recessions like the Great Depression
  • inspired FDR and modern monetary policy
• argued against Say’s Law (supply creates demand)
• it is demand that powers the economy
• only through increasing investment and consumption could you create higher employment or income
• because of price stickiness (workers may not always act in a way that an economist would judge as rational in making wage demands because prices and wages take time to adjust to market changes)
• Absolute income hypothesis
• introduced the MPC curve
• introduced liquidity preference: people prefer cash to securities

The Economic Consequences of Peace

• Argued against the Treaty of Versailles’ large war reparations for Germany
• because there would be great damage for the German economy, which would then impact the global economy
• starving Germany reduced to “servitude for a generation”, provoking revolution and dissent
• Keynes resigned from the Paris Peace Conference

Treatise on Probability

• established the logical relationist theory of probability

Tract on Monetary Reform

• supported the Cambridge cash-balance theory of money

See Qwiz5’s article for more information

Naomi Klein

The Shock Doctrine

• introduction
  • cites Friedman’s claim that Hurricane Katrina was “a tragedy” but “also an opportunity”

Thomas Malthus

An English economist noted for his pessimism. He was a major influence on successors like John Maynard Keynes.

The Corn Laws were famous British protectionist laws designed to favor domestic grain producers by keeping tariffs high on grain imports. Malthus initially opposed the Corn Laws, but he later came to support them. Malthus justified his support for the Corn Laws by maintaining that they would help England attain a self-sufficient food supply. Ricardo argued the opposite, advocating for an end to the Corn Laws and support for free trade.

The Poor Laws were England’s system of relief for the poor. Malthus was critical of the Poor Laws, believing that they encouraged unsustainable population growth. Malthus argued for the centralization of the poor population of England in workhouses. Malthus stated that “the fare should be hard” in these workhouses, seeing them only as a place to provide the barest relief from suffering.

An Essay on the Principle of Population

• 1798
• Malthus’ most famous work
• Population always increases in a geometric progression, in contrast with food production, which increases in an arithmetic progression
• population size was kept in check through a combination of natural checks (war, famine, disease) and preventative checks (abstinence)
• influenced many thinkers, including Charles Darwin

Principles of Political Economy

• should not be confused with Ricardo’s book of the same name, which was written to rebut this book
• challenges Say’s Law (“supply creates its own demand”)
• oversupply (glut) could lead to economic depression
• contrasts with Say and Ricardo, who felt that the economy would fix itself by increasing demand

An Inquiry into the Nature and Progress of Rent

• developed the differential theory of rent, contemporaneously with several colleagues including Ricardo
• rent is a deduction from the surplus

See Qwiz5’s article for more information

Stephen Margolis

Network externalities can be broken down into autarky and synchronization.

Alfred Marshall

Principles of Economics

• introduced consumer surplus, quasi-rent, demand curves and elasticity

Karl Marx

Das Kapital (“Capital”)

• extended the labor theory of value to create a theory of surplus value
• divided society into the bourgeoisie and the proletariat
• “Commodity fetishism”
  • arises when social relationships between people become objectified into a commodity relation
• later sections organized and published by Engels after Marx’s death
• defended economic materialism

The Communist Manifesto

• co-written by Engels
• “A specter is haunting Europe”
• all history is the “history of class struggle”
• “workers of the world, unite!”
• outlines the distinctions between the ruling bourgeoisie and the working proletariat
• explains problems with capitalism
• See Qwiz5’s article for more information

The German Ideology

Theses on Feuerbach

Vilfredo Pareto

He introduced the concept of “indifference curves”.

He invented the 80/20 principle, also known as the “law of the vital few”, which most generally states that most effects stem from a few causes, but originally held that “80% of the land in Italy was owned by 20% of the population”.

He is the namesake of the Pareto chart, which is a chart that contains both bars and a line graph.

He created the concept of Pareto efficiency or Pareto optimality, which is a condition in which no individual can be better off without making another worse off. By the first theorem of welfare economics, Pareto efficiency holds for any competitive equilibrium. The Kaldor-Hicks criterion generalizes Pareto efficiency to allow for compensation of lost utility.

Manual of Political Economy

Circulation of the Elites

Edmund Phelps

With Milton Friedman, he developed the theory of a natural rate of unemployment. The natural rate of unemployment is an equilibrium in the unemployment level. Friedman and Phelps argued that attempts to decrease unemployment beyond the natural rate would cause inflation. The theory challenged the orthodoxy of the Philips Curve: the theoretical negative relationship between inflation and unemployment. Phelps quantified the natural rate of unemployment with his NAIRU model (Non-Accelerating Inflation Rate of Unemployment).

He was the originator of the Hysteresis hypothesis.

Eric Posner

Radical Markets: Uprooting Capitalism and Democracy for a Just Society

• with Eric Glen Weyl
• critiques Henry George’s “simpler, easier, and quieter way” of solving the monopoly problem of solving the monopoly problem with an example involving the Empire State Building

Francois Quesnay

He was the leader of the Physiocrats, which were the first systematic school of economic thought. He thought that laissez-faire policies are economically and morally righteous and that land is the ultimate source of all wealth.

David Ricardo

He was an English economist known for introducing many important economic concepts, including the theory of comparative advantage and the Iron Law of Wages.

The Iron Law of Wages states that over time, wages would tend towards the minimum wage necessary to live.

Ricardian Equivalence, a term coined by Robert Barro, is Ricaardo’s theory that demand stays constant regardless of whether the government finances spending through debt or taxes.

He was an outspoken critic of the Corn Laws, a series of protective tariffs on agricultural imports. He claimed that the Corn Laws would drive wealth to landlords rather than industrialists, thus slowing Britain’s transition to an industrial power.

The High Price of Bullion

• calls for the use of specie (metal currency) because bank notes (paper currency) are inherently susceptible to depreciation

Principles of Political Economy and Taxation

• should not be confused with Malthus’ book of the same name, which this book is a rebuttal of
• Theory of comparative advantage
  • every pair of potential trading partners can benefit by trade if they are producing at least two goods
  • this result is true for every pair, no matter how unproductive one of the parties might be
  • because of opportunity cost, each party should specialize in what it doest best and then trade for everything else
  • used example of Britain’s cloth industry and Portugal’s wine industry
• attempted to justify unfettered international trade through the above

Amartya Sen

His “liberal pardox” builds off of the work of Arrow.

Adam Smith

A Scottish economist, founder of the Classical School of economics.

An inquiry into the nature and causes of the Wealth of Nations

• describes an invisible hand that guides markets
  • producers and consumers acting in self-interest will create an overall benefit to society
• Book IV, “Of Systems of Political EconomyO
  • critiques mercantilism and its protectionist tariffs, keeping of large gold reserves, and other tenets of mercantilism
• monopolies lead to increased prices
• superiority of industry over agriculture
• described potato-eaters as stronger and more beautiful than bread-eaters
• introduced labor theory of value and comparative advantage
• first chapter
  • uses the example of a pin factory to illustrate that division of labor
• final chapters
  • argue for progressive taxation
• rent is “the highest which the tenant can afford… in the actual circumstances of the land”
• third section on the “Progress of Opulence”
  • after explaining the “natural progress of opulence”,
  • claims the fall of the Roman Empire discouraged agriculture in Europe
• fourth section
  • describes the motivations behind establishing colonies
• one section
  • describes how the working poor have a mental torpor that make them incapable of “rational conversation”, “tender sentiment”, or “just judgement”

The Theory of Moral Sentiments

• Divided systems of morality into categories of nature and motive
• compatible self-interest and ethics (invisible hand)
• developed theoretical basis for sympathy based on Hume

Lectures of Jurisprudence

See Qwiz5’s article for more information

George Stigler

Used “about four pages” from “The Problem of Social Cost” to name the Coase theorem.

Joseph Stiglitz

Formulated the Henry George theorem, which posits that public investments will completely recoup their cost through tax revenue.

Thorstein Veblen

He critiqued Irving Fisher’s The Nature of Capital and Income. He is the namesake for Veblen goods, a class of commodities for which price and demand vary directly, such as luxury items. He established a dichotomy between that which is related to tribal legends of the past (“ceremonial”) and that which is related to the technological imperative (“instrumental”).

“Why is Economics Not an Evolutionary Science”

• argued against the inclusion of economics as an evolutionary science
• attributed the question to “a difference of spiritual attitude or point of view”

The Theory of the Leisure Class

• “conspicuous consumption”: the leisure class spends just to display its wealth
• likened the ostentation of the rich to the Darwinian proofs of virility found in the animal kingdom (deer antlers or peacock tails, for example)
• “pecuniary emulation”: people pursue social status by acquiring money because they see that high-status people happen to have a lot of money
• “predation” and “emulation”

Theory of Business Enterprise

• described a conflict between engineers and businessmen, which built on The Theory of the Leisure Class’s framework of “predation” and “emulation”

“The Beginnings of Ownership”

• discussed the seizure of women as slaves