Questions for Thought and Discussion
These questions and answers are a supplement. They are not in the book.
This page is still under construction. The number of questions is not yet sufficient, and some of them have so far not been answered. I will do my best to improve this page as soon as possible.
Chapter 2. The Subject of Economics I
Chapter 2― Question 1
Contrast Amartya Sen's approach to development with the standard economic approach.
* The standard approach stipulates prosperity first, rights later. Implicitly, it tolerates horrible working conditions, the violation of human rights, the absence of democracy, social policies, health care and education as temporarily unavoidable sacrifices on the way to prosperity.
Amartya Sen says that rights further development; rights and decent working, living and social conditions are indeed identical with development, which is why they should come first.
Chapter 2― Question 2
Comment on Hume's dictum "There is no way from is to ought".
* It implies that the properties of the human body do not entail that clothing should be made of cloth or similar fibres. It could as well be made of cardboard or bricks.
Chapter 2― Question 3
Why can the economy not be adequately described as a purely private affair?
* Nobody would think of describing an analogous phenomenon such as traffic as a purely private affair. Like the economy, traffic involves individuals pursuing their own interests while acting in a collective. Traffic is rigorously regulated; violation of rules is punished. It is also relatively egalitarian; wealth does not yield privileges. Though able to drive faster, people with expensive cars are subject to the same rules as people with small cars.
Chapter 2― Question 4
Economists define economic efficiency as maximum GDP. How would you define economic efficiency?
Chapter 2― Question 5
Make a list of your country's most pressing economic problems. How could economists contribute to their solution?
Chapter 2― Question 6
What would you expect economists to deal with?
* I myself would expect economics to pursue a problem approach. I think that it must contribute to the solutions of the enormous economic problems we are faced with. Mainstream economists would argue that solutions must be preceded by analysis, which is true. They would also say that solutions, as they require setting goals, imply normative statements, which they consider as none of their business.
Chapter 2― Question 7
How do you account for the fact that three different systems of capitalism are equally successful?
* In all of them, governments give heavy support to the business world, though in different forms. In Japan, close co-operation between big corporations and the government is overt and undisputed. In Germany, support comes in the form of subsidies, tax loopholes, close personal ties between business leaders and politicians, strong influence of lobbyists, and a traditional endeavour of governments to open up export markets. In the USA, things are different. Government support for the economy would be a misleading description. Rather than government intervention in the economy, corporate intervention in politics is quite common. Many US industries, particularly the military-industrial complex and oil companies, are in a position to exert considerable influence on economic, political and military decisions.
Chapter 3. The Subject of Economics II
Chapter 3― Question 1
Make a list of human characteristics that you consider relevant to microeconomic analysis.
* By and large, all the characteristics listed in the Critique of Chapter 3 are relevant. Microeconomics is about the interaction of supply and demand on markets, in other words, about selling and buying. The experts in this field are marketing people, not economists. What they think about human nature is manifested in advertising. In some way or other, all commercials reflect their knowledge that our decisions are influenced by some very fundamental facts: We are mortal, emotional, conscious, theoretical, rational, lonely, social, transcendent, sensual and physical beings.
Chapter 3― Question 2
Comment on the impact of the ultimatum game on the theory of homo economicus.
* The ultimatum game revealed that a sense of fairness plays a surprisingly large role in economic decisions and overrides considerations of utility maximisation. More precisely, people seem to equate utility and their self-interest with preserving their own dignity.
Chapter 3― Question 3
Make a list of the most common biases and explain how they impede rational behaviour.
Chapter 3― Question 4
O'Donoghue and Rabin argue that the mildest form of paternalism is choosing default options that benefit the people involved. Can you give any examples of default options?
* You are likely to sit in front of one. Microsoft has opted for Times New Roman as its default font. This is, I think, regrettable. Times New Roman is not particularly suited for the Web or for manuscripts. As its name implies, it is a newspaper font.
Companies selling subscriptions frequently offer their products free for the first three months or so. Thereafter, the subscription is automatically continued at the normal price unless you send a letter to discontinue it. This default option relies on consumer inertia or forgetfulness.
Chapter 4. The Tools of Economics
Chapter 4― Question 1
Explain the terms chaos and complexity. Do you think they are relevant to economic analysis?
* Chaos stands for unpredictable behaviour in otherwise deterministic, i.e. well-known, systems. Unpredictability is in the main due to high sensitivity to initial conditions and feedback.
Complexity means that all variables in a system are interrelated. It is the opposite of ceteris paribus.
It is difficult to think of a system whose behaviour is as much determined by complexity, feedback and sensitivity to initial conditions as that of the economy.
Chapter 8. Demand Theory I
Chapter 8― Question 1
What immaterial needs do capitalist economies fulfil?
* After survival and some comfort have been ensured, the desire for distinction is satisfied. Survival and comfort are an individual's genuine physical needs; distinction derives from man's capacity as a social being. It is aimed at other people rather than the individual itself and is intended to fulfil immaterial needs. In poor countries, people must distinguish themselves by behaviour or abilities; there is hardly and possibility of conspicuous consumption. Another immaterial need motivating many purchases is consolation, which in poor countries must be satisfied by community ties.
Chapter 8― Question 2
Make a list of goods that, according to Adam Smith's definition are today "indispensably necessary", i.e. goods the lack of which is "indecent for creditable people, even of the lowest order." Or, also according to Smith, which are necessary because they enable people “to appear in public without shame”.
* Anything that allows a person to participate in community life. A home that allows to invite guests, decent clothing, a TV set, a computer and internet access, affordable access to health care and education.
Chapter 8― Question 3
Imagine you get a pay rise that trebles your income. What would you do with it? Or, to put the question in economic terms, would the pay rise shift your demand curves to the right?
* This seemingly easy question is not easy to answer. For many goods, heart pills or washing machines for instance, there are no individual demand curves. For others, existing demand curves are likely to shift to the left; people buy less of what they used to buy. Instead, they buy things that they could not afford before, that is, they have new demand curves. What goods they will buy is difficult to predict because survival in a market economy requires that you do not desire things that are completely out of your reach. People tend to be realistically modest as Amartya Sen found out. But when an increase in their incomes catapults them into a new class, they start considering things that they used to ignore for the sake of contentment.
Chapter 8― Question 4
Explain the relation between conspicuous consumption and the notion of identity.
* They are very closely related. On a lonely island, there is no identity nor is there conspicuous consumption. Identity is a message that an individual sends to other people about himself. Conspicuous consumption is the easiest way to get that message across.
Chapter 8― Question 5
Please list the qualifications of demand theory that must be made and explain why or why not you find them significant.
Chapter 10. Supply Theory I
Chapter 10― Question 1
Do you think that the economic failure of communist countries can be attributed to diseconomies of scale?
* Yes, unless diseconomies of scale are rigorously defined as rising long-term production costs. An entire economy is such an oversized enterprise that it cannot be operated efficiently by a planning committee.
Chapter 11. Supply Theory II
Chapter 11― Question 1
What did Keynes mean by "animal spirits" of entrepreneurs?
* An urge to spontaneous action as opposed to deliberate, calculated decisions.
Chapter 11― Question 2
Comment on Milton' Friedman's statement about the social role of companies: "Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible." *
* This statement is based on three assumptions that I find incomprehensible. (1) The social responsibility of managers is to make as much money for their shareholders as possible. This is not a social responsibility. It is at best an agent's responsibility towards a principal, or an employee's responsibility towards owners. (2) Why is this "social responsibility" to make maximum money associated with the very foundations of our free society? Stockholders are free to instruct their managers to create reasonable stakeholder relations, to avoid environmental damage, to contribute generously to charities, to increase the company's goodwill, to invest in new technology, etc. (3) Shareholder earnings consist of two parts: dividends, which result from a company's good financial performance, and rises in share prices, which result from investor assessment of a company. In part, this assessment depends on a company's reputation, which can be harmed when its board-room decisions are determined by short-termism.
For another view of the subject see the UN Geneva Declaration. Adopted at the 2007 Global Compact Leaders Summit, it defines the role of business in society.
http://www.unglobalcompact.org/docs/summit2007/GENEVA_DECLARATION.pdf
Chapter 13. Competition Theory I
Chapter 13― Question 1
Explain the fallacies involved in equating the economy with nature.
* In the widest sense, nature stands for everything that is not man-made. Excepting natural resources and humans, all ingredients, structures and institutions of the economy are entirely man-made.
Chapter 15. Market Theory I
Chapter 15― Question 1
Markets are markets for goods. There are also markets for bads. For instance heroin, weapons, hard-core pornography, pollution permits and others. Some of these markets are legal, others are not.
Not all illegal markets trade bads. Examples are the kidney market, the women market, the children market. All examples show that markets can fail for goods and bads. Economists would say that these are not cases of market failure. The markets work but produce undesirable social outcomes. Is there a better theory?
* There are things that must be exempted from the commodity status. But this view is completely unacceptable for most economists.
Chapter 15― Question 2
Discuss the pros and cons of organ trading.
* There is demand for organs, in particular for kidneys. There is also supply of kidneys. The sources of supply are the problematic part. These are purchases from live unrelated donors, theft, kidnapping, cadavers. As there is a wide gap between supply and demand, prices should be exorbitant. They are lowered by increasing supply through dubious, if not criminal practices. Many economists are in favour of organ trading, arguing that there is a market for a good (not a bad like pollution credits). Such economists brush aside one of their own central theories: A prerequisite for a functioning market is the freedom of contract, which is absent on markets for organs. Would these economists, usually professors, agree to a live donation? Would they be prepared to sell one of their kidneys or segments of their livers?
Consult the web for help and look at the sites of "Organs Watch", a NGO based at the University of California at Berkeley. Information on trade with organs of executed Chinese prisoners can be found at www.american.edu/TED/prisonorgans.htm.
See also News on this Website for three recent economic papers on the subject.
A solution might lie in encouraging after-death organ donations and creating incentives. People who agree to donating their organs could be given the promise that their funeral will be paid for. In numerous European countries, the default rules have been changed. Organs are automatically used for transplants unless an individual has explicitly stated that he does not agree to it. Germany, which has refused to adopt a presumed-consent scheme, has recently launched an enormous publicity campaign to elicit more after-death organ donations. It provides information to alleviate fears associated with organ donations and makes it easy to register for donations.
Chapter 16. Market Theory II
Chapter 16― Question 1
By and large, governments in capitalist economies leave the distribution of incomes to the market. Are there any sensible alternatives?
* Three sorts of government intervention could be considered as useful. (1) The government could stipulate that those who benefit from other people's work must pay for it. This can by no means be taken for granted. Many government subsidise wages and hence force taxpayers to pay for part of the work that employers receive. (2) The government could force employers to pay decent wages by enacting minimum wages that cover a decent living. (3) The government could put a floor into income distribution with the help of a guaranteed minimum income to be paid to everybody and financed by taxes.
Chapter 16― Question 2
Discuss the pros and cons of statutory minimum wages.
* I can only see one great logical pro: Economists treat labour as a commodity. The price of a commodity must cover the costs of its production, otherwise the commodity cannot be produced. Analogously, the wages of labour must cover the costs of producing that labour, i.e. a sufficient living.
Chapter 16― Question 3
Do the same for subsidised wages.
* I do not think that employers have a right to force taxpayers to pay for the work they receive. Proponents of subsidised wages say that they lower the burden of welfare imposed on tax payers. In other words, they advocate a shift of public funds from poor people to employers, which is not the same as a reduction of public expenditure.
Chapter 17. Microeconomic Policy to Correct Market Failure
Chapter 17― Question 1
Discuss the pros and cons of pollution credits. Explain how they work and why they are a good/bad thing (give your opinion). For the basics you find help on the Web "Wikipedia. Emissions trading."
Chapter 17― Question 2
Why do economists assume that agents cheat principals? Do principals never cheat?
* Perhaps because some economists have a tendency to identify with superior and richer economic agents.
Examples of cheating principals are ubiquitous, here are just two: Employers who treat their employees badly, or insurance companies that deceive insurance buyers with untransparent contracts. Sometimes the roles are reversed. Shareholders are theoretically principals, while managers and CEOs are only their agents. In reality however, the power of a shareholder is confined to the possibility of selling his shares, unless he hold a very large stake in the company.
Chapter 18. Microeconomic Policy to Rectify a Lack of Equity
Chapter 18― Question 1
Discuss the pros and cons of redistributing income.
* Ultimately this question is about the trade-off between capital flight and poverty. The increase in taxes required for a redistribution of income increases capital flight. On the other hand, poverty breeds crime and a very disagreeable environment for everybody, including the rich. A solution of this dilemma might lie in giving absolutely favourable tax treatment to donations for projects intended to eliminate poverty. This would relieve the conscience of the rich and spare the public at large a great deal of unacceptable arguments and theories whose exclusive purpose is the justification of poverty amidst riches.
Chapter 18― Question 2
Compare Rawls's approach towards inequality with that of Sen.
Chapter 18― Question 3
Define the prerequisites for well-being.
Chapter 19. Taxation
Chapter 19― Question 1
Discuss the Tobin tax.
* It is difficult to understand why it is not introduced as there is an analogous tax on the sales of shares. The gains made by selling shares are subject to a capital-gains tax. In some countries, it is always due; in others only if the shares were sold shortly after they were bought, in other words, if they are likely to have been bought for speculative purposes.
Chapter 19― Question 2
There is a paradox in sin taxes. Do you see it?
* Sin taxes are levied for two reasons: to raise government revenues and to make undesirable behaviour more expensive. If people comply by stopping the penalised behaviour, there are no revenues. If they don’t stop it, the penalty has not worked.
Chapter 19― Question 3
Discuss the pros and cons of Milton Friedman's tax proposal.
* If tax revenues from progressiveness, corporations and inheritances are to disappear, the entire tax base must be shifted to indirect taxes and a flat-rate income tax. To procure sufficient tax revenues, both rates would have to be very high, which might leave many people with insufficient purchasing power.
When tax-deductible contributions to charities and educational donations must go, these institutions would be deprived of an important source of funding, and corporations would be deprived of an important source of goodwill and thereby of part of their financial worth.
Chapter 20. Labour and Social Policy
Chapter 20― Question 1
List the anti-welfare arguments that make sense for you.
* To me, none of the arguments really makes sense, though in some of them there is a grain of truth. When insecure, I find it helpful to ask what motives are behind theories. Which arguments are intended to help the people who are in misery? Which arguments are simply intended to justify the refusal of a helping hand? Or are theories a sort of "conspicuous argumentation", by which I mean that they are put forward for identity-reasons, that is, in order to signal that one identifies with the rich and powerful and therefore must be one of them.
Chapter 20― Question 2
Social policy is not really a subject of economics. Discuss.
* Economists would espouse the above statement. They investigate undesirable social outcomes produced by markets but insist that they are not cases of market failure. Ultimately, economists view social problems as normative questions. It must, however, be taken into account that economic problems - unemployment, poverty, lack of access to vital goods such as education or health care - are at the heart of almost all social problems.
Chapter 20― Question 3
Discuss the relevance of the concept of "relative poverty" for advanced western societies.
* Poverty is always relative. It makes no sense to tell poor people in western societies that they are rich compared with their ancestors in the Middle Ages or people in today's Africa. In poor societies, poor individuals can appear in public without shame, in today's rich western countries they cannot. In Africa poverty is not associated with personal failure, in the United States and Europe it is.
Chapter 21. Price Theory
Chapter 21― Question 1
Many scientists say that the scarcity of water will be the most severe environmental problem in the future. Discuss the paradox of value in the light of this concern.
* Water is vital, scare and much too cheap. It is cheap because it is subsidised. This applies in particular to water used in agriculture. Governments are keen on keeping foodstuffs cheap to keep wages, welfare benefits and inflation low.
Surprisingly, the problem is not direct water consumption; instead it lies in the enormous amounts of water needed to produce other commodities, in particular foodstuffs. Here are a few figures: Agriculture consumes around 90 percent of all water resources. The average European consumes 50 litres of water a day. In addition, he consumes up to 8,000 litres a day just by eating. Producing a kilogram of maize requires some 900 litres of water, a kilogram of beef some 16,000 litres.
Chapter 22. Equilibrium Theory
Chapter 22― Question 1
In his inaugural address, Alfred Marshall said that he would do his best to increase the number of Cambridge students who were willing to devote part of their effort "to grappling with the social suffering around them" and to do so "with cool heads but warm hearts". Would you agree with Marshall's statement?
* Yes, I do. I think the "cool heads" are today mostly needed to avoid any ideological arguments. The "warm hearts" are still needed to gear economics to eliminating social suffering, which today is different from the suffering surrounding Marshall. But social problems in Western countries and the plight of developing countries are still primarily, though not exclusively, economic problems and a result of wrong economic theories and policies.