Economics: Laissez-Faire Economy and Adam Smith's Ideas

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Questions and Answers

According to Malthus, what happens to prices when money income increases?

Prices become unpredictable

Prices rise (correct)

Prices remain constant

Prices decrease

What is the result of an excess of demand over supply according to Malthus?

Increased savings rate

A general boom in the economy

Stable prices and output

A general depression in the economy (correct)

What is the main reason for under-consumption according to Malthus?

Low-income earners cannot afford goods (correct)

Wealthy class consumes less proportion of their earned income

High-income earners consume most of their income

Poverty rates are increasing

What is the main characteristic of investment according to business cycle theorists?

Highly unstable and fluctuating Signup and view all the answers

What happens to investment when consumer demand increases?

Investment increases Signup and view all the answers

What is not mentioned as a factor influencing investment according to business cycle theorists?

Government policies Signup and view all the answers

What is the main objective of the institutional school of thought in terms of economic reforms?

Favour a large role of government in economic and social affairs Signup and view all the answers

What is the approach favoured by the institutional school of thought?

Inductive approach Signup and view all the answers

What does the institutional school of thought recognize in terms of interest groups?

Clash of interest Signup and view all the answers

What is the main criticism of the institutional school of thought against static equilibrium analysis?

It seeks to discover eternal economic truths without regard to time and place Signup and view all the answers

What does the under-consumption principle argue against?

Say's law of the supply creates its own demand Signup and view all the answers

What is the alternative to the pleasure-pain psychology approached by the institutional school of thought?

Behavioristic idea Signup and view all the answers

What is the main purpose of the institutional school of thought in terms of business slumps?

To correct and overcome maladjustments Signup and view all the answers

What does the Darwinian evolutionary approach suggest about society and its institutions?

They are in a state of constant change Signup and view all the answers

What was the primary goal of social reform according to the content?

To save capitalism and improve the condition of the masses Signup and view all the answers

What did Veblen prefer in terms of social change?

Radical reconstruction of society Signup and view all the answers

What is an 'institution' according to the institutional school of thought?

An organized pattern of group behaviour and cultural norms Signup and view all the answers

What did the institutional school of thought emphasize in economic thinking?

Studying the economy as a whole Signup and view all the answers

What are maladjustments in economic life according to the institutional school?

Normal parts of economic life Signup and view all the answers

What was the essence of social change through social reform?

To save capitalism and improve conditions Signup and view all the answers

What was the approach of the institutional school in terms of social change?

Reformist approach Signup and view all the answers

What did the New Deal of the 1930s represent in terms of institutionalism?

The epitome of institutionalism Signup and view all the answers

What does Adam Smith's concept of 'laissez-faire' imply?

A free economy with minimal government intervention Signup and view all the answers

What is the primary function of the government according to Adam Smith?

To maintain law and order, protect private property, and regulate the monetary system Signup and view all the answers

What is the significance of trade according to Adam Smith?

It brings about the most productive and efficient use of society's resources Signup and view all the answers

What is the definition of Marginal Efficiency of Capital according to Keynes?

The rate of discount that makes the present values of streams of expected returns equal to the supply price of the capital asset Signup and view all the answers

What is the idea behind Say's Law?

Supply creates its own demand Signup and view all the answers

What is the role of the government in the Keynesian school of thought?

To stabilize the economy at a full employment level through various measures Signup and view all the answers

What is the title of Jeremy Bentham's book published in 1789?

Principles of Morals and Legislation Signup and view all the answers

Who is the founder of the Institutional School of Economics thought?

Thorstein Veblen Signup and view all the answers

What is the primary driving force behind individual behavior according to Jeremy Bentham?

The desire to do things that serve their own best interests Signup and view all the answers

What is the year in which the Institutional School of Economics thought is said to have ended?

1936 Signup and view all the answers

What is the term used by Jeremy Bentham to describe the forces of demand and supply in the market?

The invisible hands Signup and view all the answers

What was Thorstein Veblen known for in the Institutional School of Economics thought?

Critically dissecting orthodox thinking and providing a theoretical approach to the institutional economy Signup and view all the answers

What is the primary goal of Jeremy Bentham's approach to economics?

To achieve the greatest total welfare for the greatest good of society Signup and view all the answers

What was Wesley C. Mitchell known for in the Institutional School of Economics thought?

Stimulating inductive and deductive approaches in statistical studies Signup and view all the answers

What was John R. Commons known for in the Institutional School of Economics thought?

Helping to write new laws and persuading the nation of the need for reform through government legislation Signup and view all the answers

What is the goal of the government's action in reducing the rate of interest according to the Keynesian school of thought?

To stimulate private investment during depression Signup and view all the answers

Study Notes

Laissez-Faire Economy

Adam Smith advocated for a laissez-faire economy, where the government does not interfere with the economy.
He believed in a "natural law of economic behavior" where the government should not intervene in the economy.
The government's role should be limited to maintaining law and order, protecting private property, and regulating the monetary system.

Adam Smith's Ideas

Trade plays a crucial role in bringing about the most productive and efficient uses of society's resources.
Specialization and divisions of labor are essential in an economy.
The government should not use society's resources for things people would not want to spend their money on (Say's Law).

Jeremy Bentham

Published "Principles of Morals and Legislation" in 1789, which focused on the welfare of the nation.
The book discussed how to measure the welfare of the nation and how to achieve it.
Bentham believed that the wealth of the nation should be shared among the people for the greatest total welfare.

Jeremy Bentham's Ideas

Individuals are motivated by self-interest and desire to do things that serve their own best interests.
The market system works through the force of demand and supply, known as the "invisible hand."

Keynesian School of Economics

Defined Marginal Efficiency of Capital as the rate of discount that makes the present value of expected returns equal to the supply price of the capital asset.
The government should intervene to promote full employment, rather than relying on laissez-faire.
The government can stimulate private investment during depression by reducing interest rates.

The Institutional School of Economics

Founded by Thorstein Veblen in 1900 and represents an American contribution to economic thought.
The school emphasized the importance of institutions in economic life and the need for social reform.

Key Ideas of the Institutional School

The economy should be studied as a whole, rather than examining small parts separately.
Institutions are organized patterns of group behavior, including customs, norms, and laws.
Maladjustments in the economy are normal and require continuous correction.
The Darwinian evolutionary approach should be used to understand the constantly changing society and its institutions.
The school promotes liberal democratic reforms for a more equitable distribution of income and wealth.
The institutional school favors an inductive approach, emphasizing fact-finding and statistical studies.
The school recognizes serious clashes of interest between different groups.

Under-Consumption Principle

Thomas Malthus argued that the wealthy class consumes less proportion of their income and saves more, while the poor may not be able to purchase most goods produced.
Under-consumption leads to a general depression when consumer goods industries curtail output.

Instability of Investment Principle

Investment is highly unstable and can be affected by changes in technology, interest rates, and final demand.
An increase in consumer demand can lead to more investment, but static demand means no new investment is needed.

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Description

Learn about Adam Smith's advocacy for a laissez-faire economy, where the government doesn't interfere with the economy, and how trade plays a crucial role in bringing about productive and efficient uses.