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Unformatted text preview: Government Notes #4 • Governments and markets – relationship between economics and politics o Economics and policy Political conflict is largely economic conflict • E.g. the battle for welfare Economic prosperity reduce conflict • Scarcity needed for politics • More resources equals less conflict What the state could do can be limited by its financial situation • A state without money can’t fund programs People with wealth are more likely to have political power Parties and interest groups are developed to secure economic interests • AARP – push for cheaper medication Political interests mirror economic interests • People who want more student funding would support an act to double the funding o Government interventions Market failures • Externalities – something not part of the transaction bearing a cost • Public goods – indivisible and non-exclusive, government must provide them • Monopolies Equity and security must be provided by government Imperfect information • Economic Theory o Adam Smith and the Classical Theory Wrote the Wealth of Nations • Governments of Europe were wrong in practicing mercantilism • Government regulated market, owned large corporations, had monopolies • Smith believed that government created poverty • Individuals should maximize self-interests • Government regulation reduces competitions while it creates inefficiency o Business charges price that market could bear • Markets will self adjust o People need jobs, wages will lower as a result to make room for new jobs o Hiring more people will increase productivity o Eliminate unemployment and create economic growth o Government should be limited to contracts and oversight o Government should leave market alone • Critics of the classical view o People disagree that politics and economics should be separate o Ricardo Iron law of wages – market will drive wages to the subsistence level Giving people more wages creates more children and more scarcity • As a result, wages will drop o Malthus (Malthusian) Government should give the poor nothing • Giving the poor stuff will create more children and more scarcity Natural check on the population o Marx Can not separate politics and economics The wealthy benefit from a market system • Economy primary benefits the capitalists Economy is created by a group of people with vested interests Economy in turn gains capitalists what they want Economy enslaves people according to the theory of surplus value Theory of surplus value • The worker creates the product and in turn creates the surplus value • Benefit goes to the capitalists • McDonalds, Dell, etc. (Ronald McDonald, Michael Dell) • Surplus value example – a hamburger that is worth $.30 for its parts is sold for $.99, $.69 surplus value o Keynes Wrote during the Great Depression Unemployment not going away, market is not self-adjusting...
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