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Unformatted text preview: Economic Liberalism & the Market
Wednesday, October 25, 2006 Economic Liberalism The modern global political economy functions under the theory of Economic Liberalism What are the alternatives? At the heart of this concept is exchange within competitive markets. Scholars often use the concept of markets to explain economics and politics Decentralized Markets Determine the allocation and distribution of scarce resources: raw materials, labor capital How is this different from planned economies? Market Exchange Liberal Economic method of allocation Price Mechanism Supply and Demand Voluntary transactions Selfinterest "Invisible Hand " Factors of Production Land, Labor, and Capital Each nation has some mixture of the three, called its Factor Endowment The Factor Endowment of a nation may change with discoveries, technology, or education Land All of the resources derived from nature are included under the category Land Animals for work or food Land for farming and harvesting Minerals and other resources to be mined Usually takes some expenditure of labor, intelligence, and capital, to transform natural resources in to something useful Labor Efforts put in to producing commodities Effects on size of available labor pool: Population size, age distribution, gender Labor laws, working week, child labor Social security, pensions, retirement age Welfare & Health of work force Education Societal attitudes about labor Capital differs in that it does not occur naturally. Capital is created. Used to transform other factors of production Capital can be technology, machines, production processes, scientific advances, and education and training of labor force Your presence in school is an investment in your human capital to transform you in to a more productive member of the work force. Capital Importance of Capital Capital is the critical ingredient for a nation to achieve economic success. More capital means more productive use of land and labor. Generally, capital trumps natural resources Capital is what separates the wealthy and affluent from the less developed societies. The Normative Appeal of Economic Liberalism Individual Choice Most democratic of all allocation mechanisms Social Efficiency Most efficient of all possible allocation mechanisms Least wasteful of all allocation systems Produces the same product at the least cost More materials for other products and benefits to the society Real Market Inefficiencies HOWEVER...Real Markets always fall short of their theoretical ideals. Allocation is never completely efficient. Why? What are the theoretical prerequisites for efficient markets? Theoretical Prerequisites for Efficient Markets Clear Property Rights No Transaction Costs Perfect Competition No Externalities Complete Information In order for market exchange to function, clear property rights must exist People cannot buy or sell if ownership is not clearly established Transaction costs are the costs of conducting the transaction These costs rise when there is uncertainty about property rights. Transaction costs are almost never zero. Clear Property Rights and No Transaction Costs Perfect Competition Necessary for the pricing mechanism to work All consumers and suppliers must be price takers, meaning they must take the price set by the market Any one who can change the price by manipulating supply and demand is a price setter. Monopolies and Oligopolies ruin perfect markets No Externalities Costs or benefits to third parties who are not part of the transaction Can be positive or negative Positive externalities & freeriding: National Security France & NATO Negative externalities incur additional costs to society Environmental pollution Required for efficient exchange Complete Information Asymmetric Information is when one party has information the other does not have Used car dealer sells you a "lemon". "Green" goods vs. the cheap stuff. Incomplete Information can lead to pooling equilibria: Can't tell the good from the bad How do we encourage situations where separating equilibria exist? ...
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