ECON 312 - Exam 1 Study Guide
questions with complete solutions
Marx's Theory of Change - VERIFIED ANSWER-• Karl Marx concluded that capitalism isn't sustainable
• Materialist conception of history: productive forces determine production relations, markets, and
society itself
• Why materialistic approach? His main idea is that economic forces determine how society itself is
organized
• Underproductive forces: labor
o The agent of change to Marx is a class antagonism:
o Underdeveloped relationships and superstructure: weak production
o The new arrangements not compatible with the old, tensions arise
wars arise as a result of incompatibilities between emerging class and land gentry--
Joseph Thumpeters theory of Change - VERIFIED ANSWER-Capitalism is driven by change through
innovation
The New Instiutional Economics: Friederick Hayek, Ronald Coase, Douglas North, Gordon Tullock,
Mancur Olson. - VERIFIED ANSWER-¥How institutions evolve and what is an effect of this evolution on
economic performance (Hayek).
¥ Economic institutions arise according to a spontaneous order in which new organizations, laws,
regulations, and customs are tested by daily economic life. "Working" arrangements are retained by
society.
¥ Standard microeconomic theory holds time and institutions constant.
¥ Changes in institutions can be explained by changes in property rights, innovations that alter
transaction costs, information asymmetries, and opportunities for voluntary behavior (Douglas
North).
, ¥ Market institutions such as banks, contract law, etc. were created because they happened to be
economically rational at the time of their creation
¥ Institutions will change as a result of conditions (decrease of transaction costs, increase of
information costs, change in property rights)
Marx versus New Institutional Economics - VERIFIED ANSWER-¥ Marx - institutional change is
inevitable and follows predetermined path.
¥ New Institutional Economics - institutional change is dictated by economic variables, and cannot be
predicted. The path depends on initial conditions (history, culture, resource endowments) from which
progress begins.
Hayek and Mises Critique of Socialism - VERIFIED ANSWER-¥ Lack of price system
¥ The principal problem of economics is "how to secure the best use of resources known to any
member of society, for ends whose relative importance only these individuals know."
¥ Without relative prices, socialist managers would lack of information that would to lead efficient
decision making, and they would waste resources• Socialist economy cannot effectively plan from the
center because it can digest information on prices, needs private firms to effectively digest
information
Adam Smith: The Market and The Invisible Hand - VERIFIED ANSWER-¥ The Market works through the
invisible hand
¥ Adam Smith put into the center of economics the systematic analysis of the behavior of individuals
pursuing their self-interest under condition of competition.
¥ Mercantilism vs. "Invisible hand". Mercantilism argued that economies must be heavily regulated by
the state to prevent a loss of resources to rival nations (was popular in France.)
questions with complete solutions
Marx's Theory of Change - VERIFIED ANSWER-• Karl Marx concluded that capitalism isn't sustainable
• Materialist conception of history: productive forces determine production relations, markets, and
society itself
• Why materialistic approach? His main idea is that economic forces determine how society itself is
organized
• Underproductive forces: labor
o The agent of change to Marx is a class antagonism:
o Underdeveloped relationships and superstructure: weak production
o The new arrangements not compatible with the old, tensions arise
wars arise as a result of incompatibilities between emerging class and land gentry--
Joseph Thumpeters theory of Change - VERIFIED ANSWER-Capitalism is driven by change through
innovation
The New Instiutional Economics: Friederick Hayek, Ronald Coase, Douglas North, Gordon Tullock,
Mancur Olson. - VERIFIED ANSWER-¥How institutions evolve and what is an effect of this evolution on
economic performance (Hayek).
¥ Economic institutions arise according to a spontaneous order in which new organizations, laws,
regulations, and customs are tested by daily economic life. "Working" arrangements are retained by
society.
¥ Standard microeconomic theory holds time and institutions constant.
¥ Changes in institutions can be explained by changes in property rights, innovations that alter
transaction costs, information asymmetries, and opportunities for voluntary behavior (Douglas
North).
, ¥ Market institutions such as banks, contract law, etc. were created because they happened to be
economically rational at the time of their creation
¥ Institutions will change as a result of conditions (decrease of transaction costs, increase of
information costs, change in property rights)
Marx versus New Institutional Economics - VERIFIED ANSWER-¥ Marx - institutional change is
inevitable and follows predetermined path.
¥ New Institutional Economics - institutional change is dictated by economic variables, and cannot be
predicted. The path depends on initial conditions (history, culture, resource endowments) from which
progress begins.
Hayek and Mises Critique of Socialism - VERIFIED ANSWER-¥ Lack of price system
¥ The principal problem of economics is "how to secure the best use of resources known to any
member of society, for ends whose relative importance only these individuals know."
¥ Without relative prices, socialist managers would lack of information that would to lead efficient
decision making, and they would waste resources• Socialist economy cannot effectively plan from the
center because it can digest information on prices, needs private firms to effectively digest
information
Adam Smith: The Market and The Invisible Hand - VERIFIED ANSWER-¥ The Market works through the
invisible hand
¥ Adam Smith put into the center of economics the systematic analysis of the behavior of individuals
pursuing their self-interest under condition of competition.
¥ Mercantilism vs. "Invisible hand". Mercantilism argued that economies must be heavily regulated by
the state to prevent a loss of resources to rival nations (was popular in France.)
