HW Assignment, due October 6, 2015

Please turn in, by email, answers to the following questions in Pointers No. 8:

Ch. 12: Nos. 1, 2, 4, 5, and 6.

Ch. 14 on Austrian economics.

Epilogue: No. 2

In addition, please answer briefly the question: What have I personally learned from EC 12?

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EC 12. Pointers No. 8

FAQs on Chs. 10-14, and Epilogue of Backhouse

Ch. 10:

  1. What is Keynesian economics?
  1. What is the role of ‘animal spirits’ in Keynesian economics? [Try to research what Robert Shiller has written about animal spirits.]
  1. Who put forward the idea that would later be called the Keynesian multiplier? Explain this idea.
  2. Before Keynes came along, what were the most prominent theories of the business cycle?
  1. How did Irving Fisher think of the interest rate?

Ch. 11:

  1. What are the most important ideas in general equilibrium theory? What’s wrong with it?
  1. What is game theory? Is it a good alternative to general equilibrium theory? Why or why not?
  1. How is equilibrium defined in game theory? What is a Nash equilibrium?

Ch. 12:

  1. What is “welfare economics”?
  1. What is Pareto optimality?
  1. What is Kenneth Arrow’s “Impossibility Theorem”?
  1. How did Backhouse assess the contribution of welfare economics to economic thought?
  1. What is “market failure”?
  1. Explain the Coase Theorem.

Ch. 13:

  1. What is the main difference between the ideas in Keynesian economics and the so-called New Classical Macroeconomics?

  2. What are the main theories of economic growth in ‘development economics’? What is the ‘Washington Consensus’? Would the Washington Consensus be applicable or relevant to the Philippines? Why or why not?
  1. What did Hyman Minsky contribute to economics? (extra credit: not in Backhouse)

Ch. 14:

What is Austrian economics? Summarize the ideas of Austrian economics. Who are the main figures of Austrian economics? Is Austrian economics useful for understanding the Philippine economy?

Other topics (not in Backhouse):

What is the Tragedy of the Commons? Explain.


  1. What is the so-called “neoclassical synthesis”?
  2. Discuss and compare the two different ideas of competition in economics? (The first is the competition as imagined and written about by Adam Smith and Friedrich Hayek; the other is competition in the sense of perfect competition in neoclassical economics.)
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Creative Destruction

Can you create while destroying?  This apparent oxymoron is a key to understanding capitalism as an engine of human progress.

Josef Schumpeter coined the term “creative destruction” as shorthand for describing the way that free markets, including of capital, result in technological progress.

In Capitalism, Socialism, and Democracy (1942), Schumpeter wrote:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)”

In other words, when a useful innovation is discovered and implemented, firms that are on the old technology would see their businesses shrink as consumers find the new products both less expensive and more useful. This process is brought about when there is freedom to risk one’s capital in research that could offer above-normal returns.

W. Michael Cox and Richard Alm, writing for the Concise Encyclopedia of Economics, had this to say regarding Schumpeter’s ideas:

Schumpeter and the economists who adopt his succinct summary of the free market’s ceaseless churning echo capitalism’s critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace comes from recognizing the good that comes from the turmoil. Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.”

Cox and Alm add that the process of creative destruction results from the working of entrepreneurship and competition. These two features of an economy are those that form essential parts of the explanation of the market mechanism, known also as Adam Smith’s Invisible Hand.

These authors conclude that while capitalism is on balance a blessing, it comes with the undesired effect of some people losing their jobs, even permanently. In short, the concept of creative destruction is similar to the adage in the gym when people try to build muscle: “No pain, no gain.”

Reference: [http://www.econlib.org/library/Enc/CreativeDestruction.html]

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EC12. Pointers No. 7

FAQs on Chs. 8-9 of Backhouse – History and Theory in Europe, American Economics to 1939

  1. How does Schumpeter’s view of the business cycle differ from that of Marx? Extra credit (the answer is not in Backhouse): Can either view be used to predict or forecast the business cycle?
  1. Explain Schumpeter’s idea of “creative destruction.” [Hint: Try a source other than Backhouse.]
  1. Explain Walras’ idea of tatonnement.
  1. Carl Menger proposed two doctrines that eventually became the foundations of Austrian economics. What are these doctrines?
  1. What is the foundation of Marshall’s economics? Discuss the time periods he applied to market transactions.
  1. State the theory of income distribution proposed by John Bates Clark?
  1. How did Clark view the effect of technological innovation on an economy?
  1. What term did Veblen use for “habits of thought”?
  1. Who coined the term “neoclassical”? What does it mean?
  1. Who contributed the theory of monopolistic competition? What does this theory say?
  1. Schumpeter disagreed with Karl Marx on how capitalism would break down. How did these two economists differ? [Note: Refer to the chapter on classical political economy for Marx’s views on capitalism.]
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EC 12 Pointers

Additional FAQs on Chapters 6-7 of Backhouse

  1. According to David Hume, why is manufacturing valuable? Could this view apply as well to agriculture? Discuss.
  1. In Adam Smith’s works, what did he consider as duties of government, which could not be relegated to the working of the market system or the Invisible Hand?
  1. Who invented the law of diminishing marginal utility?
  1. Who was the first to use a diagram to explain how demand and supply determine the market price?


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HW Assignment Due September 1, 2015

Read Chapters 6 and 7 of Backhouse, taking into account the pointers given on this website.

Please turn in, by email, answers to the following questions in the pointers:

Pointers No. 5: Nos. 1, 3, 4, 5, and 10.

Pointers No. 6: Nos. 4, 7, 8, 11, and 12.

Please bring at least two hard copies of your answers when class resumes on September 1.

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EC 12. Pointers No. 6

FAQ on Backhouse, Ch. 7 – Classical Political Economy

  1. Backhouse states that Adam Smith’s work was essentially “moral philosophy,” and not economics as the modern textbooks would have it. How did Backhouse define moral philosophy?
  1. Backhouse characterized political economy as having a “scientific” character. What did he mean by the “scientific character”?
  1. Backhouse states that Thomas Malthus and the followers of Jeremy Bentham were Whigs. Who or what were the Whigs? What did they stand for? (Note: The answer is in standard dictionaries).
  1. In Malthus’s theory of population, what are the three events that could contain or limit the growth of population? Which of these three is the most important, and why? Relate this issue to present-day problems of the Philippines.
  1. What was the defining theme of Ricardian economics?
  1. What are the two key propositions of Ricardian economics? On what three basic arguments or “pillars” did David Ricardo rely?
  1. What is the Iron Law of Wages that is attributed to David Ricardo?
  1. Say’s Law states that supply creates demand. Explain.
  1. How did J. S. Mill distinguish socialism from communism?
  1. List at least three situations wherein, in Mill’s view, the doctrine of laissez-faire will not work. Why would laissez-faire not work?
  1. How did Marx explain the “low” wages of workers?
  1. What did Marx see as the main driving force that produces the business cycle of expansion-crisis-recession?
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