Political Economy Basics

Front 1

Why do firms exist, according to Coase?

Back 1

to reduce costs of transactions in markets

Front 2

What are two ways of organizing economic activity?

Back 2

1) price + legal contract

2) integrated command

Front 3

What are the three basic types of markets?

Back 3

1) money - central bank, network of banking institutions coordinating supply and demand for money

2) capital - stocks/bonds or loans, transforms M to C to M1 ('money capital')

3) finance - secondary trade of capital market assets (stocks, loans, etc)

Front 4

What are 4 functions of investment banks

Back 4

1) raise $$ for companies from investors - pension funds, hedge funds, private equity

2) proprietary trading - use own $$ to trade shares and bonds

3) advising -- mergers and acquisitions

4) new financial products

Front 5

What are two core struggles in organization of firms?

Back 5

1) workers vs. capital -- wages, organization of work/training, hours

2) managers vs. owners of capital

are interests against each other, or shared?

stock options, dividends, share buybacks -- tied to shareholder value movement

Front 6

What are four core functions of government in the economy?

Back 6

1) Production of services, goods, research

2) Spending + transfers (taxation and social welfare programs)

3) economic activity -- fiscal + monetary policy

4) Regulating markets

Front 7

What are two financial products that have increased the financialization of the economy?

Back 7

1) asset-backed securities (ABS)

pool risk to spread it in case of defaults, then structure this risk via collaterialized debt obligations into "tranches"

2) derivatives --

Front 8

What are 3 core sources of modern finance?

Back 8

1) Banking

2) Stocks

3) Bonds

Front 9

What are 4 types of regulation for banking?

Back 9

1) Liquidity

2) Solvency

3) FDIC deposit insurance

4) Prudential regulation vs. liquidity crisis

Front 10

Two core assumptions about Smith regarding human nature that defined his approach to capitalism?

Back 10

Humans wish to:

1) GROW

and

2) EXCHANGE with one antoher

Front 11

What is a problem with Smith's two assumptions about human nature?

Back 11

They are not historically bound. Pre-capitalism, not clear that humans had these two desires, or that it was advantageous to have them! W

Front 12

How did serfs respond to subsistence living patterns?

Back 12

1) social protection: larger families as social protection

2) subdividing land among themselves/growing family lineages

3) safety via diversifying necessary foods

led to Malthusian cycles -- famine, epidemics, war

Front 13

What is Brenner's argument for how we got capitalism?

Back 13

Unintended result of differential struggles between serfs and lords across Europe

Front 14

Three principles of capitalism (think LK's class)

Back 14

1) Property is private -- right to transfer and sell, use in private ways deemed legal, and keep residual income from use of property

2) Actors are market dependent - commodities are produced for market exchange -- rather than subsistence

3) Labor is free politically and from means of subsistence -- workers can leave their jobs but they are separated from means of subsistence so must sell skills on market to maximize price/cost ratio

Front 15

Keynes' view of Say's law was

Back 15

Say was wrong! Supply does not always create it's own demand.

Think about time horizon, and animal spirits in capitalism -- Liquidity preference

Front 16

what is the liquidity preference?

Back 16

Keynes view: in times of greater uncertainty and risk, people want to store money and save it, removing it from economic exchange and leading to contraction

mutually beneficial harmonization of individual self interest is not necessarily aligned with collective welfare

Front 17

What was classical vs. Keynesian view of unemployment?

Back 17

Classical view focused on wage NON-rigidity: unemployment resulted when workers were not willing to take lower wages in declining product markets, and that full employment could be achieved if workers could accept lower wages

Keynesian view: workers wouldn't accept this even in recession, and even if they did, it would make recession only WORSE because there would be decline in demand for goods and services that workers buy

Front 18

What are 4 different major changes/evolutions in work organization in 20th century?

Back 18

1) Assembly line

2) Taylorism -- dividing up production process into simplest possible tasks

3) Fordism -- mass production via routinizing everything

4) Lean production (1980s in Toyota) --

Front 19

What does GDP equal to?

Back 19

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Front 20

What is the preferred investment ratio?

Back 20

20-22% of GDP (investment in fixed capital -- machines, structures, buildings, railways)

Front 21

What is the relationship between employment and inequality?

Back 21

One of the main points of Jared and my new book is that unemployment is a main cause of inequality. This is because when more people get hired it disproportionately benefits those in the bottom half and especially the bottom fifth of the income distribution.

These are the people who are most likely to get jobs. And those with jobs will also have the opportunity to work longer hours. And, a tight labor market will create conditions in which workers at the bottom will have more bargaining power. Walmart and McDonalds will be paying workers $15 an hour if that is the only way that they can get people to work for them.