Are You an Austrian?

Take the following quiz of 25 questions on economic issues (or go to truncated 10-question version). There is also a Spanish edition. Click on the answer that most describes your view. You must answer all 25. Submit your quiz, and get your score emailed to you. There will be no follow up emails. (Q&A prepared with the assistance of Randall Holcombe, Peter G. Klein, Robert Murphy, D.W. MacKenzie, Joseph Stromberg, Mark Thornton, and many others who have suggested improvements in wording—none of whom bear final responsibility for the answers.)

The method and scoring of the quiz will be revealed once you submit your answers. Discussion of the quiz here. Essential sources for understanding the Austrian School intellectual framework are the Ten Must Haves from the Mises Institute catalog and the Austrian Study Guide. (Professors who want to use a version of this quiz in their classroom, running it off the Mises server and tailored to particular classroom needs, can email .)

1. What is the correct economic status of private property?
A Property is a naturally arising relationship between human beings and material things. Property and enforceable property rights make possible economic calculation, a wider and more productive division of labor, and therefore increasing levels of prosperity. Indeed, civilization itself is inconceivable in the absence of private property. Any encroachment on property results in loss of freedom and prosperity.
B Property is at the heart of most serious inequalities and oppressions in modern civilization. Only by regulation, transfer payments, redistribution of property, and common ownership can society arrive at fairness, justice, and human dignity for all.
C Property is an important component of our social system but its status as a "right" is contingent. It must be subject to regulation and modification for the general good. The state must intervene to prevent abuses of economic power, even at the cost of reducing traditional prerogatives of owners.
D Property is central to prosperity and economic growth. Accordingly, it is of the utmost importance that the state, or more abstractly the law, maintain and modify the bundle of property rights in such a way as to allocate transactions costs in such a way as to promote maximum growth and economic efficiency. Property does not arise naturally, but is the end product of the legal system.
2. What is the proper method to conduct research in economic science?
A The economist should not mimic the behavior of the natural scientists, because the social sciences involve human beings. Human action is characterized by intentional behavior, which involves the rational use of means to achieve desired ends. The very subject matter of economics—capital goods, money, wage rates, etc.—is not defined by physical or chemical properties, but instead by the mental or subjective attitudes that human minds take toward these things. Consequently, the proper method for an economist is to start with self-evident axioms—such as that people try to achieve the highest satisfaction at the lowest cost—and logically deduce conclusions from them.
B Like the physicist, the economist (if he wants to be scientific) should construct a precise model that yields quantitative predictions about economic variables, such as GDP and unemployment. Then the economist should test those predictions against the actual data as collected by statistical researchers. At any given time, the best explanation or "theory" of a certain economic phenomenon is that model which yields the best fit between predictions and actual data.
C The question is misleading; economics cannot really be scientific in the conventional sense of the term. In physics we have fixed "laws" that are the same in every society and every time period. In contrast, there are no fixed laws in economics. The economist might study a certain historical episode and conclude that, say, rent control didn’t achieve its objectives when it was tried in Manhattan after World War II. Nonetheless, it may still be true that rent control could work in Paris in 2004 if the people in charge take care to avoid the mistakes of the past.
D To be scientific, we need to modify the traditional economistic approach of viewing society as nothing but a collection of atomistic, egoistic individuals. In reality, human beings consider themselves to be part of a greater social whole. A more fruitful avenue of research would be to study the complex groups with which people identify, whether class, race, or sex. Such an analysis would reveal the undeniable power of relationships in society, and give a much better understanding of economic events than typical, simplistic economic models.
3. What is the reason for the interest rate, and should the rate be regulated?
A Interest payments compensate investors for their loss of liquidity when they sink cash into a business project or lend it out for a certain period; the interest rate is the price of liquidity. Interest is a monetary phenomenon, not a "real" one (as the classical economists thought). Modern economics recognizes the role of expectations or what might generically be called "confidence in the future." For example, if the interest rate jumps from 5% to 10%, this does not mean that people have become more oriented towards present consumption; it could simply reflect heightened anxiety about the economy. Government manipulation of the interest rate is certainly one of several tools needed to smooth economic fluctuations, but by itself this approach is relatively impotent. If everyone fears a worsening recession, employers will not hire more workers or build more factories, no matter how low the interest rate is pushed.
B Interest payments are a return on capital, and the interest rate in equilibrium equals the marginal product of capital. The situation is perfectly analogous to labor, where the wage rate equals the marginal product of labor. There are various technological recipes yielding output at various future dates, and consumers have preferences for consumption at various future dates. On the margin, present consumption will be preferred to future consumption, and an extra unit of capital invested will yield an increment in output (available in the future) that just makes the consumer indifferent between consuming now or waiting an additional unit of time and consuming the higher yield made possible by the productivity of capital. The government should not meddle with interest rates, for the same reasons that the government should not meddle with wage rates.
C "Interest" is just a codeword for profit; a capitalist earns interest when he spends less on wages and raw materials than he earns from selling the final product. This surplus value arises from the exploited workers hired by the capitalist. Under the wage system, workers are paid the bare minimum they need to survive, even though the full product of their labor far exceeds their compensation from the employer. In this respect, the wage system is no different from traditional slavery, where the slave owner keeps the product yielded by his slaves’ toil, and from this fund only "pays" them enough to maintain their bare survival. Obviously interest is a barbaric feature of capitalist societies, and will disappear once the system of wage slavery is overturned.
D Interest payments reflect the higher value of present goods over future goods. Other things equal, everyone wants to consume sooner rather than later. The current price of a computer might be $1,000, but the price of a claim to a computer delivered in one year would currently sell for less than that, say $900. An entrepreneur might invest $900 in labor and raw materials in order to sell a product next year for $1,000; his implicit interest return is due to the fact that the factors of production represent technological "claims" on future consumption goods, and thus their current price (the $900) is less than their ultimate sale price ($1,000). Obviously the government need not interfere with the market interest rate, since it merely reflects the subjective premium individuals place on a marginal present good over a marginal future good.
4. What is the economic impact of saving?
A In normal times, saving is not economically harmful but in a recessionary environment it can cause the economy to spiral downward. Saving reduces consumer spending and may not be translated into investment spending because of investor pessimism. This will reduce total demand in the economy and lead to unemployment. One way of correcting this is to expand the money supply to keep interest rates low. This will support private investment and stimulate total spending in the economy. Fiscal and monetary managers need to implement policies that discourage hoarding and encourage current expenditure. As for saving over the life cycle of individuals, we need a social safety net that will provide for people in their older years.
B The vast accumulation of wealth within select classes and families creates an economic oligarchy that shuts out those who cannot gain a foothold within the economic system. Inheritance taxes, and taxes on dividends, are essential to a society that values equality. After all, the yield from vast bank accounts really amounts to unearned income. No society can tolerate some people living off interest while others live paycheck-to-paycheck off the meager sums offered by minimum wages.
C Saving (which means forestalling current consumption) is essential for capital formation, but there is no socially optimal ratio of consumption to saving that should predominate in society. It all depends on the social rate of time preference, that is, the extent to which people prefer goods sooner to later. Individuals may choose consumption over investment or vice- versa. Government intervention can skew these choices, subsidizing or taxing savings or consumption or both. In order to have the mix reflect the most economical choices, government should have no policy toward saving, even in the case of saving for old age.
D There is no investment, and hence no economic growth, without saving. For this reason, the encouragement of saving should be an economic priority. Inflation discourages savings, which is a major reason why a policy of stable money should be the central-banking policy. Empirical studies show that saving takes place over the life-cycle of individuals. Miscalculations can occur, which is why the government might need to encourage private retirement accounts, a system that is more efficient than Social Security because it yields higher returns.
5. What is the source of economic value?
A Physical objects such as a banana or an automobile do not possess intrinsic economic value. On the contrary, only a human mind can attribute value to such items, and only then do economists classify them as goods. An object is valuable only because there is at least one human being who believes that this object can help satisfy his or her subjective desires. For example, even if a particular root cures cancer, if no one knows this fact, then the root has no economic value, and people will not trade money for it. Consequently, value is caused by an individual's subjective desires and his or her beliefs about the causal properties of a particular item.
B The value of a commodity is equal to the amount of total labor used in its construction. If one bicycle has the same market value as, say, 500 eggs, then we can write 1 bicycle = 500 eggs. In what does this equality consist? Obviously the bicycle is not "equal" to the eggs because of any of its physical properties. If we examine the matter carefully, we will conclude that the one thing that the two have in common is the amount of labor used in their construction.
C The value of a good is determined by the interdependence of supply and demand, or what might be called the interaction of cost and utility. In contrast to some schools of thought, which try to explain value on the basis of utility alone, the correct approach is that of Alfred Marshall, who realized that economic value is due to both subjective preferences and to objective technological conditions. To see this most clearly, consider that if the costs of production go up for a particular good, in the new equilibrium its final price must be that much higher.
D Economic value is a complex matter that cannot be explained through simple formulas. To understand why the people in a particular society value some things more than others, we must study their culture and history. For example, a Native American tribe might have valued a particular animal as sacred. The white Europeans, of course, did not share this value system and thus slaughtered the animals. The same is true of a good or service on the market.
6. What is money and how does it originate?
A Money can emerge from barter, but private interests will probably not develop it to suit the needs of a modern economy. We need central banks to sustain the financial sector. Efforts to manipulate the economy using the money supply will at best fail, and at worst cause severe problems. Monetary authorities should not increase the money supply at their discretion. They should increase it at a steady rate, matching the long term growth rate of the economy.
B Money is a vehicle for exploitation that distorts real values. Money is neither necessary nor desirable, but is an arbitrary artifact of history. Social progress will lead to revolutionary social changes, including the elimination of money. This will end exploitation and result in a society that aims at satisfying real values, instead of aiming at private financial profit.
C Money always emerges out of barter. The difficulties of finding trading partners under barter systems results in the emergence of commodity monies. Durable, portable, and divisible commodities, like gold and silver, typically fit the bill as money best. Money and related institutions emerge as an unintended consequence of self interested trading. The evolution of such institutions is best left to the competitive market forces that created them in the first place, as governmental intervention will result in inflation and other distortions.
D Money is a creature of the state. Sound monetary institutions require planning and a central bank. Central banks can also stabilize markets. Central bankers can counteract booms and busts in the private sector by expanding the money supply during recessions and slowing it during booms. Public control of the institution of money is key to running the economy.
7. What causes the business cycle?
A Variations in the money supply cause GDP growth to deviate from its general trend. Absent these variations the economy is relatively stable. Variations in the money supply cause inflationary booms and crashes. Lags in the adjustment of wages with these cycles mean that financial booms and busts will entail significant changes in unemployment rates.
B Competition in the face of declining profits and increasing monopolization generates increasingly large crises under capitalism. Capitalists invest in labor saving devices to keep unemployment high and wages down. Competition leads to falling profit rates and crashes. Some capitalists will then get good deals on capital from bankrupt capitalists, raising their profitability for the moment. However, the tendency of capitalism to reduce profit rates will lead to further unemployment and another crash.
C Expansion of the money supply artificially reduces interest rates. This causes a boom in consumer and investor spending. With businesses thinking longer term, and consumers thinking shorter term, a discoordination emerges in the economy. The time relationship between saving and investment, production and consumption, is disrupted. Market processes reveal that many investments are not really profitable but instead are clusters of errors. Businesses then liquidate these investments, causing a recession.
D Booms begin in excessive optimism, often prompted by technological shifts, resulting in speculative frenzies. Deficient total spending then causes recessions/depressions. When total savings exceed total investment, total spending on goods falls. This decreases the demand for labor to produce these goods. Then pessimism among business investors leads to insufficient aggregate demand and economic hard times.
8. What is the right anti-recession policy?
A Recessions serve as a reminder to society that laissez-faire is a failed policy. Policymakers should learn from recessions that it is long past time to reign in stock speculators and out-of-control corporations. More sectors should be brought under public control, even if it means nationalizing industry. We owe it to the real victims of boom and bust: the workers.
B The recession reveals underlying discoordinations and malinvestments brought about through reckless monetary policy. It is an essential phase that should be permitted to run its course. Countercyclical policy is counterproductive. Future recessions can be prevented by reforming the monetary system that creates the boom in the first place.
C The Federal Reserve can stimulate the economy through low interest rates, and Congress can increase aggregate demand, even if it results in deficits. Once the economy gets back on course, the Fed can permit rates to rise and Congress can curtail spending.
D In addition to traditional fiscal and monetary measures, it is essential that government protect industries hit particularly hard during recession. Government should also protect workers from layoffs and provide benefits for the unemployed. Consumers should not to hoard cash but rather spend, while the business sector should freely borrow from both banks and government to restore a productive equilibrium.
9. How viable is socialism?
A Capitalism is productive but capitalists themselves, left to their own devices, put profit before people, and selfishly discount the interests of workers and consumers. Institutions in society such as labor unions, minimum wages, antitrust regulation, child labor laws, safety regulations, and other legal structures, are essential to bridging the conflict between capitalists and workers/consumers. Public ownership is essential in some sectors such as utilities and education while private ownership seems to work in other sectors, provided regulation is present. In establishing such institutions, we have learned from the socialists. We should stop treating socialism as if it were some kind of bogeyman.
B Socialism is an eminently viable option, one to which history is inexorably leading. But it faces resistance because of the influence that business interests exert over current political systems. How can socialism work? As with wartime planning, socialist planners can watch inventories of goods and increase (decrease) prices when inventories fall (rise), and adjust prices to match consumer demand. They can also direct local managers to carry out production and innovation efficiently. This kind of trial-and-error process conducted by people of good will can work at least as well as the market, and without the social cost. Socialism is not rocket science; it is viable and may work better than capitalism.
C Experience has shown thus far that free enterprise has been more productive than most known socialist experiments. This may be due to the lack of incentives to produce or it could be due to the poor quality of planning under socialism. A completely unregulated market, however, has its share of failures as well, which is why it must be tempered in some respects. In any case, it is futile to search for a general theory that allows us to say, a priori, that all socialist planning fails. History shows us that some forms of central planning do work. Central bankers engage in planning, as do judges and regulators, and rather successfully so. The desirability of government intervention beyond its role as a rule maker and enforcer will depend upon the severity of market imperfections compared to governmental imperfections.
D Common ownership of the means of production (e.g., factories) precludes markets for capital goods (e.g., factory machinery). Absent market prices emerging from exchange within a framework of private property, there is no profit and loss and thus no rational basis for directing the use of capital goods towards the most urgent consumer demands in the least-cost manner. In contrast, private owners of capital employ property and use market signals (prices, including wages and interest) as guides. Freedom of exchange results in prices that reflect consumer preferences and directs the use of capital toward the most urgent uses, while entrepreneurial judgment contends with constant change. Socialism, which requires a total state, is not a viable option to capitalism. Any step toward socialism is a step toward economic irrationality.
10. What is the proper size and scope of government?
A Markets deliver ordinary consumer and producer goods in a relatively efficient fashion. However, for various economic and political reasons, private transactions for fundamental services and institutions, like law, money, and defense, fail badly. There is no sense in even discussing markets without the prior need of a state. Government must exist to enforce the 'rules of the game' for society to emerge from chaos. Government must establish and enforce basic rules for society, but avoid discretionary or destabilizing intervention into markets.
B Markets fail to provide fundamental institutions and suffer from serious imperfections concerning ordinary goods and services. For example, instability in markets causes recurring crises and leads to growing inequality. We should retain markets for most goods and services, but government must have discretionary authority to intervene in every market based on observed failures. In this way, the state and market can work together in a public-private partnership model.
C Markets are an arena for powerful business interests to exploit workers and consumers. Capitalism impoverishes and alienates the masses while enriching a few elites. It also devastates the environment and entrenches violence. A truly humane society would abolish private property, except for personal possessions (e.g. clothing and shoes). Communal arrangements in the production and distribution of goods deliver a more just and fulfilled society for all.
D Order in society can emerge through voluntary transactions between individuals. People can engage in private transactions for anything they value, including laws and security. Since all choices concern alternative future states of the world, each individual alone understands which goods best suit him or her, including protection and dispute resolution. Ideally, government would be limited to protecting rights, but government as we know it serves elites and violates rights to self-ownership, and efforts to limit governmental powers tend to fail. Private institutions for security and arbitration are more efficient and moral than public equivalents.
11. Who should regulate consumer products and how?
A Empirical studies indicate that consumer preferences do not change much in response to things like advertising. Consumers react rationally to information concerning products, so consumer safety is not necessarily a big issue. Governmental safety regulations may have perverse effects that increase harm to consumers, but government might play a positive role in providing better information to consumers, insuring that retailers and others tell the whole truth and nothing but the truth.
B Consumer products develop through experimentation. Consumer preferences also change and develop gradually through time. To meet them requires entrepreneurial judgment. Aside from a few innate demands concerning hunger and temperature, consumer preferences emerge as a result of interaction between many individuals. Each consumer regulates the consumer products he consumes by spending money. There is no good substitute for the market process concerning the development and dissemination of consumer goods.
C Capitalism has within it a culture industry that manufactures false preferences. People might think that modern consumer culture satisfies them best, but this is not true. Businesses gain through wasteful competition among consumers for social status and the creation of preferences for goods that no one really needs. Capitalism alienates consumers from their true selves while businesses exploit them for profit. Proper consumer products regulation requires revolutionary changes in society.
D Businesses mislead and manipulate consumers with advertising and other marketing devices, drawing them to and from products, creating an artificial sense of need, and bringing about waste. This can result in serious harm to consumers, or at least excessive prices. Faulty or dangerous products and fads are serious problems that government can and should address. There are also "merit goods" that consumers do not appreciate adequately, and should therefore get public subsidies.
12. What are wages?
A Wages are the basis for capitalist exploitation. All value derives from labor. But capitalists pay workers less than the value of their work so as to collect profits. Common ownership of the means of production will eliminate wage exploitation by eliminating private profits.
B Wages represent the discounted productivity of labor in satisfying consumer demand. Demand for consumer goods translates into demand for workers. Markets enable us to calculate the value of different types of labor, so that we can direct the use of labor to its most highly valued uses. Governmental intervention in labor markets (e.g. minimum wage laws) cause unemployment among less productive workers.
C Wages determine the income that creates demand for products. Raising wages increases demand for goods, and leads to prosperity. Capitalists will often pay workers too little to generate full employment. Government should pay subsidies to households and push for higher wages because this will increase demand and improve economic conditions.
D Wages represent the productivity of workers in satisfying consumer demand. However problems with monitoring workers cause employers to pay higher wages to increase productivity. This increases unemployment among low productivity workers. Governmental subsidies can correct this failure of markets, but this is not always necessary.
13. What causes economic growth?
A A balanced relationship between aggregate demand and aggregate supply is the leading determinant of economic growth. Because private markets cannot always provide this, stable institutional environments are necessary. The public sector plays a vital role in securing economic growth by providing a framework of legal and financial institutions. A variety of public-sector efforts such as low-interest rates and subsidies may also play a positive role. A limited amount of regulation is necessary, but this is not necessarily true.
B Private consumer demand is not enough for economic growth. Overall private spending is often too little, too manipulated by business, and rife with choices that overlook social priorities. Consumers may save too little or too much. This sometimes makes public deficit spending necessary to stimulate the economy. Also, private spending fails to supply public goods. Public spending in such areas is necessary for economic growth—particularly in education, infrastructure, and scientific research.
C The capitalist process causes economic growth, but this is a non sequitur. While capitalism is the most productive system, the distribution of wealth under capitalism is wrong. Whole classes of citizens are left out. Capitalists take advantage of workers by paying them the lowest possible wage instead of the value of their labor. So capitalism delivers the goods, but to the wrong addresses. What we need are workers' democracies where productivity can go hand-in-hand with a more just distribution of wealth.
D The source of economic growth is mutually beneficial, voluntary exchange. Within the exchange economy, consumers spend part of their income on goods and services to satisfy their most immediate wants. This drives current production. Consumers save part of their income according to their less immediate wants. This drives entrepreneurial investment in future production and leads to the development of sophisticated capital markets. Private contracts, competition in markets, and private institutions that allow for capital investment and accumulation are all you need to attain optimal economic growth.
14. What is your view of economics and the environment?
A Pollution is a visible example of market failure. So long as business is earning a profit, it tends to overuse resources and impose the environmental costs on others. As for valuable lands, old-growth forests, and endangered species, the tendency is to poach what is valuable and otherwise disregard the social interest in preservation. This is why environmental regulations must play a role in setting aside lands, preserving species, limiting pollution, cleaning up air and water, and otherwise policing business so that its profits do not come at the expense of the natural environment.
B The only long-term solution to the problem of the pollution and environmental degradation is a severe limit on economic development. This is precisely what local communities have done in order to preserve the quality of life. They have told developers: "this community values more than just production and material gain." Nor is it the case that people and profits are all that matter. The delicate ecosystem must be guarded in every respect, from the smallest life-form to the largest body of water and reaching upward to the earth's atmosphere. This also means controlling population.
C Most issues concerning the environment are best solved through reliance on market incentives. Courts should be attentive to the need to establish clarity concerning property lines when conflicts arise. Issues of externalities can be solved through compensation exchanges between owners, arrived at through arbitration. As for pollution, it can be minimized through a market for pollution rights, and these can be traded so that the costs of pollution are borne by the polluters. Fees for use of public lands are generally set too low so as to encourage overuse. Higher prices are the key to conservation.
D Virtually all issues concerning the environment involve conflicts over ownership. So long as there is private ownership, owners themselves solve these conflicts by forbidding and punishing trespass. The incentive to conserve is an inherent feature of the market incentive structure. So too is the incentive to preserve all things of value. The liability for soiling another's property should be borne by the person who caused the damage. Common ownership is no solution. Because national parks, for example, are not privately owned, the goal of economical management will always be elusive.
15. What do taxes fund?
A Taxes often serve corporate interests and the wealthy. Businesses want private revenue and profits, but socialized costs. This is due to the inordinate influence of business and the rich on politics. True democracy would not allow for this. Measures like campaign finance reform or public funding of elections might help greatly. Better still, movements towards community ownership of industry by the workers will make industry responsive to public needs, rather than private profit. This is important because the laissez-faire system leaves the public largely unserved in their essential needs.
B Since markets are imperfect, public spending could go to subsidize the provision of some of a variety of public or merit goods that the market would not otherwise provide. Taxes can also mitigate social costs and deter the consumption of goods that should not be made available through the market. Ideally, political competition between interest groups transfers income to those who value it most. It is possible that taxes are employed in uneconomical ways, but political competition will probably mitigate the worst examples of governmental waste.
C Taxes make up for the deficiencies of private expenditures, which do not reflect the benefits that the general public derives from some goods. Taxes fund public goods like law and order, roads, education, and scientific research that benefit the public at large. There are also social costs (i.e., pollution) of private production that need to be countered. Taxes also fund "merit goods" whose worth is not apparent to the general public, as well as discourage some "demerit goods" that the public should not want, but does. Experts in government can and should tax demerit goods and the sources of social costs to fund public and merit goods.
D Taxes raise money for transfers to special interests and public employees. In contrast to private businesses that supply the goods that consumers are willing to buy, public officials have no means to assess data as to what consumers truly demand, much less how to go about meeting those demands economically. Lacking the ability to act economically, public officials respond to interest groups, so tax money will necessarily end up with narrow interest groups rather than going to fund the provision of public goods. Taxes typically go to waste or to special interests that do not and should not own the funds.
16. What caused the Great Depression and how effective was the New Deal?
A The stock market crash of 1929 represented the most visible sign of a necessary correction in an economy artificially inflated by expansionary monetary policy. Instead of permitting liquidation, Hoover attempted to resuscitate the economy through interventionist measures, including protectionism, which only drove the economy further into depression. FDR built on this record and embarked on a disastrous course of central planning, which ended up saddling the US economy with bureaucracy and wage and price controls. The economy didn't fully recover until after WWII.
B All market economies face the problem of recurring crises, but Hoover failed to intervene in time and instead pursued a laissez-faire approach. The New Deal, for all its faults, was the right approach at the right time, an effort to deal with new economic realities. The New Deal boosted aggregate demand in the face of lost public confidence and represented a bold effort to employ both fiscal and monetary stimulus to make up for the deficiencies of the market. Where the New Deal fell short, the war made up the difference. The lesson is that active policy measures are essential to stabilize the economic system.
C The Great Depression put the failures of the market in sharp relief, and the New Deal was a wrong-headed attempt to save the market from itself. Business interests worked to prevent it from going nearly far enough, however. In this sense, the New Deal wasn't so much an experiment in economic democracy and planning as an attempt to save capitalism. The main beneficiaries were corporate interests, which is exactly what we might expect from an administration closely connected to the corporate elite. Where the New Deal failed, the national mobilization of wartime planning succeeded.
D The Great Depression began as a conventional business cycle, characterized by deflation that might have been fought through by monetary expansion. But Hoover failed to see the seriousness of the situation and permitted banks to fail rather than restore faith in the nation's money. This led to the election of FDR, who was right to take the nation off the gold standard but wrong to institute excessive controls over the nation's economy. It was World War II, not the New Deal, that ended the depression. With fiat money and a Fed that stands ready to intervene, the experience never needs to be repeated.
17. Do markets create and sustain monopolies and what should be done about it?
A If the history of capitalism shows us anything, it is that it leads to business concentration. With fewer and fewer firms dictating the terms, the result is ever higher prices combined with ever lower wages. Unions and antitrust enforcement have had some measure of success in curbing this, but neither institution goes far enough to counter the trend toward monopoly within market settings. We must also question the idea that competition itself should be a policy goal. Most often, it is socially wasteful and a slogan repeated by monopolists to justify exploitative behavior. The ideal of cooperation between all, a truly democratic economy, should be the ideal.
B The market tends to generate monopolies of varying sizes and types. Business should not be permitted to exercise monopoly power in pricing. It can be detected by various formulas comparing costs with output price according to a perfectly competitive model. Geographic monopolies may not be as important as they once were due to advances in transportation technology. What we face today are a variety of technologically driven monopolies, such as the example of Microsoft shows. Still, regulators need to be constantly on the lookout for businesses that attempt to employ market power, enriching themselves at consumer expense. Competition needs rigorous enforcement.
C Economists of the classical school were right to define a monopoly as a government-grant privilege, for gaining legal rights to be a preferred producer is the only way to maintain a monopoly in a market setting. Predatory pricing cannot be sustained over the long haul, and not even the attempt should be regretted since it is a great benefit to consumers. Attempted cartel-type behavior typically collapses, and where it does not, it serves a market function. The term "monopoly price" has no effective meaning in real market settings, which are not snapshots in time but processes of change. A market society needs no antitrust policy at all; indeed, the state is the very source of the remaining monopolies we see in education, law, courts, and other areas.
D Monopoly regulation has caused more harm than good by protecting particular competitors, not competition. Some types of regulation against trusts are based on flawed models that fail to understand that some firms gain market share solely because of their products' desirability to consumers. Most cited cases of "path dependency" turn out to be mythical. What is left for regulators to do? As Adam Smith said, they should prevent business conspiracy, blatantly predatory behavior, and otherwise assure a level playing field leading toward genuine competition. Finally, some goods lend themselves to being best provided by monopolies, e.g. courts and defense.
18. What is the role of equality and inequality?
A The modern emphasis on equality is the great policy advance of the last century. No longer does the political and economic system exclude women and minorities from participation but rather includes them as a matter of law. These groups tend to be artificially undervalued by the "invisible hand" of the market, which is why there is a role for anti-discrimination and public-accommodations law. The welfare state, too, has benefited society by insuring that the benefits of rising wealth are spread throughout society, so that the rich do not become richer at the expense of the poor. We've come a long way, but we still have a long way to go.
B Equality is a term that properly relates to mathematics but not to social science. Human beings are unequal in their endowments, opportunities, and will to achieve. Unequal does not mean inferior or superior; it merely means different. Differences are the very source of the division of labor, and, within a market setting, lead not to conflict but cooperation. While differences should be celebrated, property owners have every right to treat people unequally because it is owners that bear responsibility. Legislators, however, should not have any concern for bringing about equality of result or opportunity, either between individuals or groups of individuals classified according to any criterion. The only place for equality concerns the law, which should treat all individuals the same without regard to their station in life.
C Inequality is an intrinsic feature of a social structure that is mired in a prejudicial overhang from the long and shameful history of the manner in which Western society has treated women and other minorities. The prejudicial impulse, rooted in the spirit of conquest that gave birth to Western capitalism in the first place, is a form of violence and yet part of the corrupt infrastructure of the market economy itself. If the owners of capital were left to their own devices, excluded groups would remain so in perpetuity, so society had to act to restrain them. Full equality will continue to elude us, so long as we have a society that treats people as goods to be bought and sold, and so long as we put private ownership for the few above the common interests of us all.
D It is a great mistake to make equality of result a policy goal, because egalitarian legislation can kill incentives to improve. Punishing the rich is self defeating, even for the poor striving to make their way. Equality of opportunity, however, is different. It is something everyone merits by their very dignity as a human being. Thus should a nation strive for quality educational institutions, institute a limited inheritance tax, and otherwise assist those who, through no fault of their own, lack the means to gain entry into the division of labor. Once these institutions are in place, we will find that the forces of market competition will achieve egalitarian goals through predominantly voluntary means.
19. What is your view of free trade and globalization?
A International trade increases living standards through productivity enhancing specialization. Increased specialization and division of labor increases labor productivity. Globalization also allows for improvements in capital goods and the organization of production. The spread of global capitalism is key to sustained economic development the world over. Issues like environmental damage turn on local property rights enforcement, not the spread of global capitalism. Globalism is good both for consumers in the developed world and workers in the developing world.
B Economic internationalization has both positive and negative effects. Free Trade and globalization can increase productivity and increase consumer welfare. But, multinationals will exploit the workers and damage the environment in many places unless some authorities regulate them and work toward regulatory and tax harmonization. We need detailed regulation by global authorities to avoid the negative effects of international trade. A world government that would undertake such responsibilities would be of great benefit to mankind.
C Globalism sails under the flag of free trade but is really a vehicle for the exploitation of consumers and workers. Multinationals that can't find markets at home exploit workers in the developing world by paying near subsistence wages. This also damages indigenous cultures and leads to a commodification of people. The drive to do this stems from the nature of capitalist nations, which inevitably experience declining profit rates. The only cure to the ills of globalization is the abolition of global capitalism itself.
D Free trade has positive effects, but requires some public support. Labor specialization and capital investment by multinationals increase productivity and raise living standards. However, we need global governance through the World Trade Organization to provide the legal and financial conditions, such as transparency laws and protection of intellectual property rights, if we are to realize the advantages of global economic cooperation. Some global public institutions are needed for International trade and globalization to work to the good of all.
20. What is the function of the stock market?
A The stock market can play a positive role in society, but it is also subject to waves of speculative frenzy and abuse, typically by large institutions who take advantage of smaller investors. This can lead to stock overvaluation, insider trading, and other practices that benefit a handful of CEO's, promoters, and large investors at the expense of small investors. Large players can and do rig the system to their own benefit, which is why governmental regulation of stock markets can and should deal with these practices through severe fines, limits on CEO pay, mandated audits and reports, and vigilant audits of financial statements. Public authority is vital for a well-functioning financial market.
B The stock market constitutes a vital part of the process by which we coordinate production. Stock market prices reflect the productivity of business firms as well as entrepreneurial judgments concerning future productivity. Competition in stock markets enables us to ascertain the value of real investment. Takeovers, mergers, and insider trading are wrongly maligned because these practices represent real competition. Without the stock markets, rational coordination of production in modern society would be impossible. Governmental regulation cannot improve on the workings of stock markets because it is the market that most directly informs us regarding the best use of resources.
C The stock market represents the interests of an unproductive class in society. The investor class profits off of the labor of others, while roping the public into the system through investing schemes. Stock market speculation, insider trading, takeovers, and mergers, work to destabilize the economy. Financial acquisitions concentrate control of the means of production in the hands of a few. Bull markets produce no real wealth, and are really financial bubbles. These waves of stock market speculation lead to financial panics that disrupt the production of real wealth. What we need are not more high-flying financial centers but more common work at the local level toward common goals.
D The stock market helps to align incentives in production and sort out productive from unproductive companies. At any moment, the prices on the stock exchange reflect all available and relevant information, which is why forecasts are right on average and no one investor can outwit the market on average. Takeovers and mergers put pressure on CEO's to serve the interests of investors, large and small. The system works so long as regulations mandate full transparency and no relevant knowledge is deliberately withheld. In this way, government intervention can improve the workings of stock markets.
21. What are labor unions for?
A Unions are labor market monopolies because they benefit from government privilege. Unions work to raise wages above competitive levels. This reduces the employment of low productivity workers and decreases the overall production of consumer goods. Union leadership is often corrupt and takes great advantage of union workers themselves. Unions also work to concentrate power into the hands of pro-union politicians in government. The concentration of this power is inimical to free societies.
B Unions are monopolistic, but may serve some positive purposes. Their historic role has been to offset the concentration of industrial power. At the same time, too much union domination may also raise wages above competitive levels and reduce employment and production. The effects of unions vary with particular circumstances, so there is no basis for forming a general opinion as to the merits of unions. It depends on circumstances of time and place.
C Unions, as currently constituted, cannot repair the defects of capitalism. Capitalism exploits workers by its very nature. Since all capital comes from labor, capitalists must pay workers less than their work is worth in order to exist. Unions cannot change this. The only thing that can change this is the abolition of capitalism and community ownership of the means of production. To the extent that unions represent a vanguard movement to bring this about, they should be defended and empowered.
D Unions are vital to free societies. Unions act as a countervailing power to offset the influence of business. Capitalism naturally concentrates great power in the hands of business leaders. So unions are necessary to prevent the exploitation of workers by big business. Government should support unions with laws guaranteeing the right to organize, and workers are usually always better off with union representation than without.
22. What are the economic implications of national defense?
A National defense is neutral to the market. On the one hand, it cost taxpayers money, but, on the other, it provides a stable environment that permits peace to flourish and rights to be protected. By its very nature, government should maintain a monopoly over the use of force, and defending the nation against external and internal foes flows from this primary obligation. Before we can even talk about economic production, government-provided security and defense must be firmly in place. Otherwise, we are back to the Hobbesian jungle.
B National defense is desirable on its own terms, but the strongest economic impact, as with many public-sector programs, is that it creates jobs and boosts incomes to strengthen the economy. It is especially beneficial to the GDP because so much of military production involves heavy industry. The funding does more good for the nation overall if spent on large projects than if spent on small consumer goods. Moreover, public funding generates technological spin offs that assist all of society, and also employs many people who otherwise would lack the training and discipline to earn high wages in a market setting. The military, in fact, is a great example of government planning at work, serving all of society.
C Government spending on the military is a social cost that crowds out private alternatives, even as its alleged benefits are unquantifiable. Security, like any good desired by individuals in society, can and is provided by the market economy, which is to say, by individuals organizing themselves voluntarily within the matrix of private property and exchange. Private security works vastly better than the government system that squanders trillions, is riddled with bureaucracy, provokes enemies, and doesn't actually work to defend the nation. Governments have used the excuse of "defense" to start wars that reinforce the power of the state over the market.
D National defense supplies a public demand that would not otherwise be produced in sufficient quantity if supplied only by the market. This is because national defense is an example of a public good. Everyone benefits from it and these benefits are not excludable in the way market goods are. Because of free riders, and the sheer expense associated with its provision, individuals have no particular incentive to purchase the good for themselves. This is why most societies from time immemorial have charged government with the main obligations of security provision. The benefits surely outweigh the costs.
23. What about goods like education and roads?
A There is no reason to debate whether roads and education are essential needs, and yet the market will likely not provide them in sufficient quantity. The only real question concerns the public administration. There are good and bad ways to provide these services. Market incentives can increase their efficiency. Construction and administration can be contracted out. Traffic problems can be addressed through tolls and other forms of market rationing. Schools can be made more competitive through vouchers and innovative systems of government chartering to meet special needs.
B There are some goods that the market cannot provide in a way that meets social needs. Private schools are fine for those who can afford them but a democratic society must provide education to all. So too with roads, which are part of the public infrastructure of a modern society and hence should not be subjected to the wiles of free enterprise. That doesn't mean there isn't room for reform. Schools are inadequately funded and teachers underpaid. Roads are subject to overuse, and should be supplemented by generous provision of public transportation systems. Carpooling should be encouraged.
C These are goods like any other: they can be supplied by markets and markets alone. The state cannot construct educational institutions that pass the test of economic rationality because it must attempt to do so without the benefit of direct consumer feedback. Instead it collects taxes and spends them arbitrarily. The same is true of government roads: how many are built, in what quality and where, ultimately comes down to political choices influenced primarily by political considerations. In a market economy, the range of quality, quantity, and type of goods and services correspond to social needs. These goods are services that are valued by consumers, and hence, they will be provided if it is economically feasible to do so relative to other social priorities.
D It is often claimed that free enterprise is the answer to our economic problems, and that public authority cannot provide. But the example of modern schools and roads are a clear contrary case. Public schools have educated millions and public roads are a key to making the open society accessible to all. Indeed, the success of these institutions points the way to the vast possibilities available to society that has the courage to move beyond laissez-faire and toward true social provision of all that we value, but which the narrow interests of business will not and cannot make accessible to all.
24. What are the economic implications of warfare?
A Warfare reduces economic welfare by destroying real resources. It can benefit a select few who benefit from military spending on the winning side only. For most consumers and businesses it means drastically reduced prosperity. The only justifiable reason for a war is pure self defense.
B War reduces economic welfare by destroying real resources. It may benefit only a select few from military spending, but could also be important in terms of national goals. If diplomacy fails, the general welfare of society may increase as a result of attaining important national objectives via warfare. Defensive wars are always justified. Offensive wars may be good in some circumstances.
C Warfare stimulates the economy by increasing demand. While wars appear to be destructive, we generate more wealth by rebuilding the things that wars destroy. This employs idle resources and makes for increased prosperity.
D Warfare exists to increase capitalist profits. As competition forces profit rates for domestic ventures down, capitalists go overseas to collect profits. This leads to conflicts between capitalists in different nations. Nations go to war over such competing imperial claims. Capitalism is the main force behind wars. Warfare will end with the end of Capitalism.
25. Who serves society best?
A Legislators and policy experts, along with consultation from a variety of advisory groups, have the public interest in mind when they formulate and execute policies. They are willing and capable of improving the welfare of society. Entrepreneurs pursue profit, and care little for overall public welfare. They serve the public interest only insofar as they earn a profit in the process. Given numerous and severe defects in the way markets work, informed civic leaders officials need to work to improve public welfare—a viable project provided that we limit the influence of business interests in politics.
B Entrepreneurs play an indispensable role in society. Entrepreneurs are alert to profit opportunities and make judgments concerning the future. Competition concerning these opportunities results in profit and loss statements that generate prices for labor and capital. This competition directs resources to the satisfaction of the most urgent consumer wants. Successful politicians are those who are the best at retaining and wielding political power. These are typically the most ruthless people in our society.
C Capitalism serves entrepreneurs and entrepreneurs serve themselves. The capitalist system is predicated on the exploitation of consumers and workers. The only solution to these problems is to do away with capitalism, and with it the capitalist class of entrepreneurs. A truly democratic or socialist society will end exploitative tendencies. People will no longer pursue private profit because private profits will no longer exist. People will have better motives and be more publicly spirited under socialism. The leaders, if there are any, in the future socialist society will promote the common good.
D Politicians pursue their own interests, but political competition and the public-policy process leads them to serve the public to some extent. Entrepreneurs also serve the public to some extent, because they earn a profit by serving customers. The question as to whether civic leaders or entrepreneurs serve the public best is an open one. This depends upon particular circumstances of time and place. The democratic society has shown itself capable to sorting out questions of social management over time.
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