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Lecture 11

IDSB01H3 Lecture Notes - Lecture 11: Pareto Efficiency, Normative Science, Washington Consensus


Department
International Development Studies
Course Code
IDSB01H3
Professor
Ryan Isakson
Lecture
11

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IDSB01 Lecture 11 April 2, 2014
Neo-Classical Economics and Institutional Political Economy
Exam:
- Short essay
- Short responses
- Compare and contrast
- Cumulative – stressing the latter half
- Study guide on blackboard
Neo-Classical Economics
- Paradigm in response to Marxian economics
- 19th century
- Attempt to revive and rescue the classical argument for capitalist provisioning
-The Innovations of Neo-Classical Economics (Microeconomics)
oUtilitarian Value Theory – (draws on Bentham’s Utility) the value of a good is
determined by the pleasure that it provides
Individuals want to maximize this utility/pleasure and minimize pain
Opposed to a labour theory of value – what all commodities have in
common isn’t the labour but the fact that they all bring us pleasure
We can’t measure pleasure – so this is a subjective theory of value
Since it’s not focused on labour, it undermines Marxian theory
oMathematical rigour
Newtonian physics
Uses calculus for modelling
o“Objective Science”
Whereas classical political economics emerges from philosophy, neo-
classical economists weren’t concerned with questions of good/bad but
with measurement; efficient/non-efficient. Positive science vs. a normative
science
But by choosing efficiency as the measurement of what an economy
should be a value judge is made…
oAtomist
Methodological individualism
Modelling itself again physics – atom is the smallest part
Doesn’t focus on classes or collectives of individuals, but on the smallest
parts – individuals
Economy consists of these individuals added up
- Objective: capitalism
- Entry Point: Individuals
- Logic:
oDifferential calculus
oPrivate property and competitive markets -> efficiency and maximum happiness
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IDSB01 Lecture 11 April 2, 2014
Key Assumptions of Neo-Classical Theory
Actors Institutions
Consumers
oUnlimited wants
oSelf interested
oAll “likes” and “dislikes” can be
measured as “utility”
Markets
oCompetitive – many many firms
out there producing identical
products
oComplete – they are pervasive,
no rural pockets in the world not
linked to markets. And the
provisioning for all goods can
take place in markets (houses,
land, child care).
Producers
oObjective is to maximize profits
Information
oComplete and perfect – if you
are a consumer, you know
exactly what you’re buying in
terms of quality and what the
prices everywhere else are.
Producers know everything
about input prices, labourers’
skill level, etc.
Property Rights
oClearly defined
oEnforceable – no one is
claiming property that belongs
to someone else
Efficiency and Pareto Optimality
Three conditions of (Wilfredo) Pareto Optimality:
oProduction Efficiency: Resources are used to produce the max amount of output.
An economy is producing on its PPC.
oProduct Mix Efficiency: Not only producing as much output as possible, but the
optimal combination of goods and services, the one that is most “valued”.
oExchange Efficiency: G&S are distributed to the people who “value” them the
most (i.e can pay the most for them!)
Neo-Classical Thinking and Neo-Liberal Restructuring
Ideology that we must strive for efficiency but promoting individual freedom within
representative democracies, within markets (spend dollars where you deem appropriate)
Rise of NC economics in late ‘70s
oAcademia (“Chicago School”)
oPolitical (Thatcher, Reagan)
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