Chapter 4: Economics, Wellbeing and the Limits of Markets
We know money cannot buy happiness, but we assume that it can increase people’s
happiness by allowing them to consume things that make them happier.
It is reasonable to assume that giving individuals more will make them happier.
Utility → refers to the amount of happiness enjoyed by a person.
Positional Goods → those where relative quantity matters most, where the link between
context and evaluation is strongest. Non positional goods, by contrast, are those where our
pleasure is independent of the behavior and possessions of others.
Nonreproducible → the supply of reproducible foods can be increased without diminishing their
The Baumol Effect → the tendency of services to rise in price relative to goods when an
economy becomes more productive because productivity increases are concentrated in goods
production. This is because labor services are valued not for their output but for the amount of
labor that goes into them and, therefore, cannot ave productivity increases.
**This leads to the costdisease in the service sector where the cost of providing
services rises relative to the price of goods.
Labor Productivity → the ratio of output to the labor input, either the number of workers or the
Economists who concern themselves exclusively with commodity transactions miss the great
volume of activity allocated b command or through other types of exchange and as gifts,
allocated by business decision, family, government, or by tradition.
Markets reward entrepreneurs who produce products that sell, markets encourage productivity
and the development of products that consumers want.
Market exchanges are voluntary, economists assume that they are welfare enhancing for both
parties and occur only because both parties to the transaction are made better off.
Markets also encourage producers to heed consumer demands, even the wishes of small,
niche markets, because if they do not provide the right quality products at a food price then
consumers may choose not to buy from them.
Markets can be democratic; and this protects members from discrimination.
Idiosyncratic → when a one party in a relationship needs special services for which the other
party is a unique supplier.
Market Failure → describes a situation where the market outcome does not maximize welfare
for society or even for the individuals involved.
*A situation where a free market will not lead to an efficient allocation of resources.
**Includes situations where the quantity producers supply at a given price does not equal
the quantity consumers want; situations where prices do not reflect the true social costs
of production because of externalities, public goods, or monopolistic practices by
Arthur Okun → Makes a utilitarian argument for redistribution, favoring redistribution from the
rich to the poor on the grounds that the poor will value income more because they have less of it.
If a market is not perfect, then society can improve on the market allocation, creating a better
and more productive economy. Chapter 5: The Evolution of Economic Ideas
Philosophic Antecedents →
Thomas Hobbes → English philosopher (15881679) who wrote during the social
disorders of the English Civil War of the 1640s. Warned that people were selfish egoists.
In his masterwork, Leviathan (1651), he warned that outside of society, people are selfish
egoists whose lives would be “solitary, poor, nasty, brutish, and short’, a ‘war of every
man against every man.” When people formed society, they handed all authority over to a
sovereign, a “Levithan”, exchanging obedience for protection.
John Locke → English philosopher (16321704) whose work was influenced by the
much more tranquil “Glorious Revolution” of 1689 where Parliament peacefully replaced
the English king. In Two Treatises of Civil Government (1690), he bases the right to
private property on the labor people put into developing the property. Individuals form
society, he argues to protect their rights and their property.
Voltaire → French philosopher (16941778) critical of France’s absolute monarchy and
its alliance with the Roman Catholic Church. Leery of any absolute system, he a