Quiz

Answer each question in 2-3 sentences.

* According to the Austrian perspective, why is it problematic to use quantitative methods in economics?

* What is the key difference between an economic good and a non-economic good?

* Explain why value, according to the text, is not considered inherent in goods themselves.

* How does the concept of marginalism impact our understanding of the value of different units of the same good?

* Why are goods vital for survival, such as water, often inexpensive, according to the principles discussed in the text?

* How does the text explain the relationship between capital accumulation and the lengthening of the production process?

* What does the author mean by stating, "Capital is not just the product of any investment in lengthening the production process; capital consists of only the investments in the lengthening of the production process that yield higher productivity?"

* In what ways does the text suggest that human thought is the last bastion of human freedom?

* What are the two main ways that scarcity is created in the access to ideas, and why does the author criticize the second method?

* Explain how the division of labour relates to the size of markets and the potential for technological advancement.

Quiz - Answer Key

* Quantitative approaches conflate measurable factors with causative factors, ignoring the subjective nature of human action that drives economic activity and leading to imprecise results. Moreover, the Austrian school points out that value is subjective and cannot be measured or compared interpersonally.

* An economic good is scarce, with demand exceeding supply, leading to rivalry for access. Conversely, a non-economic good is abundant, exceeding demand, and there is no competition to obtain it.

* Value is a subjective judgement that people make regarding the importance of goods for their well-being, not an intrinsic property. Value exists only within the consciousness of individuals and their relationship to the goods.

* Marginalism highlights that each additional unit of a good has a decreasing value to an individual as it meets less pressing needs. The value of a good depends on the specific use and relative quantity, not just on the good itself.

* While essential for survival, water is often cheap because basic needs are often met in sufficient quantities and therefore the marginal value of additional units is low. People do not pay based on the total value of water for survival, but on the value of the marginal units they consume.

* Capital accumulation lengthens the production process by adding intermediate steps. For example, a fisherman might take time to build a fishing rod rather than catch fish directly, therefore increasing the time before he achieves his end.

* Capital is not merely investment into production; it's specific investments which demonstrably improve the yield of the production process. This means only investments that lead to higher productivity are considered capital.

* The author suggests that human thought remains free because it cannot be controlled by physical force. People can be coerced to act in a certain way but their inner beliefs cannot be suppressed, making ideas resilient.

* The two ways are trade secrets and intellectual property. The author criticizes intellectual property laws such as patents and copyrights because they restrict innovation, diverting focus from actual advancement and toward lawsuits.

* The division of labour enables people to specialize in increasingly specific tasks that can lead to higher productivity. Larger markets support the division of labour, which is necessary for technological progress and large-scale production to be viable.

Essay Questions

* Discuss the significance of subjective value in the Austrian School of Economics, and how it contrasts with other economic schools of thought.

* Explain the role of capital goods in the production process, and evaluate how capital accumulation impacts a society's economic well-being and future prospects.

* Analyse the concept of 'time preference' and its impact on the originary rate of interest, savings, capital accumulation and economic development.

* Evaluate the importance of a sound monetary system in a free market economy, paying particular attention to the distinction between commodity credit and circulation credit and exploring the consequences of inflating the money supply.

* Examine how technological progress has affected standards of living and the economic structures of society, including the evolution from human powered labour to modern machinery.

Glossary of Key Terms

Austrian School of Economics: A school of economic thought that emphasizes methodological individualism, subjective value, and deductive reasoning. It rejects mathematical and empirical approaches to economics.

Capital Goods: Goods that are not consumed directly but are used in the production of other goods. These are also known as higher-order goods.

Circulation Credit: Credit issued by banks that is not backed by savings, leading to an increase in the money supply.

Commodity Credit: Credit issued by banks that is fully backed by savings, acting as an intermediary between savers and borrowers.

Economic Good: A good that is scarce, with demand exceeding supply, leading to competition for its use.

Fiduciary Media: Notes and bank balances redeemable for money but without equivalent backing, thus functioning as a form of money.

Fiat Money: Government-issued money that is not backed by a physical commodity like gold, with its value based on government decree or public confidence.

Hardness: In relation to a good, the difficulty of increasing its existing liquid supply. Quantified by the stock-to-flow ratio.

Marginalism: An economic concept that states the value of a good is determined by the satisfaction provided by the last (or marginal) unit, not the average or total utility.

Monetary Demand: Demand for a good as a medium of exchange, intended for later use in transactions.

Non-economic Good: A good that is abundant, with supply exceeding demand, meaning there is no competition for access.

Originary Interest Rate: The percentage increase in money required to persuade an individual to delay consumption, reflecting the underlying time preference.

Power: The quantity of energy delivered per second. In the context of this book, it means energy at the margin, in the form of work.

Production Possibility Frontier (PPF): A curve that shows the maximum combinations of two goods an economy can produce with its current resources and technology.

Purchasing Power: The value of a currency in terms of the quantity of goods and services it can buy.

Salability: The ease with which a good can be exchanged for other goods or services on the market. Money is considered the most salable good.

Saving: Abstaining from current consumption, which is a prerequisite for capital investment.

Stock-to-flow Ratio: A measure of hardness calculated by dividing the total existing liquid supply of a good by its new annual production.

Subjective Value: The idea that value is not inherent in goods but is assigned to them by individuals based on their individual needs and preferences.

Time Preference: The tendency of people to prefer goods and services sooner rather than later. A higher time preference means people value present goods more than future goods.

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