Summary SMP Exam
Week 1
Radford – Economic Organisation of a POW Camp
- POW = Prisoner of War Camp
Economic activity can be found in a POW camp
- Economic activity = exchange of goods and services
- No longer giving away, because supply was limited started to think about maximizing
individual satisfaction.
- Cigarette became standard value in the permanent camp.
- Transit camp was chaotic and uncomfortable. There were many markets in the transit
camp.
- French trading centre was highly organized.
- Coffee of the French went over the wire, and came in contact with other economic
worlds.
- Permanent camps in Germany were the real markets. Only cigarettes accepted, no
barter, and food had standard prices, but clothing was less homogenous so price
determined by the seller.
- Cigarettes were good but, some brand better than others and only poor quality was used
as money. The red cross send cigarettes that were machine-made, but if you broke down
the machine-made cigarettes, you could make more hand-made cigarettes. So these
became of use in the market. Hand rolled was not homogenous so price was no longer
stable.
- Red cross inability of delivery crashed the market.
- BMk = bully mark, became a paper currency.
- Public opinion important, they needed to have trust in order for the market to work.
Needed general support for recommended scale.
Preparation questions based on the article:
a) How did the market evolve?
Differences in preferences. Since the prisoners had different preferences and different
combinations gave them the most utility, they started to trade in order to maximize
their individual utility. Cigarettes became the central currency, because it is easy to
transport and difficult to mitigate.
b) What does a ‘market’ need to function?
The market needs a central currency, in this case, cigarettes became the main currency.
Furthermore, it is best for a market to have some kind of stability. In the transit camps
for example, there were multiple markets which asked different ‘prices’ for the same
goods.
c) Is ‘market’ in human nature?
Yes, humans try to increase their own utility. This can be done by trading on markets.
,Summary SMP Exam
Three levels
- Societal level: does the state have to fix the market
- Sectors and organizations: real markets are embedded, so they are not a simple market
- Individuals: market incentives are important. If you create market incentives, people and
organizations work harder
What is market
- Exchange of goods and services. Different preferences.
- Price creating mechanism —> creating equilibrium.
- Price is reflection of scarcity.
- Oversupply/undersupply
- Coordination mechanism for allocation.
In the beginning only talking to people in your own camp, so prices were different.
Information board emerged and there was first a middle man who collected rent from the
transactions.
Why did the market emerge?
- The market emerged because people have different preferences and they want to
maximize their own utility by trading for goods that give them more utility.
Why is the market efficient?
- The market is efficient, because there was no oversupply/demand. There was an
equilibrium.
- Consumer surplus
- Allocation efficiency, process efficiency.
- Free exchange: people only do exchanges that makes them better off
- Without the market it would be labour intensive.
- Price regulates all the costs in between. Low transaction costs.
What was needed for the market to operate?
- Clear information, trust in the market, trust in currency. Currency keeps its value.
Property rights. Ethics.
- We need organized markets, so no chaos. Which we could find in the permanent
prisons.
Why are markets efficient
- Neo-classical economic theory
- The invisible hand or markets can coordinate economic processes efficiently, no need for
government coordination.
,Summary SMP Exam
- Prices give efficiently information about relatively scarcity of products
- Self-interested behavior of individuals on the market leads to the greatest social benefit
- Critique: public goods —> non-rivalrous, non-excludable; government needs to
intervene.
The advantages of markets
- Full market: producers and buyers
1. Gains from trade (POW camp)
2. Gains in productive efficiency
Specialization – can produce more with the same resources
Competition – incentive for cheaper production, better products, and innovation
3. Reduction in transaction costs using information transmitted by prices
1. Scarcity > prices up > produce more
Planned economy slow and inefficient, because bureaucracy and huge
transaction costs.
Different views on state vs market
- Markets/economy
Markets as natural form of organizaton: Smith
Slavery, feudalism and capitalism as modes of production. Create power structures:
Marx
- States
Provide property right
Provide trust
Provide law and order
- Who holds modes of production: land, capital, assets
Different views on state vs. Markets
- Historical view on markets. We need to understand what was the market in the
beginning of history and is it different from market that we know now.
- We live in a market society now.
- A simple market as platform for exchange is part of human history for a while. But it has
been at the margins, has not defined social relations people had. Traditional economists
were different.
- Market society —> social relations embedded in economic institutions. With capitalist
institutions an effort to mold human nature to fit the new market based economic
institutions.
- Sociology of markets: markets are social arenas —> the cognitive maps individuals
possess and that offer conceptual tools to understand or interpret the moves of others.
, Summary SMP Exam
Week 2: Efficiency
Questions
a) What does ‘efficiency’ mean as the core concept in this neo-liberal logic?
Efficiency in the neo-liberal logic means allocative efficiency making best use of
scarce resources to meet people’s needs + preferences.
b) Heath provides a different answer to the question “when do governments get
involved?” Why?
Normative standards are important. They tell us what the state ought to be doing.
There are three normative purposes that provide justification for the scope of
government activity, namely: equality, community and efficiency.
Heath describes three models of the welfare state: the redistributive,
communitarian and public-economic model of WS.
Redistributive WS: central function of WS is redistributing resources, with goal of
making outcomes produced by market economy less unequal.
Communitarian WS: central function of WS is imposing limits on scope of market to
resist commodification of certain domains of interaction.
Public-economic WS: sees WS as complementary to the market. WS corrects market
failure either through regulation, subsidization and taxation or the direct provision
of goods and services.
One aspect of WS that any model should be able to explain: growth of WS in the 20 th
century.
Conclusion: only last model is able to do this. Public-economic model is most
plausible because provides good explanation of existing configuration of WS
activities + it can explain why in all Western democracies state spending rose as
fraction of GDP.
Article 1: Greater London Authority - The rationale for public sector intervention in the
economy
Market failure
- Competitive market efficient delivers right amount of goods and services that best
meet people’s needs and preferences given scarce resources.
- Allocative efficiency: making best use of scarce resources to meet people’s needs +
preferences
- Market failure = problems with mechanisms through which market works.
Public sector intervention
- Needed when:
1. Market is not efficient (market fails) AND
2. intervention improves efficiency
- Most likely when:
1. Market failure is big: significant problem
