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take home test from my first semester at UMSL

Posted by on January 11, 2010

I came across this today, and I really like it, so here it is:

[questions 1 and 2 were in-class, 3 and 4 were take home. I’m pretty sure the questions were something like
3.) Discuss the history of the theoretical notion of how prices should be determined. Begin as early as possible and discuss Adam Smith’s contributions in particular.

4.) Discuss the theories of Thomas Malthus and how he was influenced by contemporary thinkers as well as his influence today. Was he right or wrong?

or some such]

3. The earliest record of a value assigned to a commodity comes to us from the Babylonians of the Euphrates river valley. They recorded the effort expended in production of their grain harvest in terms of “female labor days” and were able to compare their production from one year to the next in this way. There is every reason to believe that before the advent of money, when barter was the dominant means of exchange, people still worried about whether they were getting sufficient value in exchange for what they gave up. After money began to reign supreme over exchanges, the question was surely put to the most intellectually capable, the philosophers: “How much money should one pay for a thing, and how much can one expect to get?” Aristotle weighed in that all goods had two separate values: value in use and value in exchange. Value in use comes from the fact that men only make things which can be used, such as shoes(to wear) and art(to contemplate, or add to aesthetic value). Value in exchange comes from the fact that one can get something to use by giving up something else, hence the thing we give up had value to us even though we did not use it. Aristotle saw value in use as the only natural means for valuation, as exchange was an unnatural value to apply to an object. Things are made to be used, and not to be exchanged, he argued. What he left out was that value in exchange gives rise to increasing efficiency brought about through specialization. That is, as Adam Smith put forth, when tasks are divided up into simpler steps and the steps each handled by a separate man, overall productivity increases, thus there are more things “for use” to go around. Smith indicated that value in exchange would be determined by the amount of inputs required to produce the thing, thus the “labor theory of value.” Adam Smith saw price as a means to allocate resources and set about establishing definitions for value and price. Smith saw the natural price of a thing as the price at which it could be sold with zero economic profit. To determine value, Smith said to analyze the factors which cause the market price to not equal the natural price. Ricardo expanded on Smith’s notion of price by realizing the notion of comparative advantage. The real value of a thing, according to Ricardo, was not in the labor hours required to produce it, but in the comparative ratio of goods which could be obtained by specializing in the production of one good and trading with someone who produces some other good at a lower relative cost. Natural Order was important to Smith because it set up the initial conditions driving which goods could be produced most efficiently and by whom.

4. Malthus’ father was friends with David Hume, and the radical atheism of Hume is somewhat echoed in the defeatist notion lying behind Malthus’ population theory. Moreover, his mathematical background prepared him to analyze the increasing food supply and increasing population as two functions operating on a similar timeline. He considered the governments role in the face of overpopulation to be misdirected in his time. The “poor laws” were only hastening the decline by encouraging the ignorant poor to raise children they couldn’t realistically support. He saw a possibility of preventative checks on population growth in the form of fewer marriages, of marriage later in life, or abstinence. Malthus’ theory was criticized for it’s pessimism, as well as for it’s exaggerated approach to actual data. As we know today, with 300 years of hindsight, Malthus predictions simply didn’t hold up. His primary critic was his contemporary and good friend, David Ricardo. Malthus famous population theory states that population grows geometrically(2,4,8,16,32,…), while food production only increases arithmetically(2,3,4,5,…) thus leading to an inability to provide sufficient food for all, or even most. Due to the limits of production, Malthus saw an increasing supply of workers fighting for shares of a relatively decreasing pie, thus each man would command less and less wages, with subsistence being a floor beneath no one could reasonably fall(and live). Ricardo saw Malthus’ case for increasing population and decreasing wages, agreeing with the Iron Law of Wages(wages tend toward subsistence) and expanding it to explain how economic rent would come about as a result of increased demand for food driving up the price of food and leading land owners to utilize less and less efficient land to produce food. Since the price of food is always determined by the cost of producing it on the least efficient land employed in its production, the surplus yielded on more efficient land would be kept by the landlord as “economic rent.” Malthus Theory of Population is hilariously irrelevant today. Technological breakthroughs leading to incredible leaps in productivity have resulted in food production per capita increasing in virtually every year to year comparison in human history. As recently as the 1960s and 70s, the green revolution has led to abundance in formerly destitute regions. At present, starvation and famine only occur through force or government mismanagement. The case put forth by the cornucopians is a convincing one(see Simon, Julian. The Ultimate Resource 1981).Not only could today’s worries about environmental damage not be used to justify Malthus’ ideas, I would say that nearly the opposite is the case. The legacy of Malthus is one of fearmongering scare tactics. Such a simple argument as the one put forth by Malthus 300 years ago is hard to resist, until one sees the facts. We now know that Malthus missed the big picture: that technological advancements would bring about a level of production well beyond the imagination of anyone alive during the eighteenth century. A strong case can be made that a similar, deceptively simple argument is being employed by those who warn of environmental despoiling. The same folks who fear Malthusian overpopulation cry that doomsday is around the corner, and the culprit is man. Technology and science truly will be our salvation from such worries, despite the doomsday cry of today’s neo-malthusians.

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