Introduction 1

Dr. Reisman Short-Answer Questions, Introduction 1

INTRODUCTION

1. The schools of economic thought that 13. Classical economics was abandoned have been the main supporters of capitalism are a. in part because it came to be viewed as imply- a. Marxism and Keynesianism ing the leading ideas of Marxism and the case for b. the British classical school and the Austrian socialism school b. in part because it’s espousal of the wages-fund c. both (a) and (b) doctrine offered fundamental opposition to essen- d. neither (a) nor (b) tial aspects of the case for socialism c. both (a) and (b) 2. The Manchester, Currency, and Chicago d. neither (a) nor (b) schools have been among the principal allies of the classical and Austrian schools. 14. The abandonment of classical economics 3. The most important members of the classi- in the nineteenth century contributed to the success of cal school were Adam Smith, David Ricardo, and John anticapitalist ideas in the twentieth century Stuart Mill. a. insofar as the abandonment of the classical economists’ ideas on the role of saving prepared 4. The most important members of the Aus- the ground for the acceptance of Keynesianism in trian school were Carl Menger, Eugen von the 1930s Böhm_Bawerk, Ludwig von Mises, and F.A. Hayek. b. insofar as the abandonment of the classical 5. Among the leading critic(s) of capitalism economists’ ideas on the role of cost of produc- or various major aspects of it have been tion as a determinant of prices paved the way for a. Karl Marx the acceptance of the doctrines of pure-and-per- b. John Maynard Keynes fect competition and oligopoly and monopolistic c. Joan Robinson competition in the 1930s d. Edward Chamberlin c. both (a) and (b) e. all of the above d. neither (a) nor (b) 6. Malthus and Sismondi were important 15. According to the instructor, classical eco- members of the classical school. nomics makes possible a far more fundamental and thoroughgoing critique of the Marxian exploitation the- 7. J. B. Say, James Mill, J. R. McCulloch, ory than that provided by Böhm-Bawerk and the Aus- and Nassau W. Senior were important members of the trian school, despite the prevailing mistaken belief that classical school. it implies the exploitation theory. 8. The schools of economic thought that pre- 16. The schools of economic thought which ceded the classical school included the Scholastics, the have been opposed to capitalism or essential features Mercantilists, and the Physiocrats. of it include the German historical school and the 9. The Mercantilists were intellectually American institutionalist school, both of which denied closer to the classical school than were the Physio- the very possibility of a science of economic laws. crats. 17. The leading members of the German His- 10. Contemporary Keynesianism most torical school were Wilhelm Roscher (1817–94), Gus- closely resembles tav Schmoller (1838–1917), Lujo Brentano a. mercantilism (1844–1931), and Werner Sombart (1863–1941). b. physiocracy 18. Sombart began his career as a Marxist c. classical economics and later became a leading supporter of Nazism. d. the Austrian school 19. The leading members of the American in- 11. The most important members of the Aus- stitutionalist school were Thorstein Veblen (1857– trian school are 1929), John R. Commons (1862–1945), and Wesley a. Alfred Marshall Mitchell (1874–1948). b. Milton Friedman 20. Alfred Marshall’s doctrine of the repre- c. Leon Walras sentative firm led to the conclusion that large-sized d. all of the above firms usually cannot gain by cutting their prices be- e. none of the above cause it viewed all competitors as perfectly equal. 12. The leading difference between classical 21. The partial equilibrium approach of Al- economics and Austrian economics pertains to the the- fred Marshall focuses on the individual firm and indus- ory of value and price and centers on the theory of di- try divorced from the rest of the economic system. minishing marginal utility.

22. The general equilibrium approach of clas- b. “The use of calculus and differential equations sical and Austrian economics studies economic phe- to describe economic phenomena represents a Pro- nomena from the point of view of their effects on all crustean bed, into which the discrete, discontinu- members of the economic system, not just on those di- ous phenomena of actual economic life are rectly involved. mentally forced, in order to fit the mold of mathe- 23. The partial equilibrium approach led to matically continuous functions to which the meth- the breakup of economics into “microeconomics” and ods of calculus can be applied.” “macroeconomics,” the one studying the individual c. “One major consequence [of mathematical eco- consumer and firm apart from connection with the rest nomics] is the aid given to the perpetuation of a of the economic system, and the other studying the false theory of the determination of the prices of economic system as a whole, apart from its connection the factors of production: namely, the theory that to the actions of individuals. the prices of the factors of production are directly derivable from the value of the consumers’ goods 24. According to the instructor, the theoreti- they help to produce.” cal substance of most textbooks on “microeconomics” d. all of the above is that the great bulk of business activity is tainted with e. none of the above an element of monopoly and that the only exception is the domain of pure and perfect competition, which is 28. Von Mises virtually nonexistent. At the same time, little or noth- a. is almost alone in the development of a system- ing of the sound price theory developed by the classi- atic defense of capitalism in all of its leading as- cal and Austrian economists is presented in these pects textbooks. b. is the leading critic of socialism and Marxism c. both (a) and (b) 25. According to the instructor, the theoreti- cal substance of most textbooks on “microeconomics” d. neither (a) nor (b) is “that with a few, limited exceptions, such as wheat 29. Von Mises farming, the whole of a capitalist economic system is a. developed answers to virtually all of the accu- tainted by an element of monopoly. The solution for sations made against capitalism—from its alleged this alleged state of affairs is supposed to be a radical exploitation of labor and responsibility for unem- antitrust policy, which would fragment all large busi- ployment and depressions to its alleged responsi- nesses, or else the nationalization of such businesses bility for monopoly, wars, and racism and/or government control over their prices—and fur- b. developed a social philosophy of capitalism ther policies that would force firms in the same indus- which demonstrates the benevolent operation of try to produce identical, indistinguishable products.” all of capitalism’s leading institutions, especially 26. According to the instructor, the theoreti- private ownership of the means of production, eco- cal substance of most textbooks on “macroeconomics” nomic competition, and economic inequality is the elaboration of the doctrines of Keynes that capi- c. expounded a procapitalist interpretation of talism causes depressions and mass unemployment modern economic history, and provided a devasta- through overproduction and excess saving and that ting critique of socialism and government inter- what is needed to counteract or prevent these evils is vention in all of its forms inflation of the money supply and deficit-financed gov- d. all of the above ernment spending. 30. Von Mises demonstrated that a socialist 27. According to the instructor, a shortcom- economic system lacks the ability to engage in rational ing of mathematical economics is that economic planning because of its lack of a price sys- a. “It leads to an undue concentration of attention tem and thus the ability to perform economic calcula- on states of final equilibrium, which are all that its tion. differential equations are capable of describing. It 31. In the instructor’s view, “what von Mises thus takes attention away from the real-world op- undertook, and which summarizes the essence of his eration of the profit motive and of the market pro- greatness, was to build a systematic intellectual de- cesses by means of which the economic system fense of capitalism and thus of material civilization.” continually tends to move toward a state of full 32. Von Mises’s major criticism of socialism and final equilibrium without ever actually achiev- is that it is impossible to practice a perfect system in ing such a state. The economic system never actu- an imperfect world. ally achieves such a state because of continuous changes in the fundamental economic data.” Answers to Questions 1-32 on the Introduction

Correct Q. # Answer 1b 2T 3T 4T 5e 6F 7T 8T 9F 10 a 11 e 12 T 13 c 14 c 15 T 16 T 17 T 18 T 19 T 20 T 21 T 22 T 23 T 24 T 25 T 26 T 27 d 28 c 29 d 30 T 31 T 32 F