Herbert Simon (1916-2001)

Bounded rationality

Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. It was proposed by Herbert Simon as an alternative basis for the mathematical modeling of decision making, as used in economics and related disciplines; it complements rationality as optimization, which views decision making as a fully rational process of finding an optimal choice given the information available.

Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one. Simon used the analogy of a pair of scissors, where one blade is the “cognitive limitations” of actual humans and the other the “structures of the environment”; minds with limited cognitive resources can thus be successful by exploiting pre-existing structure and regularity in the environment.

Some models of human behavior in the social sciences assume that humans can be reasonably approximated or described as “rational” entities (see for example rational choice theory). Many economics models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preferences. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice due to the finite computational resources available for making them. (Wikipedia)

The theory in a nutshell: http://www.businessmate.org/Article.php?ArtikelId=227

Európai munkanélküliség a múlt század végén

(Földes Károly:

Az európai munkanélküliség tényei és összefüggései. Tanulmányrészlet, 1999.)

1. Kiinduló helyzetfelmérés

Bevezető tájékozódásra alkalmasnak látszik a tárgy mértékrendjeinek, mennyiségi viszonyainak tanulmányozása. Ehhez az EU-térség mellett két nagyobb és két közepes lélekszámú tengerentúli ország mutatóit használom fel. (USA, Kanada, Japán, Ausztrália), továbbá egyes olyan európai országokét, amelyek nem minden statisztikai megfigyelés idején voltak, (csak az utóbbi időben lettek) EU tagok. Néhány kisebb EU tag egyes időszakokra vonatkozó jelzőszámait, helykímélés okán, nem nyomtatom ki.

A munkanélküliség összetett jelenségét néhány egyszerűbb elemre törekszem visszavezetni. Ehhez meg kell vizsgálni kapcsolatát más helyzeti és folyamati ismérvekkel. A kapcsolat lehet oksági, vagy ennél gyengébb, például funkcionális jellegű és egyszerűen rendezési összefüggés, ami minden további tanulmány alapját jelenti. Ezeket az egyes országok összehasonlítása alapján próbálom elkülöníteni. Ezután kerül sor az idősorok részletesebb vizsgálatára. Az első megközelítésben inkább az idősori átlagok országok közötti összehasonlítása történik, a másodikban pedig az időszakok közötti változásokon lesz a hangsúly. Mindezt egyfajta nyelvezet interspatiális és intertemporális elemzésként különbözteti meg. Talán elegendő, ha ehelyett földrajzi egységekre , illetve történelmi időpontokra , szakaszokra vonatkozó ismérvek összevetéséről beszélünk. Jelen esetben, míg az első feladat nehezebbnek, a második fontosabbnak ígérkezik, mert ez jelenti a fejlődési tendenciák vizsgálatát.

Kezdetként a nyolcvanas évek néhány országos mérőszámáról lesz szó.

Rövidítések: angol országnevek első két betűje, ill. AUS: Ausztrália, AU: Ausztria. GE: Németország (nyugati része), B+L: Belgium és Luxemburg. Forrás: The World Competitiveness Report, IMD-World Economic Forum, 1991. A részben eltérő

statisztikai felépítések miatt fejezetrészenként homogén forrásokból állítottam össze néhány adatsort míg a készen átvett táblázatokat a Függelék tartalmazza.

1.1 Reál GDP átlagos évi növekedése, 1983-1989 (a továbbiakban: növekedési ráta)

1.2 Foglalkoztatás átlagos évi növekedése, 1981-1989, %

1.3 Munkanélküliség az aktív lakosság %-ában, 1989

Ország 1.1 1.2 1.3
AUS 4.55 2.51 6.13
AU 2.54 2.24 3.16
B+L 2.64 0.16 8.60
CA 4.41 1.59 7.54
FR 2.56 0.26 9.38
GE 2.77 1.03 5.61
GR 2.27 0.47 7.89
IR 3.42 -0.46 15.63
IT 3.09 0.06 12.09
JA 4.60 1.17 2.29
NE 2.46 -0,43 7.37
SP 3.94 1.20 17.09
SW 2.62 0.70 1.35
UK 3.35 1.23 6.17
US 3.87 1.97 5.27

Az 1.1 oszlophoz képest a 81-82 es válságévek figyelembe vétele (amit jelen forrás nem tartalmaz) alacsonyabb átlagokat eredményez, de ez láthatólag nem szüntetheti meg a nagy különbséget az 1.1 és az 1.2 dinamikái között. A foglalkoztatás növekedése ebben az adatsorban többnyire 2-3 százalékponttal elmarad a “növekedési ráta” mögött. Ezt kielégítően magyarázza az alább kimutatott termelékenységi tényező (1.10). Ami az 1.3 oszlopot illeti, ez a jelek szerint nincs pozitív korellációban az előző két vektorral. Szóródási pontjai nem “sorakoznak” össze, akár az első, akár a második oszlop számsorát tekintenénk független változónak. Tehát tovább keresendő, hogy az eligazodás jelenlegi szakaszán még kaotikus mértékhalmaz (3.1) mögött van-e rend. Ehhez strukturális elemeket is ismerni kell. Egymással részben ellentétes irányu helyzet- és folyamatjelzőkről lehet szó, amelyek nagyobb csoportokban kezelhetők. Kezdjük a képzési csoporttal:


1.4 Vállalaton belüli átképzés eredményessége, rangsorszám

1.5 Képzési költség/fő, 1988, rangsorszám, + 15 évesnél idősebb analfabéták aránya

1.6 Egyetemet végzettek aránya, 1987

Ország 1.4 1.5 1.6
AUS 11 14 +1.0 7.52
AU 6 10 +na 4.76
B+L 9 13 +na 13.24
CA 20 3 +4.0 12.15
FR 18 11 +1.0 na
GE 3 12 +na 4.52
GR 15 22 +6.8 na
IR 8 18 +na na
IT 12 17 +2.9 4.58
JA 1 9 +na 11.53
NE 7 8 + na 4.01
SP 16 19 + 4.6 3.05
SW 5 4 +na 10.86
UK 22 15 +1.0 15.75
US 17 6 +0.5 19.19

Az 1.4 mutatóban elért előkelő helyezés csak néhány országban járt együtt alacsony , vagy közepes munkanélküliséggel (JA, GE, SW, NE) . A kiugró munkanélküliségi ráták többnyire összefüggésben állnak az 1.5, 1.6 és 1.7 oszlop kiugróan kedvező vagy kedvezőtlen mutatóival, amelyek viszont az általános fejlettségi szinthez kapcsolódnak, (hajlékonyan, l. pl. a kanadai analfabéták nagy arányát.) A szigorúbb mérésekhez nagyobb adatbázisra van szükség, de itt már előtűnik némi minőségi és mennyiségi rend, amely szerint például, ha az alacsony képzettségi szintű országok GDP-je a többinél gyorsabban növekszik, akkor ez az összes munkanélküliségre ceteris paribus növelően hat az illető országcsoporton belül.

A strukturális jellemzők következő alcsoportja a nők és fiatalok helyzetével kapcsolatos.

1.7 A női munkaerő aránya a gazdaságban, %, 1989

1.8 24 évnél fiatalabb munkanélküliek aránya , %, 1988

1.9 Szolgáltatói szektor aránya a foglalkoztatottak között, %, 1988

Ország 1.7 1.8 1.9
AUS 40.20 42.63 67.80
AU 40.50 31.20 54.50
B+L 41.10 30.00 68.72
CA 43.90 29,76 69.80
FR 42.50 30.11 62.90
GE 39.30 22.70 56.10
GR 36.90 42.80 46.20
IR 30.50 38.32 56.80
IT 36.20 49.53 57.70
JA 40.10 25.09 58.00
NE 38.30 44.87 68.80
SP 33.80 42.10 53.10
SW 48.00 36.07 66.70
UK 42.00 29.43 68.00
US 44.50 36.98 70.20

A nők munkanélküliségi rátája magasabb, mint a férfiaké, ezért az utóbbi évtizedekben elért nagyobb arányuk emeli az általános munkanélküliségi mutatót is. Más típusú mutatószám a munkanélkülieken belüli arány ( az utóbbiak között jelenleg az európai régióban a férfiak vannak többségben, ami a ciklus következő szakaszában megszűnhet). Egy ilyen típusú jelzőszámot a tábla a fiatalokra nézve tüntet fel. Magas mértékét

feltehetőleg elviselhetőbbé teszi, hogy a képzési lehetőségekkel is nagyobb arányban élhetnek, tehát a perspektívájuk ezért is jobb, mint az 50 éven felülieké. Végül, itt szerepel a női munkát az átlagosnál nagyobb mértékben alkalmazó szolgáltatási szféra aránya az összes foglalkoztatotton belül.

Az 1.2 pontra visszautalva, a termelékenységi faktorral folytatható a gondolatmenet.

1.10 Gazdasági növekedés termelékenységgel fedezett hányada

Ország Arány(%)
AUS 24
AU -0.25

 

+/ Megjegyzés
B+L 114
CA 38
FR 87
GE 39
GR 65
IR 119
IT 95
JA 71
NE 115
SP 59
SW 62
UK 34
US 27

A fentinek az 1.2-vel való összevetése alapján olyan szóródás tapasztalható, amelyben a termelékenység alacsonyabb részarányaihoz, bizonyos elhajlások mellett, a foglalkoztatás gyorsabb ütemű növekedése tartozik. +/Ausztriában a termelékenység csökkent

2. Növekedési ráta, fejlettségi színvonal, munkanélküliségi ráta

Ebben a fejezetrészben a növekedést és a munkanélküliséget az 1977-1986 -os időszak országonkénti átlagos rátái jelzik, a fejlettségi színvonal mutatói 1983-ra vonatkoznak. Forrás : IMF World Economic Outlook, Washington D.C. October 1995

és Nemzetközi Statisztikai évkönyv, KSH 1986

Az előző tábláktól eltérően Belgium külön szerepel, Luxemburg nélkül.

2.1 Növekedési és munkanélküliségi ráta

2.2 Fejlettségi szint és munkanélküliség

2.3 Növekedési és munkanélküliségi ráta kombinációja

2.1 Munkanélküliségi ráta országonként

GDP növekedési ráta 0-5% 5-8% 8%-nál magasabb
3%-nál magasabb JA 2.4 CA 9.3

IR 11.6

2-3% US 6.2 FR 7.6

GR 6.5 UK 7.8

AUS 7.3 EU 7.8

IT 8.2
2%-nál alacsonyabb SW 2.6

AU 3.3

GE 5.8

NL 6.6

BE 9.6

SP 14.5

A címoszlop és a címsor által határolt 3×3 cellás téglalapon meghúzható két átló közül a bal felső – jobb alsó irányú egyenes fut keresztül azon a “normál” tartományon, amelyben a magas növekedés alacsony munkanélküliséggel jár (JA) és fordítva (BE, SP), míg a közepes növekedés közepes munkanélküliséggel jár. Az ide tartozó országoknak, köztük az EU egy részének mutatói a növekedési ráta emelkedésével csökkennek.

Ezzel szemben a bal alsó – jobb felső irányú átló alapján nem tárható fel logikai láncolat: a nagyobb munkanélküliség (CA, IR) általában nem a gyorsabb növekedés hatása. Azért “általában” nem, mert kis részben igen: a magasabb növekedési ráta, ha gyorsabb reálbér-növekedéssel jár, ösztönzi a munkapiaci kínálat kiterjedését, amit persze más tényezők rendszerint ellensúlyoznak. Kérdés marad tehát, hogy az első átló által nem érintett országokban mi a racionáléja a munkanélküliség alakulásának. Erről a 2.3 tábla ad majd bizonyos felvilágosítást. Az is tudható, hogy az első átló sem nyujt egyedüli magyarázatot a saját tartományában, tehát ott is vannak további hatások. A strukturális tényezőről már volt szó, ezen a helyen még a fejlettségi szint szerepét is latolgatni kell . A következő tábla csak az országokat sorolja be, a számokat az előző tábla tüntette fel.

2.2 Munkanélküliségi ráta

GDP/fő, 1983, USD 5%-nál kisebb 5-9% 9%-nál nagyobb
9000-nél nagyobb JA

SW

GE AUS

US FR

NL

CA

BE

5000-9000 AU UK

IT

5000-nél kisebb GR IR

SP

A táblázatból annyi direkt következtetés mindenképpen levonható, hogy a csekély munkanélküliségű országok között nem találunk szegényebbeket. Ennek fordítottja már nem igaz, nagy lehet a munkanélküliség gazdag országokban is, pl. Kanadában, Belgiumban sok az állástalan, A fejlettségi szint indirekt vonzatairól viszont részben már említés történt az 1.4, 1.5 és 1.6 adatcsoportok kapcsán. (Ehhez tartozik, hogy pl. a képzés csak célirányos szervezettségben emeli a foglalkoztatottak arányát.)

2.3

Ország Kombináció
AUS 21.17
AU 6.6
BE 11.52
CA 28.3
FR 16.72
GE 11.02
GR 4.95
IR 37.12
IT 22.14
JA 9.6
NE 10.56
SP 24.65
SW 4.2
UK 16.38
US 16.74

A két ráta lineáris kombinációja (szorzata) a GDP munkanélküliség miatti veszteségét jelenti, adott növekedés mellett, vagy azt, hogy adott munkanélküliség mellett minél nagyobb a növekedés, annál több “hiányzik” a GDP növekményéből. Ennek alapján a már tárgyalt normál átló útirányából kimaradó országok is folytonosan helyezkednek el a 2.1 értékeit keretező téglalap bal alsó sarkától kezdve, a következőképpen: 1/ alsó sor bal cella 2/ alsó sor középső cella 3/ középső sor jobb cella 4/ felső sor jobb cella. De ez még nem eléggé egyszerű megoldás, mivel két tényezőn alapul, használata nehézkes is lenne.

2.4 A kombináció egyértelmű rendje

Egyszerű algoritmust kínál egy q tört:

q=(100-u)/g,

ahol

q: kvóciens, u: (unemployment rate) munkanélküliségi ráta, g: GDP növekedési ráta.

Ekkor az ebben az alfejezetben vizsgált 1977-1986-os időszakra a következők a q értékek:

Ország q
AUS 320
AU 485
BE 757
CA 293
FR 420
GE 500
GR 408
IR 277
IT 340
JA 244
NE 719
SP 505
SW 574
UK 440
US 348

A (100-u), vagyis az u komplementje 100-ra a “nem munkanélküliek rátájának” nevezhető. Más mint a foglalkoztatási ráta, mivel a nemzetközi statisztika nem ehhez a 100-hoz viszonyítja a foglalkoztatást, hanem a munkaképes korúakhoz. (Ezt tudva, elfogadhatjuk egyik foglalkoztatási mérőszámnak). Mit jelent a fenti komplement és a g – növekedési ráta – hányadosa? Azt, hogy egy százaléknyi növekedésre hány százalékpont “nem munkanélküli ráta” jut. Itt tehát egy differenciálhányados és egy megoszlási hányados arányáról van szó. Közgazdasági tartalmát tekintve ez a termelékenységi dinamikához kapcsolódó mérőszámok közé tartozik. A nevezőben szereplő g növelésével csökkenő q értékekhez jutunk. Az f(g,u) funkció szóródási egyenese a független változónak tekintett g növekedésével lejt, (a deviancia nem nagyfokú).

A fenti, országnézetű vizsgálódás hatótényezőit, egy idősor-nézetű megközelítésben is figyelni kell. Ezeknek a hatótényezőknek a jelenlegi összefoglaló elmélete a munkanélküliség természetes rátájával foglalkozik. A kifejezés nem túl szerencsés, de valós problémák állnak mögötte.

3. A munkanélküliség természetes rátája

Fellendülés idején is van munkanélküliség. 1/ Frikciós munkanélküliség. A munkába újonnan belépőknek és az állástalanná válóknak idő kell, míg elhelyezkednek, akkor is, ha ez sikerül. A régebben szándékosan otthon maradó, majd ujra állást kereső emberekre is ez vonatkozik. Ez az a tartály, amiből gazdasági expanziók munkaerő igénye kielégíthető. 2/ Technológiai munkanélküliség. A nem elég univerzális kiképzésű munkakínálat alkalmazkodása annál kevésbé elégséges, minél gyorsabb a műszaki fejlődés. A szükségessé váló újfajta képzettség és gyakorlottság híján állás nélkül maradók elhelyezkedése beruházás- és időigényes. Mivel a gyors átalakulás a versenyhelyzet javulását eredményezi, a munkanélküliségnek ez a növekedése, megfelelő szociális környezetben, pozitív szerepet játszó folyamatok korellátuma lehet. 3/ Az egyes országokra specifikus összetételi, képzési fejleményekről már részben volt szó. Bizonyos intervallumban emelő hatása van annak is, ha kedvező a munkanélküli ellátás. Lényeges a munkapiaci szabályozottság foka és magának a munkakínálatnak (pl. térbeli) immobilitása, amelyek növelően hatnak a munkanélküliségre. A bérek színvonalának hatását nem kell eltúlozni, de pl. a minimálbér merev szabályozása csökkentheti a tanulatlan munka iránti keresletet. – A fenti három tétel a strukturális munkanélküliség fogalmában összegezhető és állítható szembe a ciklikus munkanélküliséggel. A természetes ráta ennek a strukturális munkanélküliségnek a viszonyszáma. Csak empirikusan megbecsülhető adat, amely pl. az USÁ-ban 6% alatt van (legalábbis S.Fisher – R.Dornbush: Macroeconomics, 1983 alapján) az Európai Unióban pedig, később részletezendő okok miatt ennél magasabbra tehető.

Mivel statisztikai anyaggal dolgozunk, további megfontolásra érdemes, hogy a munkanélküliséget másként mérik, mint a foglalkoztatottságot. Az előbbi mérése a nemzetközileg elfogadott gyakorlatban háztartás-statisztikai módszerekkel történik. Kevés országban szorítkoznak csak a regisztrált munkanélküliség mérésére. A legtöbb helyen az amerikai módszert követik: a reprezentatív megfigyelés során, ha egy munkaképes korú az elmúlt két hét, vagy tíz nap alatt néhányszor keresett, de nem talált munkát, munkanélkülinek számít, függetlenül attól, hogy regisztrálták-e. Az illető korcsoporti adottságán belül döntő, hogy a pénzkereset határhaszna nagyobb-e számára, mint a teljes szabadidőé , vagy általánosabb megfogalmazásban, helyzete szükségessé és lehetségessé teszi-e a munkavállalást. A csoporton belül munkát nem találókból aggregálódik a munkanélküliségi ráta. – Ezzel szemben a foglalkoztatottságot a munkaképes korcsoportokhoz viszonyítják. Rátája a növekedési potenciál egyik fontos eleme, a hosszabb távú fejlődés szemszögéből talán fontosabb, mint a munkanélküliség, a munka- (munkaerő)piacnak, a munkaerő-mérlegnek azonban az utóbbi az eleme.

Mivel a munkapiaci kínálat nem azonos a demográfiai munkaerő potenciállal, van egy önálló kulcskategóriája, a labour force, a terjedő amerikai írásmód szerint: labor force. Más, mint az aktív népesség, amely az önállókat is magában foglalja. Munkavállalók a tagjai, akár van állásuk, akár munkanélküliek. Az így körülhatárolt munkapiaci kínálat nagysága a munkavállalási kedvtől is függ. Tehát a fogyasztási hajlamon és a beruházási (határ)hajlandóságon alapuló elemzés azon a ponton is kiegészítésre szorul, ahol döntő szerepet játszik a munkavállalási (határ)hajlandóság. Végül is, ez határozza meg a munkakínálat expanzióit és összehúzódásait. Ma már mindenütt lemondtak a teljes foglalkoztatásról, de fontosságot tulajdonítanak ennek, mint elméleti etalonnak. A modellek nagy része a teljes foglalkoztatás melletti output helyzetétől indul el. Ismerni kell tehát azt, hogy mihez képest teljes a foglalkoztatás. A keynesi foglalkoztatási arány nem a mai statisztika foglalkoztatottsági indexe. A “teljesség” nem az összes munkaképesre vonatkozott, de a munkavállalási hajlandóság elemzése kimaradt a vizsgálatból.

Ha pedig ezt bevonjuk a gondolkodásba, akkor kiderül, hogy a teljesen, vagy részben foglalkoztatandók köre maga is flexibilis. Ez két jelentékeny bonyodalom okozója. (1) Nem csak a munka iránti keresletet meghatározó beruházási multiplikátortól, monetáris és fiskális eszközöktől, inflációtól, stb. függ , hogy mekkora a munkanélküliség aránya, hanem attól is, hogy a potenciális munkaerő mekkora része jelenik meg tényleges munkaerő-eladóként. A munkának erre a kínálatára részben közvetve, részben közvetlenül szintén hatnak az említett kategóriák. Tehát a gazdaság teljesítményét egy olyan mércéhez kellett mérni, amely mérce maga is a teljesítményt befolyásoló eszközök hatása alatt változik. (2) A munka kínálata egy sor olyan tényező hatására is változik, amelyek ugyan nem függenek a keynesi kategóriáktól, tehát az előbbi pontban említett bonyodalom nem áll fenn, viszont a gazdaságon kívüli hatásokat tartalmaznak, mivel itt nem csak egy piac egyensúlyáról van szó, hanem emberekről.

Ennek a gyakorlati fontossága a következő. Tételezzük fel, hogy a gazdaság munkaerő igénye monoton módon növekvő, például évi egy százalékkal növekszik a munka iránti kereslet és a demográfiai forrás (munkaképes lakosság) is ugyanilyen arányban sokasodik. Ha most az utóbbin belül egy bizonyos időszakban a munkavállalási kedv és arány megnő és emiatt a munkakínálat évi két százalékkal lesz nagyobb, akkor a jelzett időszakban a munkanélküliségi ráta állandóan emelkedni fog. Ez nem tarthat a végtelenségig, de eltarthat több évig, amíg a működésbe lépett ellenható tényezők miatt a munkát keresők aránya alacsonyabb szintre áll vissza. Ennek is meglehet a saját ciklusa, csakhogy itt nem a konjunktúra-mozgás részeként végbemenő dinamikáról van szó. Mivel a “ciklikus” jelzőt , rövid említésekre célszerűbb az utóbbira fenntartani, a most körvonalazott mechanizmust jobb híján “kínálati munkanélküliségnek” nevezem. A “ciklikus” munkanélküliséggel szembeállított strukturális munkanélküliségbe ezt az elemet is bele kell foglalni ( a fejezet elején említett harmadik tétel részben már tartalmazza ), de az is egy terminológiai lehetőség, hogy külön csoportban szerepeljen. Ilyen módon a munkanélküliség természetes rátája a munkakínálat önálló dinamikájának hatását is tükrözi. Van-e további, nem ciklikus elem? – ez olyan kérdés, amelyre majd az idősorok elemzése alapján keresünk választ…

Weber and Marx

Weber and Marx
Some common views and fundamental differences

Source:

https://archive.org/stream/frommaxweberessa00webe/frommaxweberessa00webe_djvu.txt


Marianne Weber: Max Weber. Ein Lebensbild ("Max Weber: A Biography", 1926) 


FROM MAX WEBER: Essays in Sociology 



TRANSLATED, EDITED, AND WITH AN INTRODUCTION BY 



H. H. GERTH and C. WRIGHT MILLS 




NEW YORK 

OXFORD UNIVERSITY PRESS 



1946 

(Excerpts)

Marx and Weber 

Upon taking over the editorship of the Archiv Für Sozialwissenschaft 
und Sozialpolitik, Weber proposed systematically to devote attention to 
the questions the Marxists had raised. Much of Weber's own work is of 
course informed by a skilful application of Marx's historical method. 
Weber, however, used this method as a 'heuristic principle.' As a view 
of world history, Marxism seemed to him an untenable monocausal the- 



INTELLECTUAL ORIENTATIONS 47 

ory and thus prejudicial to an adequate reconstruction of social and his- 
torical connections. He felt that Marx as an economist had made the 
same mistake that, during Weber's days, anthropology was making: 
raising a segmental perspective to paramount importance and reducing 
the multiplicity of causal factors to a single-factor theorem. 

Weber does not squarely oppose historical materialism as altogether 
wrong; he merely takes exception to its claim of establishing a single 
and universal causal sequence. Apart from whether or not he 'under- 
stood' dialectical thought in his reduction of it to a causal proposition, 
the approach did prove eminently fruitful. 

Part of Weber's own work may thus be seen as an attempt to 'round 
out' Marx's economic materialism by a political and mihtary materialism. 
The Weberian approach to political structures closely parallels the Marx- 
ian approach to economic structures. Marx constructed economic periods 
and located major economic classes in them; he related the several social 
and political factors to the means of production. In political matters, 
Weber looks for the disposition over weapons and over means of admin- 
istration. 

Feudalism, for example, is characterized by Weber in terms of pri- 
vate property of the means of military violence (self-equipped armies) 
and in the corporate appropriation of the means of administration. The 
'ruler' could not monopolize administration and warfare because he had 
to delegate the implements required for such a monopoly to the several 
privileged groupings. In time, these latter become 'owners' in their own 
right. This attention to the control of the material means of political 
power is as crucial for grasping the types of political structure as is 
attention to the means of production in the case of Marx for grasping 
economic structures.* 

Whereas Marx is less careful in distinguishing between economic 
power and political power, Weber, as a liberal, is eager to keep these 
spheres clearly distinct. Thus, his criticism of most Marxist contributions 
is that they fail soberly to distinguish between what is strictly 'economic,' 
what is 'economically determined,' and what is merely 'economically 
relevant.' Pilgrimages to Rome are certainly relevant for the money 
market, but that does not make them economic enterprises. The im- 
port of religious or of poHtical ideas for economic institutions does not 

* See in this volume: 'Politics as a Vocation,' 'Bureaucracy,' and 'The Social Psychology 
of World Religions.' 



48 THE MAN AND HIS WORK 

thereby transform these ideas into economic factors: the question con- 
cerns their 'economic relevance.' 

Having focused upon the struggle for the means of poHtical rule, 
Weber sees European political history since the feudal period' as an in- 
tricate parade of rulers, each attempting to appropriate the financial and 
military means that in feudal society were relatively dispersed. In fact, 
Weber formulates the very concept of the 'state' in terms of a 'monopoly' 
of the use of legitimate force over a given territory. The territorial aspect 
enters into the conception of the state in that Weber distinguishes coastal 
and inland states, great river states, and states of the plains. The geo- 
graphical factor also seems to have a dispositional bearing in that the 
coastal, and hence maritime, state offers opportunities for city democracy, 
overseas empire; whereas the state of the plains — for example, Russia and 
the United States — seems to favor schematization and bureaucracy, al- 
though of course this tendency is not without exceptions. 

With Marx, Weber shares an attempt to bring 'ideological' phenomena 
into some correlation with the 'material' interests of the economic and 
political orders. Weber has a keen eye for 'rationalizations,' that is, for 
'fictitious superstructures,' and for incongruities between the verbal as- 
sertion and the actual intention. He fought imperial and bureaucratic 
bombast, and especially the phrases of the Pan-Germanists and/or revo- 
lutionary 'literati,' with a wrath comparable to Marx's campaign against 
Victorian cant. 

The debunking technique by which ideological assertions are revealed 
as false cloaks for less respectable interests is obvious in Weber's attack 
upon the revolutionary left of 1918. Weber expressly stated at this time 
that Marxism is not a carriage, which one may arrest at will: he wished 
to extend the debunking of ideologies to include the 'proletarian interest,' 
and he attempted to narrow down this interest to the interests of the 
^literati, politicians, and revolutionary guardsmen in 'the spoils of vic- 
tory.' His debunking of socialist aspirations is also obvious in his reflec- 
tions on imperialism. Here he obviously accepts national units as histori- 
cal ultimates that can never be integrated into more comprehensive and 
harmonious wholes. At best there will be strong socialist nation-states 
energetically exploiting weaker states. The concept of the nation and of 
national interest is thus the limit of Weber's political outlook and at the 
same time constitutes his ultimate value. Yet it is characteristic of his 
restless analysis that he breaks down 'national sentiment' into a com- 
posite of various communal sentiments and attitudes. 



INTELLECTUAL ORIENTATIONS 49 

In addition to this attention to 'interests' and 'ideologies,' Weber's 
sociology is related to Marx's thought in the common attempt to grasp 
the interrelations on all institutional orders making up a social structure. 
In Weber's work, military and religious, political and juridical institu- 
tional systems are functionally related to the economic order in a variety 
of ways. Yet, the political judgments and evaluations involved differ 
entirely from those of Marx. For Marx, the modern economy is basically 
irrational; this irrationality of capitalism results from a contradiction 
between the rational technological advances of the productive forces 
and the fetters of private property, private profit, and unmanaged market 
competition. The system is characterized by an 'anarchy of production.'. 

For Weber, on the other hand, modern capitali^mis not 'irrational'; 
indeed, its institutions appear to him as the very embodiment of ration- 
ality. As a type of bureaucracy, the large corporation is rivaled only by 
the state bureaucracy in promoting rational efficiency, continuity of oper- 
ation, speed, precision, and calculation of results. And all this goes on 
within institutions that are rationally managed, and in which combined 
and specialized functions occupy the center of attention. The whole 
structure is dynamic, and by its anonymity compels modern man to be- 
come a specialized expert, a 'professional' man qualified for the accom- 
plishment of a special career within pre-scheduled channels. Man is thus 
prepared for his absorption in the clattering process of the bureaucratic 
machinery. 

The concept of rational bureaucracy is played off against the Marxist 
concept of the class struggle. As is the case with 'economic materialism,' 
so with 'class struggle': Weber does not deny class struggles and their 
part in history, but he does not see them as the central dynamic. Nor 
does he deny the possibility of a socialization of the means of produc- 
tion. He merely relegates this demand to a far distant future and dis- 
putes any hope of 'socialism for our time.' He does not see anything 
attractive in socialism. In his eyes, socialism would merely complete in 
the economic order what had already happened in the sphere of political 
means. The feudal estates had been expropriated of their political means 
and had been displaced by the salaried officialdom of the modern bureau- 
cratic state. The state had 'nationalized' the possession of arms and of i/ 
administrative means. Socialization of the means of production would 
merely subject an as yet relatively autonomous economic life to the 
bureaucratic management of the state. The state would indeed become 7' 
total, and Weber, hating bureaucracy as a shackle upon the liberal indi- 



50 THE MAN AND HIS WORK 

vidual, felt that socialism would thus lead to a further serfdom. Tor the 
time being,' he wrote, 'the dictatorship of the official and not that of 
the worker is on the march.' ^ 

Weber thus saw himself as holding paradoxical opinions. He could 
not but recognize the inevitability of bureaucratic management in public 
administration, in large capitalist enterprises, and in politically efficient 
party machines. During the war he personally scolded the stupidity of 
the Berlin bureaucrats, yet in his classic account of bureaucracy he is 
very far from John Stuart Mill's verdict against 'pedantocracy.' On the 
contrary, for Weber nothing is more efficient and more precise than 
bureaucratic management. Again in his pride in bureaucracy, 'in spite 
of all,' one may discern an attitude comparable to Marx's admiration for 
the achievements of bourgeois capitalism in wiping out feudal survivals, 
the 'idiocy' of rural life, and various spooks of the mind. 

Marx's emphasis upon the wage worker as being 'separated' from the 
means of production becomes, in Weber's perspective, merely one special 
case of a universal trend. The modern soldier is equally 'separated' from 
the means of violence; the scientist from the means of enquiry, and the 
civil servant from the means of administration. Weber thus tries to 
relativize Marx's work by placing it into a more generalized context and 
showing that Marx's conclusions rest upon observations drawn from a 
dramatized 'special case,' which is better seen as one case in a broad series 
of similar cases. The series as a whole exemplifies the comprehensive 
underlying trend of bureaucratization. Socialist class struggles are merely 
a vehicle implementing this trend. 

Weber thus identifies bureaucracy with rationality, and the process 
of rationalization with mechanism, depersonalization, and oppressive 
routine. Rationality, in this context, is seen as adverse to personal free- 
dom. Accordingly, Weber is a nostalgic liberal, feeling himself on the 
defensive. He deplores the type of man that the mechanization and the 
routine of bureaucracy selects and forms. The narrowed professional, 
publicly certified and examined, and ready for tenure and career. His 
craving for security is balanced by his moderate ambitions and he is re- 
warded by the honor of official status. This type of man Weber deplored 
as a petty routine creature, lacking in heroism, human spontaneity, and 
inventiveness : 'The Puritan willed to be the vocational man that we have 
to be.'

Patrimonialism

Max Weber (1864-1920) on patrimonialism

A good English summary of the notion and its contemporary applicability is given in:

http://tambasosa-troubleshootingzone.blogspot.hu/2010/05/relationship-between-patrimonialism-and.html

Excerpts

According to Max Weber (Weber, 1968), there are three types of domination:
1) Legal-rational domination: based on western bureaucratic impersonal rule
2) Charismatic domination: by virtue of prestige of a person due to his high extraordinary qualities
3) Traditional domination: based on the belief in the sacred character of immemorial traditions

He further distinguishes three different but strongly related forms of traditional rule:
1) Patriarchal rule
2) Patrimonial rule
3) Feudal rule

Patrimonialism develops out of the most basic form of traditional authority called patriarchalism. Patriarchalism is based on a strictly personal loyalty, and not on the adherence to abstract and impersonal rule as in the case of legal-rational domination.
In patriarchalism, the head of the household dominates over the other members of the household. The authority and domination of the head of the household is based on the filial respect of members of the family and other dependents for the patriarchal chief (head). The head exercises authority, so that in securing compliance the patriarch does not need administrative or military machine, being solely dependent on the authority traditions gives him augmented by his control over key resources such as land, grazing rights, cattle and women.

Patrimonialism first appears along with the political differentiation when patriarchalism must extend its authority to meet the need of the expanding political community and when the patriarch (head) exercises his authority beyond his own domestic group, over people who are no longer relatives or servants, which is ultimately the state.

With this expanded sphere of administrative activities, authority can no longer be exercised directly and must be mediated by administrative officers, personal retainers like servants, relatives or slaves. What determines the relation of the administrative staff to the chief is not the impersonal obligations of office, but rather the personal loyalty to the chief .

Patrimonialism signifies a particular type of administration, one that differs very markedly from the legal-rational bureaucracy. Legal-rational bureaucracy is based on hierarchy of graded authority (rational ordering of relations of superiors and juniors), fixed jurisdictional areas with clear-cut procedures and regulations, salaried officers who are recruited and promoted according to objective qualifications and experience, strict separation between incumbent and office, between the private and the public spheres.
In contrast, under patrimonialism, office holders are the personal dependents of the ruler, appointed at his whim on the basis of criteria that are subjective and non-standardised. In patrimonial administration, office holding is at the pleasure of the ruler and any patrimonial bureaucrat may be moved or dismissed by the ruler when it is expedient. Throughout the patrimonial administration there are no clear-cut procedures for taking decisions and decision-making tends to have an ad hoc character . Consequently, the defining characteristic of patrimonialism is the absence of a distinction between the public and private domain, the private servant and public officer, the public purse and the private purse-main…

…The application of patrimonialism that is a mode of traditional administration to modern political system is at the origin of the use of the notion of neo-patrimonialism instead of the one of patrimonialism. Within the African state, two mixed dual forms coexist and are articulated together in the same system. …

The concept of patrimonialism is very useful in understanding African states practices because it provides the common denominator for all the different concepts currently applied to African politics…{Ceteris paribus this denominator may apply to some East-European countries as well.)

In present western states, the legal-rationality that characterises their bureaucracies have been developed from an overlapping of feudal and patrimonial kingdoms which transformed through the centuries into approximation of the legal-rational and bureaucratic model. In contrast, in Africa, an approximation of a legal-rational state was exported to Africa through colonialism…

(Nowadays) the formal structure of the state is bureaucratic, a written law exists, the civil servants are recruited through examination, but there is no real state law and the functioning of the state is largely patrimonialised. Many developing countries continue to be characterised by the appearance of a weberian “legal-rational” administration. But beneath the trappings of formal bureaucracy, procedural rules, and law, their regimes are based on networks of personal loyalty, patron-client ties and the concentration of powers on a single ruler or a narrow oligarchy at the apex of clientelistic pyramid. Public and private resources are melded, as assets come under discretionary control of political elites, and public offices serve as conduit for private accumulations. Consequently, this leads to the personalisation of power: private means personal and the lack of differentiation between what is political and what is economic…

African political economy reflects the central hallmarks of neo-patrimonial rule. Post-independent African states have been characterised by numerous writers as a prebendal order.
The following salient aspects portray this system (Prebendalism):
1) Public resources are widely appropriated for personal or parochial gains
2) Ethnically delineated patron-client networks pattern such allocations.
3) The distributive areas are largely decentralised and clientelistic relations are diffused and pervasive.

“Prebend” is an office of state, which an individual procures either by examination or as a reward for loyal service to a lord or ruler. The definition of prebend by Weber was to illustrate the extensive corruption in Nigeria.

The neo-patrimonial nature of administration means that political exigency, personal consideration, the manipulation of benefits and liabilities have constantly dominated the implementation of government policies. This has resulted in a small circle of civilian cronies largely circumventing the formal economy through unprecedented corruption…
The combination of personal calculations and clientelistic pressures within the system, which has led to a more personalistic and predatory control of the state, makes a mockery of public policies.

Lectures in Economics 9

Lectures following Rüdiger Dornbusch’ works (9)
Growth, unemployment, inflation
(Introduction to macroeconomics continued)

The unemployment rate is one of the chief indicators of how well the economy is doing. When the unemployment is high and rising, the economy is performing poorly; human resources, instead of being used productively, are wasted.

The labor force consists of people who are either
working or unemployed. The criterion for being counted as unemployed is that a person was available for work in the currentweek, did not actually work, and had made an effort in the preceding 4 weeks to find a job. Also included are people who are not working but are waiting to be called back to their jobs or are waiting to report to a new job the next month.

Table 4-7 shows the unemployment rates for different groups in 1980 and 1981 (omitted). Note the large differences. Unemployment tends to be much higher among nonwhite people and young people. Note the fact that unemployment increased in every group. We shall link inflation, and unemployment to low growth and recession in the following.

Inflation and growth

FIGURE 4-7 RECESSIONS AND INFLATION,1967-1981. The diagram shows the rate of CPI inflation in the United States (omitted). The shaded areas correspond to periods of recession. The evidence is that recessions slow inflation but do not stop it for good. (Source: See Figure 4-4.)
In a recession firms have trouble selling goods. They therefore pro duce less, and growth slows. At the same time, unemployment rises as firms need less labor and because firms are having trouble selling. Their prices rise less rapidly or even fall. In brief, the argument is that recession, low growth, high unemployment, and slower inflation go together. In contrast, when households want to increase their purchases, firms try to produce more goods and hire more labor. Growth increases, and unemployment falls. At the same time, because the demand for their goods has risen,firms raise prices more. Thus we expect a boom, high growth,low unemployment, and more rapid inflation to go together.

Some of these relationships can be seen in the data. Figure 4-7 (omitted) shows the rate of in flation again, except this time we have shaded in periods of recession, or falling output. We observe that when the economy is in a recession and shortly thereafter, inflation falls. Thus both in 1975 and again in 1980 recessions slowed inflation.
Some economists believe that there are no very good reasons for people to worry much about inflation and that therefore society should not do so either. Others argue that there are reasons, including increased uncertainty, why people get upset about inflation. We shall review the arguments later.But it is clear that whether or not there are good reasons, people regard inflation as a
serious problem.

Unemployment and growth

A second strong relationship exists between unemployment and growth. When  the economy grows rapidly, unemployment rates fall. When the economy grows very  slowly or even moves into recession, unemployment rates increase. This means that several years of successive high growth bring unemployment rates to very low levels as more and more people find jobs while production is increasing. In contrast, when real GNP is not growing much or is even falling, firms increase their employment of labor slowly, and unemployment rates increase. The high unemployment rates in 1982 are a reflection of the very low  growth rates of real GNP.

TABLE 4-9
INFLATION, UNEMPLOYMENT, AND GROWTH, 1960-1981
(Average Annual Percentage Rate)
UNITED STATES UNITED KINGDOM GERMANY JAPAN
Inflation :
1960-1973 3.2 5.1 3.3 6.1
1973-1981 9.4 15.4 4.9 9.0
Unemployment:
1960-1973 5.0 2.9 0.8 1.3
1974-1981 6.9 6.3 3.2 1.2
Growth rate of real GNP:
1960-1973 4.2 3.2 4.8 10.5
1973-1981 2.4 0.5 2.0 4.0

Source: Economic Report of the President, 1982, pp. 355-357.
SUMMARY
(by Dornbusch, 1982)
l Macroeconomics is the study of the operation of the whole. The major macroeconomic issues are inflation, unemployment and growth and whether there is anything the governments can do about them.
2 Macroeconomics is distinguished from microeconomics by
the interactions between the decisions made by firms and households
as summarized in Figure 4-1. Households supply the factors of production to firms, which use them to produce goods and services. In return for the services of the factors of production firms pay incomes to households, which are used by the households to buy the goods and services produced by the firms.
3 A reduction in purchases of goods by households can reduce employment of labor, reducing households’ incomes, thereby reducing spending on goods and services. An important question to be studied is what mechanisms exist to prevent these from developing into major problems.
4 Growth is an increase in the production of goods and services. Growth may occur either when unemployed resources are put to work so that the economy moves from inside the PPF to it when the PPF itself shifts out. The PPF may shift either by using more factors of production or because existing factors come more productive.
5 The inflation rate is the rate at which prices of goods and services are rising. In the United States the inflation rate started out around 1 percent in the sixties and have been above 13 percent since then. By international standards American inflation has been low. Prices may also fall sometimes, in that case there is deflation.
6 A country that has faster growth than another country will eventually have a larger real GNP, however far behind it was earlier.
7 Unemployment in the U.S. economy has risen on from the late seventies. In 1982 it stood at the highest level in the post II WW period. Unemployment rates differ sharply among different countries. Youths and blacks have particularly high unemployment rates.

Lectures in Economics 8

Lectures following Rüdiger Dornbusch’ works (8)

CHAPTER FOUR

INTRODUCTION TO MACROECONOMICS

It seems clear that the government, by its actions, has the potential to affect major macroeconomic variables such as unemployment and inflation. For instance, if the government increases its demand for goods, it adds to the total demand for goods and services and probably increases output and unemployment. But at the same time it pxobably increases the price level. Or if the government increases taxes, leaving people with less to spend, that probably reduces demand, output, and the price level.
Economic pollcy consists of government actions to affect the economy. The variables the government adjusts in carrying out economic policy; such as tax rates and government spending, are called policy variables; or policy instruments.
Partly because it is closely related to policy – to questions of what the government can do-macroeooţomics is an area where there are disagreements among economists. Frequently, this disagreements result from differences in value judgments. As always, we should be on guard for these in reading any economist’s advice about macroeconomic policy. But sometimes there are disagreements on positive economics, for instance, on what happens to total production and inflation when the government cuts taxes. Here‚ we have to make up our minds on the basis of theory and data.

In presenting macroeconomic theory and evidence, we do not go out of our itinery to focus on controversies. Where there are differences of opinion on issues that matter; we mention and explain them. But most of the macroeconomics section develops the widely agreed-on solid core of the subject.

1 PRODUCTION, INCOME, AND SPENDING

The economy is made up of many independent units: millions of households and millions of firms (and federal, state, and local governments, which we leave out of he picture for a while). Households decide how much to buy and how much to work. Correspondingly, firms decide how much to produce and sell and how many people to hire. Together, these decisions by all households add up to the economy’s total spending, and the decisions by all firms add up to the economy’s total level of production. We now develop this interdependence between individual decisions and the total, or economywide, levels of spending and production.

Table 4-2 classifies the different transactions between firms and households in the economy. Households own the firms, which in turn own machines, buildings and equipment, and raw materials and other goods used for production.
Goods and services useful in production are called factors of production. They include, in particular, labor, machines, office and factory buildings, and land. Ultimately, all factors of production are owned by households, either indirectly through firms or directly as in the case of labor.
Table 4-2 provides a simplified picture of the transactions in the economy. Here are some of the simplifications. First, we have omitted the government, which is neither a household nor a firm but does play a role in the economy.
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TABLE 4-2
TRANSACTIONS BY HOUSEHOLDS AND FIRMS
(… omitted)
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Second,we show firms selling goods to other firms, flow of services of factors of production. For instance-,IBM sells computers to other firms matched by income not only to households. Third,we have not specified whether we are talking about the firms or households paying from their incomes.

All these points matter,but fortunately they are easily accounted for once we have the simple straight ideas about flows of goods and incomes. In Table 4-2 the top two entries describe the fact that households ultimately own all factors of production and that firms use those factors to produce goods and services. The middle entries show that in exchange for providing factors of production for use by the firms, the households receive incomes,primarily as wages and profits. The households in turn use their incomes to buy the goods produced by the firms,which therefore can pay for the factors of production they use. Figure 4-1 shows the interactions between households and firrns.First we draw attention to the flow of the services of factors of production from households to firms, from which the households receive incomes in exchange. … (10 lines omitted)

Figure 4-1 is called a circular flow diagram, because in each loop there is a circular flow starting at any point and coming back to it. …The top half shows how the economy willing to work cannot find services of factors of production to produce goods and services. If the firms cannot find buyers then the shelves are filled with unsold goods.

Unemployment
The firms are unable to continue production as before and hire fewer people. People lose their jobs and become unemployed.
What happens next? The economy has to find some way to put people back to work. There is a problem here because the people who have lost their jobs will have less income to spend, as we see fţom Figure 4-1. Thus firms will be able to sell even less, and that seems to make the unemployment problem worse.

Here we face a basic question of macroeconomics. If people become unemployed because firrns cannot sell all the goods they are producing, what gets the economy back on track? How do we avoid a continuing fall in production and employment? We shall see that there are mechanisms ‘that get the economy back on track; including changes in wages and prices, and govemment policies, but that these mnechanisms may work quite slowly..

Unemployment is, of course, a problem for the people who cannot get jobs. But it is also a problem for society, because it means society is wasting its scarce labor. Figure 4-2 showed the production possibility frontier that was introduced in Chapter l. When there is unemployment, society is not on the production possibility frontier but rather is operating at an inefficient point; such as G, inside the frontier. One of the basic questioms in macroeconomics is why society sometimes has very high unemployment and thus wastes resources.

Although the term “unemploymerit” is usually reserved for labor, other factors of production such as machinery and factories are sometimes not used even though they are available for production. They too can be described as unemployed. The basic macroeconomic question of why society sometimes has high unemployment of labor extends also to the question of why society sometimes (usually at the same times that labor is uriemployed) wastes resources

FIGURE 4-2 UNEMPLOYMENT AND THE PRODUCTION POSSIBILITY FRONTIER. The frontier shows combinations of output at which the economy is fully employing its labor. When there is unemployment, the economy is producing at some point such as G and wasting resources. One of the basic questions in macroeconomics is why the unemployed are not put very quickly back to work producing goods and services that people would like to consume.

Inflation
Suppose that the firms in the economy are producing a given amount of goods and that everyone is working. The economy is producing on the production possibility frontier. Now consumers decide that they would like to spend more than they used to. They demand more goods from the firms. Firms cannot produce more goods because all resources in the economy are fully employed.

Something has to give. To start with, firms may put “sold-out” signs in the windows or put customers on waiting lists. But they will also raise prices, trying to reconcile the scarcity of goods with the households’ increased demand for goods. Inflation here results as firms raise prices in response to households’ demands for more goods than can be produced.
The decisions of firms and households, affecting one another through their interactions are described in Figure 4-1. The essential difference between macroeconomics and microeconomics consists in the interactions described in Figure 4-1. The fact that firm and household decisions are made independently is not unique to macroeconomics. Going back to the supply-demand analysis of the fish market in Chapter 3, we see that the decisions about how much to supply and how much to demand are made independently by suppliers and demanders. But macroeconomics is different in that firms’ decisions about how much to produce determine the incomes of households and therefore their spending. Those interactions, or feedbacks, which are unimportant in microeconomics, are the essence of macroeconomics; they are illustrated by the circular flow diagram in Figure 4-1.

We follow up this overview of macroeconomics problems with a look at the facts. The following sections present definitions and a discussion of recent experience with inflation, growth, and unemployment.

2 THE PRICE LEVEL AND THE RATE OF INFLATION

In Chapter 2 we introduced price indices as measures of the oost of buying a specified basket of commodities. In particular, the CPI represents the price of a basket of 224 goods and services, each of which receives a weight that was determined by studying the spending behavior of more than 20;000 families. Weights for broad categories of goods were given in Table 2-7. Table 4-3 shows the CPI, with base 1967 =100, for selected years.

In 1981, for example, the value of the CP,I -was 272.4. With the base year 1967 =100, this means the cost of buying the basket of goods and services in the CPI…
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INTRODUCTION TO MACROECONOMICS
TABLE 4-3
(omitted)
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was 2.724 times as high in 1981 as in 1967. Prices had, on average, nearly tripled. Similar comparisons can be made with earlier years. For instance, looking back to 1929, which is not shown in the table, we find the CPI equal to 51.3. With the CPI at 100 in 1967 and 51.3 in 1929, the costs of goods bought by the typical consumer about doubled from 1929 to 1967. Thus we see that prices of goods in general have risen threefold since 1967 and sixfold since 1929.

In Chapter 2 we also discussed the inflation rate.
The inflation rate is the percentage rate per period that prices are increasing. Normally we talk about annual inflation, but we can also look at inflation rates between months, quarters, or decades. Table 4-3 reports the annual inflation rates of the prices of the goods represented by the CPI.
We briefly recall how ţhe inflation rate is calculated. Suppose we want to figure out the inflation rate, or the growth rate of prices, between 1979 and 1980. This inflation rate is reported in the table as the entry for 1980. Inflation for 1980 is the percentage change in prices, or the growth rate of prices, from 1979 to 1980. It is calculated as in equation (1)
The 1929 index does not measure the cost of exactly the same basket of goods as the current index, but the costs of goods bought by consumers can still be approximately compared from CPI values at different dates.

Lectures in Economics 7

Lectures following Rüdiger Dornbusch’ works (7)

(DEMAND, SUPPLY, AND THE MARKET – CONTINUED)

An example: the shift of the demand curve for tea

When the price of coffee dropped back toward the initial level, accordingly, the quantity demanded increased. The increase in the equilibrium price of coffee should have affected the demands for other goods and thus spread to other markets. We would have expected the demand for tea, which is a substitute for coffee, to shift. The quantity of tea demanded at the given price of tea should have risen. Thus there should have been an increase in the price of tea and an increase in the quantity of tea consumed. In fact, this is what happened. The quantity of tea consumed in the United States in 1977 was slightly higher than the quantity consumed in 1976. The price of tea in 1977 was nearly double the price in 1976.

Thus the increased price of coffee shifted the demand curve for tea, leading to a higher price for tea and a higher quantity demanded.

Watches
The other example we will consider involves technological innovation and cost reductions on the supply side that work to shift the supply schedule. We will take the case of digital watches. Table 3-5 shows the relevant data.
The price of digital watches declined from $76 to only $33 between 1975 and 1979. The reduction in price led to an increase in the quantity demanded from 4.2 million watches to 19.7 million. Once again, demand is seen to be responsive to price.
WHAT, HOW, AND FOR WHOM
The free market is one method to solve the three basic economic problems What is produced? How? For whom?
This chapter has shown how supply and demand, determine price and output and explain how supply and demand through markets solve economic problems.

In Figure 3-I 1 we show a demand schedule and a supply schedule at point E, the equilibrium price and the equilibrium quantity. The free market “decides” how many of a particular good to produce by price at which the quantity equals the quantity supplied.
FIGURE 3-11 THE FREE MARKET AN BASIC ECONOMIC QUESTIONS. The free market price is P0, and the equilibrium quantity supplied is Qa. Consumers who are able to pay at least Po per unit will receive the output; consumers who are willing to pay 0 receive none.

The quantity amount depends both on the position of the supply schedule and on the position of the demand schedule. If at each price consumers demanded a larger quantity, DD would be located farther to the right, and the equilibrium quantity would be higher. If at each price the quantity supplied were lower, the supply schedule would be farther to the left, and the equilibrium quantity would be lower. Thus the free-market answer to the question of how much of a good to produce is determined by both supply and demand conditions. Other things being equal, more of a good will be produced in market equilibrium the higher the quantity demanded is at each price (the farther to the right the demand schedule) and the higher the quantity supplied at each price (the farther to the right the supply schedule).

The free market tells us for whom the goods are produced. They are produced for all those willing to pay the price Po per unit of the good. The free market also tells us how goods are produced, but to understand the answer to that question we have to learn more about the production side of the economy.

It is worth emphasizing that although the free market solves the basic economic problems, its answers may be controversial. The free market does not provide enough food for everybody to go without hunger, and it does not provide enough medical care for everybody to be healthy. It provides enough food for those willing and able to pay, and it also provides enough medical care for them. The answers given by a free market, therefore, may differ very radically from what society may want to see as an allocation of resources. It is for this reason that government intervention in the free market through regulation, taxation, and the redistribution of income is so pervasive throughout the world.

SUMMARY

1 Demand is the quantity ofa good buyers want to buy at each price. The lower the price, the greater the quantity demanded. The demand curve shows graphically the relationship between price and the quantity demanded. It slopes downward.
2 Supply is the quantity of a good sellers want to sell at each price. The higher the price, the larger the quantity supplied. The supply curve shows the relationship between price and the quantity of the good sellers want to sell. It slopes upward.
3 The market clears or is in equilibrium when the price is at the level at which the quantity demanded and the quantity supplied are equal. This is the point at which the demand and supply curves intersect. At prices below the equilibrium price there is an excess demand (or a shortage), and this tends to raise prices. At prices above the equilibrium price there is an excess supply (or a surplus), and this tends to cause prices to fall. Thus in a free market, prices tend to move toward the equilibrium level.
4 The factors that are assumed to be constant along a given demand curve are the prices of related goods, consumer income, and consumer tastes and habits.

5 An increase in the price of a substitute will increase the quantity of a good demanded at each price, and an increase in the complement will reduce the quantity demanded. An increased income increases the demand for the good if the good is normal, an increase in income reduces the demand for a good, if the good is inferior.
6 The main factors determining the position of the supply: technology, input costs, and government regulation and taxes: increase in input costs will reduce the quantity supplied. Any factor increasing demand causes the demand curve to move to the right and increases both the price and the quantity being sold. Any factor reducing supply causes the supply curve to move to the left, increasing price and reducing the quantity bought.

KEY TERMS
Demand Supply
Quantity demanded
Quantity supplied Equilibrium price
Excess demand (shortage) Excess supply (surplus) Equilibrium quantity, Substitute,
Complement,
Normal goods, Inferior goods,
Shift of demand curve. Shift of supply curve,
Free market Price controls
Floor price
Ceiling price
Movement along demand curve