ECO 372

ECO 372

Exam 3: Take-Home Component

Due: Monday, 8 December, 4:30 pm, in my office; typed doubled-spaced

[I will return your take-home component to you, graded, on Wednesday morning when you take the in-class component.]

Grading Rubric: 80% on strict content; 20% on writing style and grammar

1. Mises on Economic Calculation (20 points)

In 1920, communists throughout Europe were excited about the prospect of a new world order. The Bolshevik Revolution in Russia had overthrown the czar, and the government was in the hands of the communists. V.I. Lenin promised the eradication of the feudal/market economy that had existed and its replacement with a socialist order that would eliminate want. The claims made for the new order were extravagant. In reply, the Austrian economist Ludwig von Mises wrote a paper, to be followed in 1922 by a book (Socialism) in which he argued that the economy envisioned by the communists was, quite literally, impossible.

What was Mises's central contention?
Explain in detail the argument Mises made to support his contention. (You may refer to the example used by D. R. Steele in From Marx to Mises if you wish. However, generalize it to a real economy.)
- In the course of your argument, be sure to define all technical terms, including "factors of production," "functioning market," and "NFM socialism."
- As part of your answer, make sure to differentiate between technical efficiency and economic efficiency.
After explaining Mises's critique of NFM socialism, explain how markets solve the problems that direct control cannot solve.
Finally, add a brief note on the two lines of thought that come together in the Mises critique.

2. Keynes's "General Theory of Employment" (20 points)

In February 1937, the Quarterly Journal of Economics published four reviews of Keynes's The General Theory of Employment, Interest and Money, followed by a response by Keynes himself. From your reading of Keynes's response, answer the following questions.

What was the major theme stressed by Keynes in his response?
In Keynes's mind, how did his economics differ from "classical" economics (as he defined "classical")?
Briefly sketch out Keynes's theory of income determination.

3. Friedman's "The Role of Monetary Policy" (20 points)

In his December 1967 presidential address to the American Economic Association, Milton Friedman attacked the idea that a central bank could "peg" either the interest rate or the unemployment rate.

Focusing on the unemployment rate, explain Friedman's argument in detail.
- Be sure to explain clearly the role of expectations in producing Friedman's result.
- Why did Friedman choose to use the term "natural rate of unemployment? What exactly is the natural rate of unemployment?
What does Friedman's argument imply that policymakers should and should not attempt to do?