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Heather Jones

Summer II

Econ 6306-70
7/18/2016

Hayek - Article Questions


1.1. The peculiar character of the problem of a rational economic order is determined
precisely by the fact that the knowledge of the circumstances of which we must
make use never exists in concentrated or integrated form, but solely as the
dispersed bits of incomplete and frequently contradictory knowledge which all the
separate individuals possess (H.3)
a. What does Hayek mean by a rational economic order? Rational economic order means
that to be successful and to fully utilize knowledge that everyone should be equal. There should
be no order of knowledge, but instead everyone should know the same thing and all knowledge
should be shared.
b. What does Hayek mean by dispersed bits of incomplete and frequently
contradictory knowledge? Hayek is referring to the incomplete knowledge that we as a
society pass down to individuals. We do not work together but instead are always in competition.
This competition causes information passed down to not be completely relevant for all parties
involved but instead only hold true for select groups.
c. Why is Hayek critical of the common assumptions in economic analysis
that buyers, sellers, producers and the economist all know every relevant
thing about the economy? Hayek is critical of this assumption because he is a believer of his
statement that we have dispersed bits of incomplete and frequently contradictory knowledge.
d. What, in summary, does Hayek mean by the quoted statement? Hayek means that because
there is no rational economic order when it comes to knowledge, that nobody can ever fully
understand the big picture of a problem. Individuals can only see as far as their knowledge goes,
anything beyond that is unknown, making business decisions without full knowledge allows for
vast amounts of errors.
1.2. What, according to Hayek, is the information needed to operate effectively in a
complex market economy? Hayeks major points all have to do with the need for knowledge
and the disorder in which society distributes knowledge. To operate effectively in a complex
market, having the right knowledge and the means to acquire more knowledge about important
factors like resources, is what will keep people at the top.
a. What does Hayek mean by planning? Planning In Hayek terms is in relation to the way
we as a society allocate our resources. We give information to certain people and they become
the keeper of that knowledge. If for whatever reason they do not pass that knowledge on, then we
as a society lose that knowledge.
b. What is the minimum information needed by economic planners and
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Heather Jones
Summer II

Econ 6306-70
7/18/2016

Individuals? The minimum information needed by any economic planner/individual is all the
knowledge which needs to be used. That is a very roundabout way of saying that any information
needed to help a planner/individual make a decision about the business/life needs to be available
to them. Whether that be financial information, or about resources used by.
c. Does the minimum differ for planners and for individuals? How? Why?
d. What happens when some individuals possess more information than other
Individuals? The person who possesses more information will ultimately have the upper hand
on the individual with less. That is the economic case which divides us into different societal
classes. It is more common for a person that is in upper-middle class to have a better education
than a lower/poverty class individual, allowing for a higher possession of knowledge.
e. What does Hayek mean when he says (H.16) the sort of knowledge
with which I have been concerned is knowledge of the kind which by its
nature cannot enter into statistics and therefore cannot be conveyed to any
central authority in statistical form? Hayek is talking about the ways in which knowledge is
used by each individual. There is no way to calculate what one person will do with the
knowledge that they have compared to what another person would do with that same knowledge.
Then there is also the factor that in our society it is uncommon for 2 people to have the same
exact knowledge. Therefore, there is not a calculation or scientific means for determining how
anyone will use, or not use their knowledge.
f. Why, according to Hayek, can the information problem be solved by
the price system? The price system allows for calculations which the information system
does not allow for. These calculations can be taken and then can show where there is a lack of
resources. The shortage in resources can then be adjusted based on the needs of the calculations.
When using the price system with the information problem we can see more clearly where
we lack information, and then can fill that need accordingly.
1.3. Why, according to Hayek, is the true function of the price system the
communication of information? The price system can help tell where there is a lack of
resources. When using the price system with information, a company could then tell where there
is a lack of information. That could then allow the company to expand their knowledge base in
that area, whether it be finding someone from the outside or training new individuals on the
inside with information from another individual.
a. Why does Hayek use the term marvel in his discussion of the economy
of knowledge? Hayek uses the word marvel to shock the reader into actually thinking about the
meaning of the sentence instead of just blindly reading it. Here he actually means that instead of
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Heather Jones
Summer II

Econ 6306-70
7/18/2016

taking the price system and using it to gain advantage and knowledge, businesses instead do not
fully understand it therefore do not use it to its full benefits.
b. What does Hayek mean when he says (H.26) man has been able to
develop that division of labor on which our civilization is based because
he happened to stumble upon a method which made it possible? In this sentence Hayek is
saying that no individual has ever completely thought through the price system, instead someone
happened to find it, and instead of using it fully, only a fraction of its purpose is being used.
Lucas- Article Questions
1.
According to Lucas, why has the worlds economy grown so much since 1960? 1960
was the 60th year the 20th century, and Lucas points out that growth accelerated dramatically
in the end of the 20th century. This growth is due to the technology boom, or as some call it the
ending of the industrial revolution. The technology required more advances in education,
machines were allowing better, smarter, and faster work conditions, both of which lead to
increases in profit and income.
2.
According to Lucas, why do some nations grow faster than others? The local
economies are not all growing at the same time, but instead there is a stagnant growth. The other
economies not yet growing are currently falling further behind. Once an economy starts to grow
they grow at a constant rate plus a percentage of the gap between the leader of the growth and
that economy, this gap actually does not hinder the economy but instead makes it grow faster.
This faster growth is not a good feature. Instead of helping to push the economy further it
actually reduces the overall growth rate of the economy because no economy can pass the leader
of the growth.
3.
According to Lucas, why will growth and inequality decrease in the next 100 years?
When predicting the growth of the world economy there was an overstatement of growth. This
overstatement hinders the actual growth of an economy because there is less when more was
expected. The log standard deviation has allowed for a theory that it would return to 0.
4.
Is Lucas model in this paper economics? Lucas says that there is not much
economics in his model, but the deficiencies could not have been done by anyone other than an
economist. It predicts the future economies even with the changes that cannot be foreseen.
Mankiw-Article Questions
1.
Many economists think the Solow Growth Model is of limited use. (One of my
professors at OU stated that it took economists 50 years to figure out that their growth
model has nothing to do with growth.) But does the Solow model give the right answer
to the questions it is designed to address? The Mankiw article section III. A., they determine
that the Solow model does not predict convergence of the world economy, but instead predicts an
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Heather Jones
Summer II

Econ 6306-70
7/18/2016

individual country's convergence with itself. It also cannot predict anything without manipulation
and assumption, but what model can ever predict 100% without some type of assumption on
previous views.
2.
Why is human capital important when testing the Solow model against the data? In
the Solow model, without human capital there is a variable missing. Adding the human capital
variable in the model allows for a change in views, in turn altering the results of the conclusion.
3.
Explain how the authors conclude that the incomes of the worlds nations are
converging? The authors first add a steady state to the equation. Then after doing multiple test
equations with steady state involved they take that against another equation and model to verify
that the information they are gaining from the Solow model can be verified.
Compare
Both of these papers develop the notion that the economies of the worlds nations will tend
to converge over time. Compare and contrast the way(s) in which the papers advance
the idea of convergence.
First thing I would like to point out is that Mankiw goes beyond the norm of economic growth
where Lucas does not. Mankiw understands the influx in population growth to level of income.
Mankiw looks beyond just the drive of the economy and picks up on the fact that higher income
levels lead to an increase in population. Mankiw is also more concerned with savings rates and
believes that determining savings rates will also help to determine where higher incomes will be,
Lucas on the other hand looks at the technology that is being used in each country and
determines which country will begin their revolution. Mankiw shows the importance of using
human capital in the determination of how the world economies will converge, while Lucas does
not include this important variable in his model. Without this variable there seems to be missing
data which ultimately alters the view that Lucas tries to produce. Both of these papers are trying
to predict future outcomes in economic growth, but only Lucas model can actually predict the
economic growth. This is because the Solow model is not set up or meant to predict economic
growth, but instead shows population growth and convergence of different economies.

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