reflections on av economy.pdf.pdf
A key insight in understanding many fundamental economic problems is that they have to be
analyzed at the margin. This means that one considers adding or subtracting the next single unit. For
example, this seems to solve the "water-diamond paradox" quite well: While water is infinitely
more precious than diamonds — because it is essential for life, whereas diamonds are mere
ornamentation — people that are not dying of thirst would rather have one more diamond than one
more bottle of water.
Marginalism is important in understanding income inequality, because in a market economy people
are paid according to their marginal productivity: It is calculated by how much the entire output
grows when the effort of any given worker is added, and the worker is paid that difference. That
output is measured, rather than input, is an obvious point. More subtle is the fact that the worker's
labor is seen in the context of the entire process, not in a disconnected or absolute sense. Among
other things, this means that one's marginal productivity can be increased by increasing the
productivity of people only very indirectly involved in one's own work. This is one reason why
people in high income economies generally have a higher income than people in other countries,
regardless of their profession; productive people are more productive when working together with
other productive people. As a result of paying people their marginal productivity, in a market
economy people both "put in" and "take out" an amount of wealth equal to their actual contribution
to the economy. Any other way of attempting to measure people's contribution will be much less
4. Politico-Economic Systems
It is useful to divide all possible politico-economic systems into four categories, based on two
criteria: the ownership of capital and the existence of a state.
Capital refers to "produced means of production".
(For example, land is not capital, since it has not been produced. On the other hand, a factory is
capital, because it needed to be built. As far as the question of ownership is concerned, however,
land and capital can often be grouped together.)
Capital encompasses a vast amount of technology and infrastructure that has a large impact on
peoples' lives. Therefore, the importance of the question who should have the right to control it
cannot be overstated.
A state is an entity that is considered to hold the monopoly on the legitimate use of force in its
territory. One way of summing up the state's perceived role in the economy is this: The market can
sell its services to the highest bidder, but must not use violence; the government can use violence,
but must not sell its services to the highest bidder.