FCOM111 Master Notes PDF

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FCOM111 – FINAL EXAMW2: INDIVIDUAL AND COLLECTIVE ACTIONINDIVIDUAL ACTIONActions taken by one individual person, acting based on their personal decisionsCOLLECTIVE ACTION Actions taken by a collective or group, acting based on a collective decisionTHE INVISIBLE HAND (ADAM SMITH) ·​ ​People acting in...

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FCOM111 – FINAL EXAM W2: INDIVIDUAL AND COLLECTIVE ACTION INDIVIDUAL ACTION Actions taken by one individual person, acting based on their personal decisions COLLECTIVE ACTION Actions taken by a collective or group, acting based on a collective decision THE INVISIBLE HAND (ADAM SMITH) · People acting in their own individual self-interest are able to collectively reach socially optimal outcomes · Works through trade & exchange with an agreement of price, satisfying both parties · Although people are working behind the scenes where buyers don’t know what the seller are going through and vice versa, through the invisible hand, both parties are still able to make transaction and coordinate over a mutual agreement of price · Relies on homo economicus: the assumption that all people are rational · Problem: sometimes the invisible hand fails, where people acting in their own self-interest do not arrive at an outcome that is socially optimal → result in collective action problems COLLECTIVE ACTION PROBLEMS 1. Free-rider problems · Occurs whenever people are able to benefit from a collective good without incurring the costs of participating in its production · Helps explain why some goods and services are underprovided · Non-excludable, non-rivalrous · Example: the environment, public places, voting 2. The Tragedy of the Commons · When people making choices in pursuit of their own self-interest arrive at outcomes that are not in the group’s best interest · The concept of “rivalry” helps explain the tragedy of the commons and why some goods and services are overused → race to the bottom · Non-excludable, rivalrous · Example: overfishing, hunting, deforestation DO MY INDIVIDUAL ACTIONS MATTER? Yes, it influences collective actions. Outcomes can be efficient (the invisible hand) or inefficient (not socially optimal, Free Rider and Tragedy of the Commons problems). Society is better off when people cooperate.

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W2: INSTITUTIONS INSTITUTIONS · To overcome collective action challenges, society designs and implements institutions (rules or general understanding that guides behaviors) · Example: Voting in election. Australia has compulsory voting, those who don't vote gets fined (institution). Hence, solving the free rider issue (collective action challenges) FORMS OF INSTITUTIONS 1. Formal Institution · Written rules · Examples: Laws, statutes, legislations, policies · Large group size (population) · Requires an established government to govern the institution (because of the difficulty of gaining trust and communication) · Significant: creates a huge impact to a country → South Korea's GDP significantly increased when they start having an open economy, international trade; while North Korea's GDP remains stagnant and decline

2. Informal Institutions · Non-written rules · Examples: social norms, cultural norms, beliefs, values · Small group size, where self-governance is possible · Members can communicate and build trust with each other · The threat of reciprocity encourages people to behave cooperatively Notes: - When enforced, all of them guide, constrain and incentivize our behavior - Governments rely on both formal and informal rules to guide behavior, especially in democracies

DEMOCRACY · A government under the direct or representative rule of the people of its jurisdiction. · Democracy relies on formal rules (voting, representation, constitution) and informal rules (trust, communication) FORMS OF DEMOCRACY 1. Representative Democracy: Elected people representing a group of people (e.g. NZ, UK) 2. Direct Democracy: People vote on policy initiatives directly (e.g. Switzerland) FOUR PILLARS OF DEMOCRACY 1. Justice - Everyone is accountable for their actions 2. Equity - Everyone is treated equally 3. Freedom - Freedom of speech, voice, right 4. Representation - Everyone has the opportunity to vote and be heard

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FORMS OF GOVERNMENT 1. Authoritarian: Highly concentrated and centralized power maintained by political repression and the exclusion of potential challengers (e.g. Putin, Russia) 2. Totalitarianism: An extreme version of authoritarianism, where the states holds total authority over the society and seeks to control aspects of public and private life wherever necessary (e.g. Hitler, Nazi) 3. Dictatorship: An autocratic form of government in which the government is ruled by an individual dictator (e.g. Kim Jong Un, North Korea) ILLIBERAL DEMOCRACY A rise in populist movements around the world (e.g. US, Europe's rights, Philippines, Brazil)

W3: GOVERNMENT IN NEW ZEALAND FEATURES OF NZ GOVERNMENT SYSTEM · Parliamentary system: the government is headed by a Prime Minister who commands by having the support of the majority of MP’s in parliament · Constitutional monarchy based on Westminster Democracy · Unicameral legislature: A single law-making body, one house, centralized power (e.g. Denmark, Sweden) · Liberal democracy: A democracy where individual rights and freedoms are protected, and political power is limited by the rule of law · Representative democracy · Unitary state - not a federation · NZ is the only OECD country to not have any institutional constraints on executive power: a codified constitution, an upper house, an elected head of state, or developed power 3 BRANCHES OF GOVERNMENT · The executive: PM, cabinet minister and government departments o DRAFTS LAW: decides policy, draft bills carries out policy through gov. departments · The Legislative: All MPs, including ministers, select committees, parliament o APPROVES LAW: examines and debates bill, creates Acts · The Judiciary: judges and court o APPLIES LAW: hears cases and applies relevant laws. Reviews decision of Executives BICAMERAL SYSTEM Upper and lower house (e.g. US Congress and Senate, UK House of Commons and House of Lords)

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WHY HAVE 3 BRANCHES OF GOVERNMENT? - Checks and balances within the decision-making structures → separation of powers - The 3 branches operate independently from one another: the executive proposes legislation, parliament debates and passes the law, and the judiciary upholds the Acts of Parliament - Supports a system of responsible government THE LEGISLATURE (AND POLICY) IS DETERMINED BY THE PUBLIC · The public elect the parliament and the government · Politicians care about what you want because they want to keep their jobs (working in their own self-interest) · "Parties formulate policies to win election, rather than win elections in order to formulate policies" - Downs, A. 1957. An Economic Theory of Democracy. MEDIAN VOTER THEOREM In a two-party system, the parties will move their policies closer to the middle to capture as many votes as they can. This is why the two parties end up with centrist policies. E.g. two ice cream sellers sell ice cream in the middle of the beach to capture customers · Historically, two party systems have centrist policies · But it isn't always the case, voter’s behavior and government architecture often violates the assumption of the median voter theorem: o Voter preference o Voter turnout o Multiple parties/candidates o Electoral system · In places where elections are compulsory (such as Australia), voter turnout may end up linear as the same people are voting, while when it is not compulsory there may be fluctuations in voter turnout - However, the median voter theorem is not always applied in NZ because of the MMP system ELECTORAL SYSTEM: MIXED-MEMBER PROPORTIONAL REPRESENTATION (MMP) - MMP is New Zealand’s current voting system (since 1996) - 120 seats in parliament, 70 electorate MPs (most powerful votes) and 50 list MPs - Voters have two votes, one for their electorate MP and one for their preferred political party - Each party’s representation in Parliament is determined by their percentage of the nationwide party vote – MPs from the party list are added to the electorate MPs to bring each party up to the same percentage of seats in Parliament - Under the current system, parties have to win an electorate seat or more than 5 percent of the party vote in order to get into Parliament OUTCOMES OF MMP · Rise of minor parties · Shift to coalition government · Increased diversity - more women in the house, increase in Maori Pacifica, Asian representative in the parliament 4

FIRST PAST THE POST (FPP) · FPP was NZ's voting system before MMP · There is no party vote · A simple system, however some people argued that the results may not always reflect the wishes of the majority of voters SINGLE TRANSFERABLE VOTE (STV) · Similar to FPP, the main difference is that candidates need to get more than a certain proportion of the vote to win an electorate seat · Voters rank the candidates in order of preference, and Parliament is made up of the candidates who have met the vote threshold

W3: CONSTITUTIONS CONSTITUTION - A national constitution is about power and politics on a grand scale - who exercises the power of the state, how they exercise power, how much can be exercised, whether other people and which people can stop them and how they can do it. - How New Zealand’s constitution works directly affects our economy, our society, our culture and our politics - It expresses whether we live in a democracy or a totalitarian regime, in a market economy or under a one-party communist state, and whether we celebrate diversity or exploit minorities IDEOLOGY - An account of the existing order (cause and effect) - A sense of the desired alternative (the 'good' society) - A political plan, program or project to enable the alternative to be realized "RECIPE KNOWLEDGE" There is a problem that is resulting in public concern, hence "recipe knowledge" provide a solution: "this problem is being caused by … if we deal to the causal factors (e.g. through these policies) the problem will go away"  (E.g. Trump building a wall in US-Mexico border) LIBERALISM - Focuses on the inalienable rights of the individual, not a pre-ordained social structure - Government based on the consent of the governed and constitutional constraints to prevent the abuse of power - Those who are governed (citizens) consent to be governed, and their terms of their consent often takes the form of a constitution. ● Individual freedom and justice ● Equality of opportunity ● Reason and tolerance

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NZ CONSTITUTION - Unusual: unwritten, uncodified, not supreme (e.g. UK and Israel) - The Constitution can be found in: formal legal documents, decisions of the courts, and practices and conventions NZ STATUTE LAW (Made by Legislature) - Constitution Act 1986 (e.g. 22 Parliamentary control of public finance) - Electoral Act 1993 - Bill of Rights Act 1990 (e.g. Section 5: Manifestation of religion and belief) - State Owned Enterprises Act 1986 - State Sector Act 1988 - Judicature Act 1908 (relating to the three branches of government) - Ombudsmen Act 1975 - Official Information Act 1975 - Public Finance Act 1989 - The Arms (prohibited firearms) Amendment Act came into effect on 20 June 2019 → part of NZ constitution (state, property rights) - An Act is a constitution if the Act had any impact on the rights and freedoms of individual citizens, and on the nature of their individual and collective relationship with the State OTHER NZ CONSTITUTION SOURCES - Magna Carta 1297 - English and UK Law - The Common Law (judge-made law) - Delegated Legislation - Regulations (G-G), Rules (Minister), Bylaws (Local Authority WCC) - Treaty of Waitangi - Key source of the New Zealand Government's moral and political claim to legitimacy in governing the country. Used by the courts as an aid to the interpretation of statutes CONSTITUTIONAL CONVENTIONS - Accepted principles of political conduct which have developed over centuries of democratic political practice and have a significant bearing on the way in which governance occurs. - Conventions are not specified in law, therefore not enforceable by the courts. - Law + convention = constitution

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W4: THE ROLE OF GOVERNMENT IN A MARKET ECONOMY GOVERNMENT FAILURE - Situations where government intervention creates inefficiencies, leads to misallocation of scarce resources - The knowledge problem → because information is widely dispersed, incomplete, and frequently contradictory it is impossible to acquire all the information needed to coordinate society efficiently - Rent-seeking/Regulatory capture → politicians are vulnerable to lobbying /influenced by powerful groups MARKET FAILURE - Situations where the markets fail to allocate resources efficiently, hence the government should correct MARKET IS MORE EFFICIENT THAN GOVERNMENT - Markets are more agile (can move quickly) than governments and more efficient at allocating resources - Competition means that private companies are more likely to take risks and innovate → returns on private investment likely to be greater (high risk = high return) - Markets should take precedence in allocating goods and services THE ROLE OF GOVERNMENT - Government should intervene to correct market failure - There is always a trade-off between two inefficient outcomes—one generated by free markets (market failure), and the other by governmental intervention (government failure). - Getting the balance ‘right’ can be determined by the size and scope of government - there is unlikely to be a ‘one size fits all’ model. SMALL GOVERNMENT = GOOD GOVERNMENT - Public choice theory provided the foundations for the Washington Consensus and trickle down economics - Goal of Washington Consensus: to reduce the inefficiency of government (government failure) by outsourcing to the private sector and prioritizing: Privatization, Deregulation, Trade liberalization and Tax reform 'ROGERNOMICS' TRICKLE DOWN ECONOMICS - NZ government (under a Labor-led) wanted to reduce the size of the government as government failure was a bigger problem than market failure - Welfare payments were slashed and many state assets were privatized or corporatized: - Rail network , Telecom, Banks, The Tower insurance company, Shipping companies, Air NZ and Auckland airport, Energy companies, NZ forests and NZ steel

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ALTERNATIVE PERSPECTIVES - Neoclassical idea → government failure is even worse than market failure - Hence, we outsource the responsibility of the government to privatization to reduce the risk - The problem is an ideological problem, where there is a believe that government has always failed - In reality, there are times where government functions well and effectively - Public sector and private sector are both needed, there needs to be an integration of both (partnership) to support each other - Partnership: the more we outsource, the lower the capacity to negotiate confidently - Public sector should exist in managing public services - Getting the correct contract and deals → lead to an increased value in public sector - Check and balance by providing data that is transparent to show THE ENTREPRENEURIAL STATE Mazzucato's idea of the role of the state is one where government: ● Is an innovator, risk-taker, and value creator ● Invest in its own capacity to build confidence and trust in itself and business ● Recognizes the relationship between government and markets as mutual necessary

W4: GOVERNMENT AND POLICY MIXED ECONOMY - Where the market is a combination of private and public sector - Ever since South Korea become a mixed economy country, their GDP per capita rose exponentially THE GOVERNMENT MUST DECIDE ● What should be publicly provided ● What should be publicly funded ● What should be regulated ● How to raise the funds to finance public expenditures POLICIES INVOLVE TRADE-OFFS - Policy decisions are difficult to make because every policy decision is a trade-off (has an opportunity cost) - Opportunity cost: a benefit that must be given up to acquire or achieve something else 1. Positive vs. Normative a. Positive Policy: based on factual and evidence (what is) b. Normative Policy: based on values (what should be)

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2. Present vs. future generations a. People (voters) have a positive time preference →  you preference the present generation over future generations →  influences the types of policies that governments prioritize b. E.g. climate change is a difficult issue to solve because it is linked to the future generation --> difficult to decide on a policy 3. Efficiency vs Equity a. Efficient economy: takes all opportunities to make some people better off without making other people worse off b. Equity: everyone gets their fair share. Since people can disagree about what is fair, equity isn't as well defined as efficiency c. Gov may be concerned about equity outcomes from the free market - even if the market is efficient d. How do you distribute resources fairly and efficiently? GOVERNMENT REVENUE - Sources: Taxes, Fines, User-payments (e.g. drivers license fees) - Countries are racing to lower the rate of corporate taxes to attract companies to come into the country GOVERNANCE - The arrangements and practices that allow an organisation to set its direction and manage its operations to achieve its outcomes and fulfil its accountability obligations. HOW GOVERNANCE IS MEASURED 1. Gross Domestic Product (GDP) a. A monetary measure of all the final goods and services produced in a specific time period b. Useful comparative measure across countries and time c. Limitations: doesn't account for unpaid work, damage to the environment, inequality 2. Inequality a. Gini coefficient: a measure of inequality (High = unequal, Low = equal) 3. World Governance Indicators a. Corruption, Rule of law, Regulatory quality, Government effectiveness, Political stability, Voice and accountability

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W5: LAW IN SOCIETY LAW Law is about everything: efficiency, rationality, tradition, enforcement, economy, community; however, law is primarily about rules that can be enforced. RELATIONSHIP BETWEEN LAW AND MORALITY · Morality: A set of beliefs, values, principles, and behavior standards which are enforced and created by society · Law: a set of rules and principles created and enforced by the state, concerning individuals' legal actions (rights, duties, obligations) o NZ: wearing a helmet when riding a motorcycle PATERNALISM A policy or practice on the part of people in authority of restricting the freedom and responsibility of those subordinate to or otherwise dependent on them in their supposed interest. E.g. Laws that mandate minimum wages MORALITY V. LAW Criterion

Morality

Law

Who makes the rules?

Society

Lawmaker (e.g. Parliament or courts)

Who recognizes the rule?

Some groups within society

Society as a whole

Must I obey?

No, but suffer from informal consequences (society disapprove behaviors shaming)

Yes, otherwise suffer from formal consequences (sanction

Is it enforceable by state?

No

Yes

LIBERTY, RIGHT, DUTY · Liberty: something you are free to do · Right: something you can enforce against someone else · Duty: something you must do/not do CONTRACT: An agreement between two people which involves duty and rights, that the law will enforce. If I have a right, someone else owes me a duty. The law must enforce a right/duty. · RIGHT - A claim the law will enforce · DUTY - An obligation the law will enforce However, not all contracts are enforceable. If one party does not fulfil its duty (breach the contract), they must face consequences.

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CRITERIAS OF LAW 1. Positive Approach (Observation) a. Made by a lawmaker b. Recognized by a community c. Binding d. Enforceable 2. Natural Law Approach a. Proper laws cannot go against nature b. Natural law is universal (Not specific to a particular community/time) . Must respect personhood of all people a. Leads to universal human rights (E.g. unfair discrimination is not enforceable law) FUNCTIONS OF LAW Function

Example

Guidance (certainty)

People know how to behave, lawyers ...