Bryan Caplan  

Economic Systems: The Fundamental Questions

Friedrich Hayek and Abba Lerne... IQ With Conscience...
Next month, my homeschoolers are taking the Advanced Placement Microeconomics test.  Here's a thought-provoking question from a practice exam:
Which of the following constitute the fundamental questions every economic system must answer?

I. What goods and services will be produced?
II. How will they be produced?
III. When will they be produced?
IV. For whom will they be produced?
V. Where will they be produced?

(A) I, III, and V only
(B) I, II, and IV only
(C) I, II, and V only
(D) II, IV, and V only
(E) II, III, and IV only
The textbook answer is of course B: "What will be produced, how, and for whom?"  But does the textbook answer make sense?  Anyone with a good knowledge of comparative economic systems will see some compelling doubts.  Starting with:

1. At least officially, one of the main divisions between Western and Communist regimes was on "When will they be produced?"  The Western answer was basically, "Whenever interest rates make it profitable," while the Communist answer was, "Heavy industry for you, consumer goods for your grandkids."

2. Another less-publicized Western/Communist gap appears on "Where will they be produced?"  The Western answer was basically, "Wherever the wage/rent/locational desirability package is enough to attract a workforce," while the Communist answer was, "Wherever the government orders."  This was clearest in the Soviet Union, where internal passports trapped many farmers in wretched rurality and many resource extractors in hellish locations like Siberia.  But the same held in Maoist China, and other Communist regimes to a lesser extent.

3. As readers of this blog are well-aware, immigration restrictions probably reshape the global economy more than all other regulations combined.  On reflection, this is another huge "where" question that economic systems answer.  The current answer is basically, "In whatever country the workers are born."

4. The same goes for building regulations, which make major cities much smaller (in area and population) than they'd be under laissez-faire in countries as diverse as the U.S. and India.

Bottom line: Questions of "where" and "when" are very important features of any economic system.  Important enough to call "fundamental"?  It's hard to see why not.

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COMMENTS (16 to date)
John Hall writes:

I should transcribe this Rick and Morty thing on school:

These are the types of questions I absolutely hated. I remember when I took geometry in high school, I would get all the extra credit hardest proofs right, and then I would screw up questions like this that are just regurgitating something from the textbook.

Thaomas writes:

So why was I-V not one of the possible answers?

LD Bottorff writes:

Do you think the test and the questions were written by real economists? Or were they written by educators?

Thaomas writes:

I guess the answer should be "what do you mean by "fundamental?" :)

idiocratz writes:

Hayek would be turning over in his grave if he could see this question being used to test the economics "knowledge" of high school students. This question reeks of over-reliance on static models where all production knowledge is given and there is no room for learning.

Mundane questions about production timing have enormous stakes (the difference between empty and well-stocked supermarket shelves) but often require widely dispersed knowledge to solve. This is a tricky issue for a central planner to deal with, but central planning becomes much more appealing when you can dismiss these mundane problems of production timing and location as "non-fundamental" or "mere details."

What you say is so sensible, I (as a non-economist) wonder how the textbook answer could ever have been (B).

AnonymousUser writes:

Isn't a 'where' and 'when' a sub-sections of 'how'? 'How' for me seems more general and encompassing both of them.

Cullen writes:


That's a fair interpretation, though "how" could also mean "by what means". So are goods produced by hand? By machinery? Etc. But from an AP test standpoint, I'm probably overthinking it at that point.

Hazel Meade writes:

Yes, and I would add that the textbook answer of "for whom" is actually irrelevant. In a market economy, goods will be produced when there is sufficient demand for them. It hardly matters who is demanding the goods.

Peter Gordon writes:

Economic geography and related fields devote themselves to the "where" question. It is not simple and not trivial. There is the (probably apocryphal) story of the economic geography exam that asks students to describe the U.S. today if the Pilgrims had landed at what is now Long Beach, California, instead of Plymouth Rock.

T. Lord writes:

Not one of these answers is worth a damn. These are not neatly separable categories.

More importantly, the question is worth even less.

What does the author of this question even intend to mean by "Which of the following constitute the fundamental questions every economic system must answer?"

This seems to assume that "economic systems" are normative machines, and that there *is* a bulleted list from which to pick and choose from a list of weirdly overlapping answers. That's bizarre and nonsensical.

Which, how, where, when, for whom (and don't forget by whom, or why!) are aspects, not complete descriptions, of any particular economic activity.

They certainly aren't coherent "questions" that "economic systems" must answer.

Amazing that people can believe so many impossible things before breakfast ;) I have sympathy for the kids subjected to this kind of blather.

a6z writes:

The correct answer, of course, is "none of the above."

All the theoretical, institutional, and customary arrangements that constitute an "economic system," taken together, will not "answer" any of those questions. (Certainly not without lots of exogeny and ad-hoc-ity.) One need not--and a wise and therefore free economic system does not--even attempt to.

Rather, the answers arise spontaneously (here ignoring the information costs of collecting, collating, and presenting them) from voluntarily coordinated human action.

Jesse C writes:

In honor of tax day... Alice produces for Bob, who produces for Charlie, and Charlie produces for Alice, etc. All is well, and the economy seems to answer all of the above questions, until Dick (the government) comes and takes a little bit of everything the other three produce. I guess that's a "for whom", with a little "how much"?

Mr. Econotarian writes:

Bryan, why don't you write to the AP Microeconomics Development Committee with your concerns about this question. Some of the folks are local (Meade High School, Fort Meade, MD, and United States Naval Academy, Annapolis, MD)

Or better yet, try to join the committee...

OH Anarcho-Capitalist writes:

I see #1 as the only non-economic factor. #1 is actually a values judgment which economics does not address. Economics addresses means, not ends...

Martin Epstein writes:

Could someone explain how the textbooks arrive at the answer here? Doesn't even a modicum of economic freedom imply that the system specifies none of those things?

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