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Equating money with value is in many cases a necessary expedient.

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Equating money with value is in many cases a necessary expedient.  [#permalink]

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New post Updated on: 20 Sep 2018, 22:14
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Equating money with value is in many cases a necessary expedient. People make transactions with money, of one form or another, rather than with “utility” or happiness. But even if economists often have no choice but to judge outcomes in terms of who ends up with how many dollars, they can pay more attention to the way focusing on “material well-being”, as determined by the “measuring rod of money”, influences and constrains their work.

The measuring rod itself often causes trouble. Not every dollar is of equal value, for instance. You might think that if two economists were forced to bid on an apple, the winner would desire the apple more and the auction would thereby have found the best, welfare-maximising use for the apple. But the evidence suggests that money has diminishing marginal value: the more you have, the less you value an extra dollar. The winner might therefore end up with the apple not because it will bring him more joy, but because his greater wealth means that his bid is less of a sacrifice. Economists are aware of this problem. It features, for example, in debates about the link between income and happiness across countries. But the profession is surprisingly casual about its potential implications: for example, that as inequality rises, the price mechanism may do a worse job of allocating resources.

Equating dollar costs with value misleads in other ways. That economic statistics such as GDP are flawed is not news. In a speech in 1968 Robert Kennedy complained that measures of output include spending on cigarette advertisements, napalm and the like, while omitting the quality of children’s health and education. Despite efforts to improve such statistics, these problems remain. A dollar spent on financial services or a pricey medical test counts towards GDP whether or not it contributes to human welfare. Social costs such as pollution are omitted. Economists try to take account of such costs in other contexts, for example when assessing the harms caused by climate change. Yet even then they often focus on how environmental change will affect measurable production and neglect outcomes that cannot easily be set against the measuring rod.

Economists also generally ignore the value of non-market activity, like unpaid work. By one estimate, including unpaid work in American GDP in 2010 would have raised its value by 26%. As Diane Coyle of Cambridge University has argued, the decision to exclude unpaid work may reflect the value judgments of the officials who first ran statistical agencies. But it seems likely that economists today still treat things which cannot easily be measured as if they matter less.

Economists are at their least useful when a measuring stick should not be used at all. They have been known to calculate, for example, the financial gains from achieving gender equality. But gender equality has an intrinsic value, regardless of its impact on GDP. Similarly, species loss and forced mass migration impose psychic costs that resist dollar valuation but are nonetheless important aspects of the threat from climate change.

Such quandaries might suggest that ethical issues should be left to other social scientists. But that division of labour would be untenable. Indeed, economists often work on the basis that tangible costs and benefits outweigh subjective values. Alvin Roth, for example, suggests that moral qualms about “repugnant transactions” (such as trading in human organs) should be swept aside in order to realise the welfare gains that a market in organs would generate. Perhaps so, but to draw that conclusion while dismissing such concerns, rather than treating them as principles which might also contribute to human well-being, is inappropriate. Further, the very act of pulling out the measuring rod alters our sense of value. Though the size of the effect is disputed, psychological research suggests that nudging people to think in terms of money when they make a choice encourages a “businesslike mindset” that is less trusting and generous. Expanding the reach of markets is not just a way to satisfy preferences more efficiently. Rather, it favours market-oriented values over others.
Q1) Which of the following statements best reflects the author’s argument?

a) Economists should find a better measuring tool than money to measure economic health.

b) Money distorts the value system and presents people as merely economic entities.

c) Economists should evaluate the effects of using money as a measuring tool for value.

d) The use of money as a tool for evaluating preferences is misleading as it ignores non- monetary aspects of the economy.


Q2)The author refers to ‘repugnant transactions’ (last paragraph) for which of the following reasons?

a) To distinguish between economic transactions which add positive value to the economy and those that are of a dubious moral impact.

b) To show the error in the argument of economists that welfare concerns can be addressed without distinguishing them from concerns for economic growth.

c) To provide an instance of what happens when economists are asked to explain the morality of dubious economic activity.

d) To build a case for the idea that all economic activities are not equal in the moral sense and they should be assessed on certain standards before being allowed in the market.


Q3) According to the passage, “as inequality rises, the price mechanism will do a worse job of allocating resources”, because:

a) Resource allocation occurs based on diminishing marginal value.

b) Resources allocation happens on the basis of the ability to pay for the resource.

c) The measuring rod of money will distort the relative utility of an item.

d) Satisfying preferences on the basis of wealth undermines price mechanism.


Originally posted by subhadeepb4 on 20 Sep 2018, 21:00.
Last edited by subhadeepb4 on 20 Sep 2018, 22:14, edited 2 times in total.
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Re: Equating money with value is in many cases a necessary expedient.  [#permalink]

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New post 20 Sep 2018, 21:06
OE:
1) Option 1 is incorrect. The writer points out that using money as a tool, influences the evaluation of value and this must be addressed. He does not recommend that an alternative to money should be considered. Reject option 1.

Option 2 is incorrect. The author acknowledges that “Equating money with value is in many cases a necessary expedient.” So the author’s argument is not about money distorting the value system but about its effects going unexamined. The word expedient means suitable for achieving a particular end in a given circumstance – in simpler words, useful or practical. Option 2 is, hence, too drastic. Reject option 2.

Option 3 is correct. Refer paragraph 1. “But even if economists often have no choice but to judge outcomes in terms of who ends up with how many dollars, they can pay more attention to the way focusing on ‘material well-being’, as determined by the ‘measuring rod of money’, influences and constrains their work.” The last paragraph states that psychological research proves money to be a factor causing changes in human behavior and therefore the economy. Thus the passage argues for an examination of the effect of using money as a measure of value. Retain option 3.

Option 4 is incorrect. The passage argues for the examination of the effect money has as a tool of evaluation. Using money as a tool is misleading because it does not recognize non-monetary aspects – as stated in option 4 is only one of the several reasons contained in the main argument. Reject option 4.

Hence the correct answer is option 3.

2) Option 1 is incorrect. Refer last paragraph. The example makes a point about how economists think. It is not about distinguishing between positive economic transactions and transactions of a dubious moral impact. Reject option 1.

Option 2 is correct. ‘Repugnant transactions’ like those in the human organs market, point to the contrast in economic values and welfare values. While there is no doubt that organ donations are useful, their sale in a ‘market’ is what causes moral concern. Alvin Roth represents the economists who dismiss these concerns. The conclusion by the economists, that welfare gains can be addressed in the same way as economic gains without acknowledging moral concerns, is what leads the writer to state: “…to draw that conclusion while dismissing such concerns, rather than treating them as principles which might also contribute to human well-being, is inappropriate.” Retain option 2.

Option 3 is incorrect. The example points out the stance of economists on welfare concerns of using money as a measuring tool. It is not about what happens when economists are asked to explain anything about dubious economic activity. Reject option 3.

Option 4 is incorrect. The example is not used to make any point about what should be allowed in the market. Reject option 4.

Thus the correct answer is option 2.

3) In the second paragraph, the author explains the concept of diminishing marginal value using the example of the apple. The apple which represents welfare or joy goes to the person who can offer the best price. Diminishing marginal value prevents welfare-maximizing because, the more you have the less you value the extra dollar you paid for the apple. As inequality rises – price mechanism will do a worse job of allocating resources because the person who will derive the maximum welfare from a good is prevented from having it because a person who has the maximum dollars to spare will be able to possess the good. In the process overall welfare associated with the good reduces.

From this point of view option 1 is correct.

Option 2 is incorrect because the ability to pay for a resource is different from the possession of extra dollars or diminishing marginal value. Eliminate option 2.

Option 3 is incorrect because utility and welfare/joy are two different concepts. Eliminate option 3.

Option 4 is incorrect as it describes what happens to proce mechanism and not how price mechanism affects allocation in case of inequality.

Hence the correct answer is option 1.
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Re: Equating money with value is in many cases a necessary expedient.  [#permalink]

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New post 20 Sep 2018, 21:09
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Re: Equating money with value is in many cases a necessary expedient.  [#permalink]

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New post 20 Sep 2018, 22:13
Cannot understand the explanations given for the questions.
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