V03-30, V03-31, V03-32, V03-33

The Chicago School of economics gained ascendancy in the 1950s and became the prevailing way of thinking about capitalist economics, first in the United States and eventually in many Western countries. A dominant subset of “Neoclassical economics,” the Chicago School fine-tuned many of the fundamentals of the larger movement and articulated tenets now generally taken for granted in economic thought.

A basic principle of Neoclassical economics is the concept of utility, or the assertion that a correct economic decision is one that yields “the greatest good for the greatest number.” Neoclassical economics vociferously defends a laissez-faire, or “hands off,” approach to government regulation. According to Neoclassical theory, in the absence of state interference, individual participants in the market will make rational economic decisions that maximize their satisfaction. For individuals, the principle of utility translates into buying quality goods at the lowest possible price; for companies, it means making decisions that will maximize profits.The interplay of free market forces, according to Neoclassical economists, will result in greater good – in the form of high quality products and services – for a greater number of people.

The Chicago School accepts the principles of utility and laissez-faire regulation, but tailors its understanding of these terms to focus on the related principle of “efficiency.” For Chicago School thinkers, “efficiency” subsumes Neoclassical thought on the mechanisms of utility, which concentrates on individuals making individual rational decisions, into a more sophisticated awareness of the balance between individual decisions and production. The chief cause of inefficiency for Chicago School thinkers is government regulation, which prevents the free interplay of market forces. In an economy unencumbered by state interference, not only are individuals and companies free to maximize their satisfaction, but production itself is likely to become more efficient by producing the highest quality goods at the lowest possible price.

1. According to the passage, which of the following best articulates the relationship of utility to efficiency?

(a) Utility is concerned with maximizing satisfaction, whereas efficiency is concerned with greater production.
(b) Utility is the basic principle, whereas efficiency is a more refined version of the basic principle.
(c) Utility and efficiency are equally important concepts in Neoclassical economic theory.
(d) Utility and efficiency, though opposite in meaning, are both useful in describing the statistical behavior of free markets.
(e) Neither utility nor efficiency, as a principle, is able to completely predict the behavior of a free market.


2. Which of the following best describes the primary purpose of this passage?

(a) To discuss the relationship of the Chicago School to Neoclassical economic theory.
(b) To demonstrate the fundamental disagreement between the Chicago School and Neoclassical economic theory.
(c) To argue for the application of the principle of utility in the United States economy.
(d) To trace the development of the concept of efficiency in American economic theory.
(e) To outline a plan for producing the highest quality goods at the lowest possible price.


3. The author of the passage most likely states that greater good comes in the form of high quality products and services for which of the following reasons?

(a) To underscore the fact that Neoclassical economists are more concerned with the greater good than other types of economists.
(b) To remind readers that, for the principle of utility to truly apply, goods and services must be put to appropriate use.
(c) To emphasize the fact that products and services are good, but high quality products and services are better.
(d) To distinguish between economic good (quality products and services) and economic evil (lack of quality products and services).
(e) To indicate that Government intervention is detrimental for an economy.


4. According to the passage, all of the following are benefits of a laissez-faire economy EXCEPT

(a) Individual participants will make decisions that maximize their satisfaction.
(b) Companies will make decisions that maximize their profits.
(c) Production of goods will become more efficient.
(d) Government agencies will be available to correct inflation.
(e) Quality goods will be produced at the lowest possible price.