No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Ten: It’s all About the Institutions! 245 CHAPTER TEN ANSWERS 1. This is a more open-ended question, really to get the reader to consider the cause/ effect of our choices, both in the economic world and in our spiritual decisions. The reader should consider the entire process as captured in Figure 10.1 of how we gather and apply knowledge in our plans and form expectations of the future. Discuss specifically how our choices fit into our expectations of the future. For the sanctification part, consider how our choices lead us closer to God, both in our good choices and our bad choices. It may be useful to read Romans 6. 2. We evaluate our actions of the past to see if our cause/effect framework is correct. This helps us to make changes if necessary. But our expectations of the future are in large part shaped by our reflection on the past (to the extent we expect the future circumstances to be like the past). 3. Risk: Have an objective basis to assign a probability or likelihood of occurrence. Uncertainty: No objective basis to assign a probability or likelihood of occurrence. 4. A. Uncertain B. Uncertain C. Uncertain D. Risk 5. The market system which uses prices/profits/losses is the only economic system which provides an incentive structure to use all knowledge in society. The lure of profits is the sufficient cause to guide people to behave in socially beneficial ways (produce only desired products with the fewest resources possible). Further, it is very economical—the price system communicates only the crucial info needed to the vast majority of people in an economy. Most people do not have any need to understand why the price of some good has risen, only that a rising price suggests that the good/ service itself (through increased demand) or the resources used to produce the good (through supply) have become more valuable to society and therefore we should conserve the good. 6. Dispersed knowledge is what is often called the knowledge of time and place, knowledge that is known only to the individual and cannot be aggregated. Centralized knowledge is knowledge that is usually more technical in nature, and does lend itself to being aggregated or only requires few people to coordinate its use. If the economy is primarily a world of centralized knowledge, then central planning might work. But if the economy is comprised more of dispersed knowledge, central planning cannot work. An example of centralized knowledge might be the knowledge of how to run a nuclear reactor. An example of dispersed knowledge is what is likely to be the demand for umbrellas tomorrow if the forecast is 60% chance of heavy rain?