Danika Li

U0888022
Econ 5060 Spring 16 Final
Question #2

Short-Run Philips Curve

The short run Philips curve was an empirical relationship between
unemployment and prices/inflation that was later turned into a theory. According to
Keynesian theory, in the short run, theres an inverse relationship between the
unemployment level (x-axis) and the price/inflation level (y-axis). At high inflation
levels, your unemployment was supposed to be very low, and this was used as
justification for government intervention. Theoretically, state-led planning could
target low unemployment rates and bear the expense of some inflation. However,
you see the short-run Philips curve mechanism failing in the 1970s, as extremely
high inflation levels are matched with extremely high unemployment levels.

Long-Run Philips Curve

The long run Philips curve was developed by Friedman as a rebuttal to
Keynes. Friedman asserted that in the long run, theres nothing like a Philips curve
relationship between prices and unemployment. Friedman believed that although in
the very short run there might be some relationship, government intervention was
ultimately terrible because lower unemployment would only be temporary before
prices went up and you jumped up to another short run Philips curve with the
same price but higher unemployment. In Friedmans theory, when prices go up,
your nominal wages may go up, but your real wages will fall. Also, because
unemployment is low, there are lots of workers, and when there is lots of labor, it
tends to collude and form unions. When labor unionizes, it begins to bargain for
higher wages. If the employers concede and reward labor with higher wages, the
tradeoff is that there will be some workers laid off. This pushes you up to a higher
short-run Philips curve where your price levels are the same, but you have higher
unemployment.
When the government tries to target a low rate of unemployment through
government expenditure, the only result is that you jump to higher and higher short
run Philips Curves in a process known as cost-push inflation. What happens in the
long run is that you never reach and maintain that ideal level of unemployment, but
prices continue to soar. The end result is that the LR Philips Curve is a vertical line
that the natural rate of employment boundary will eventually push towards, but
with infinitely soaring prices. It will always fall between UA and UB (which will be
shown on the second graph). In many simplified graphs, the long-run Philips curve
is said to be at the level of natural unemployment. Instead of showing natural
unemployment as a boundary where unemployment oscillates, it condenses it into a
single point the long-run Philips curve level of unemployment.
Natural Rate of Unemployment
As you will see in the graphs below, in the long-run, even with government
intervention, the unemployment rate will just cycle between UA and UB. The natural
rate of unemployment is the bound of unemployment that happens when
government intervention causes galloping, or cost-push inflation. Its also known as
the level where all unemployment in the economy is voluntary.

Graphical Explanation
In the graph, you start off at point A with SRPC1, price level P1, and unemployment
level UA, which is the upper bound of where the natural rate of unemployment
(NRU) oscillates. Through government intervention, you reach point B with price
level P2 and unemployment level UB, which is the lower bound of where the NRU
oscillates. However with low unemployment, labor will unionize and bargain for a
higher wage because their real wages have fallen at higher price P2. When
employers grant this wage raise, they have to lay off workers, but not all of the
workers who were employed through government expenditure. This is why you
jump to SRPC2 with unemployment level UC. You dont quite reach UA because
capitalists didnt lay off all the workers they hired through the process of getting to
point B. This process continues as the government tries to reach low unemployment
again and reaches point D and labor unionizes again, raising unemployment to point
E. The process cycles through in the long run with unemployment never staying at
point UB, for the long run but with prices continually galloping upwards. The long-
run Philips Curve is somewhere between UA and UB.

Question #3

Equation
Below is a picture of the equation for profit as well as a key for what all the
important terms mean:

First Crisis
 The first capitalist crisis that Marx asserts will happen is the crisis of profit
squeeze. In terms of the equation, this is where r falls. During their pursuit of profit,
capitalists seek to capture more and more markets, leading to globalization as global
markets are captured. However, the unintended consequence of this globalization is
that workers from all over the world come in contact with each other. When global
labor forces come in contact with each other, they form collusions/unions and begin
to bargain for higher wages. This higher wage bill squeezes out what capitalists get
to keep as profit, lowering overall profits. This is why rising wages are said to
squeeze out profits/lower r.
Solution
o The solution to the crisis of profit squeeze is to switch to labor-saving
technologies. By doing this, workers are unemployed and you create
Marxs industrial reserve army of labor that allows you to keep future
wages in check. As long as theres a pool of desperate, starving
workers who are competing with existing employed workers, you can
push wages back to subsistence level since the starving workers will
work for a lower wage to take jobs. This IRA also allows you to more
effectively exploit what labor you have employed by paying them less
than what their labor is worth. The bigger the IRA, the less you can
pay who you employ, raising /y.
Second Crisis
The second capitalist crisis is the crisis of overproduction, or the crisis due to
lack of effective demand. In terms of the equation, this is where y falls relative to
ybar, or where y<ybar. This crisis is also considered a classic recessionary crisis
due to under-consumption and capital being underutilized. This lack of consumption
is due to inequality, because if you have the reserve army of labor, theres nobody to
demand consumer goods that are being produced. Due to this lack of effective
demand, producers will cut back on production. This cut back means that even more
workers need to be laid off. As more and more workers are laid off, the IRA
increases and demand for consumer goods falls even further. The more production
is cut back, the less capital is being utilized this is where the rate of capacity
utilization falls (y/ybar falls).
Solution
o The first solution to the crisis of overproduction is valorization, which
is the intentional destruction of overproduced commodities. By
destroying these commodities, the value of capital assets goes up.
o The second solution to the crisis is through capturing new markets
where you can sell your goods.
o The third solution is by switching from industrial capital markets to
financial capital markets. In financial markets, you invest money in
order to make more money essentially, there are no new
commodities being produced. By switching to financial markets, you
create more money without creating more goods, so you never
encounter the problem of overproducing underconsumed goods.
Third Crisis
 The final crisis of capitalism is the crisis of rising organic composition of capital
(OCC), or k/ybar. The crux of this argument is that Marx essentially refutes what
Ricardo says about the profitability of land. He believes that soil isnt naturally
productive. Essentially, you pay the price of capital with your purchase of
equipment, and you should pay workers the price of their labor. However, profits
are realized when you pay labor less than what their productivity warrants. By
doing this, youre getting more productivity out for fewer wages, and this excess is
where profitability comes from also known as the rate of surplus value, or /y.
However, due to the first capitalist crisis, employers increasingly use labor-saving
technology, or capital, in place of labor. As OCC rises, r begins to fall because you
have less labor that you can exploit and draw surplus value from.
Solution
o There is no solution to this crisis, as its believed to be the final crisis
of capitalism.
Why these crises are inevitable
Marx discovered these crises while evaluating capitalism from a theoretically
perfect model of capitalism. Capitalism can only be theoretically perfect because its
impossible for the system to operate without flaws in real life. Marx basically says
that if even this theoretically perfect model of capitalism has these flaws, then real
life capitalism is bound to fail.

Question #4

The quote by Joan Robinson is essentially talking about coercion, and

especially the way that capitalist systems have managed to replace visible coercion
with invisible coercion. Prior to the capitalist system being put in place, command
and tradition societies used visible forms of coercion to motivate workers into
working. Although tradition used it to a lesser extent, the primary form of visible
coercion was through threats and acts of violence and death. While this is very
effective in initial motivation, one of the biggest setbacks to these types of systems
(especially command), is that theres downward harmonization of labor.
In contrast to this, capitalist systems replace the visible and violent coercion
with the invisible whip of unemployment and starvation. What this means is that
under capitalism, if you dont work for the capitalist, then your only other option is
to starve. Marx is the first economist to come to this realization that capitalism isnt
actually the system of free and natural liberty that all prior economists had thought
it was.
To explain why market systems are inherently coercive, you have to
understand the dual freedom of labor. Although under capitalism labor had been
freed from the oppression and coercion of the feudal manor and the traditional
norms of ancestral occupations, it had also been freed from having its own means
of production. In the market system, labor can only sell its own labor, so its choices
are either to work for a capitalist or to starve. Now, instead of being coerced by the
threat of a whip coming down on your back, youre coerced with the threat of not
having a job and starving to death.
 Due to capitalisms inherent competitiveness and dynamism, if a worker
chooses not to be employed, there will be no other avenue for him to earn money for
subsistence goods because the only thing he can sell is his labor (dual freedom).
Robinsons quote says that in a capitalist economy, being invisibly exploited for your
labor by the capitalist when he extracts surplus value from you is better than not
being exploited by him at all. If youre not employed by a capitalist then youll starve
to death since in the market system you can only either be the capitalist or be
exploited by the capitalist. The quality of work is also assured under capitalism
because in Marx, one of the defining features of his capitalist critique is the crisis of
profit squeeze. The solution to profit squeeze it to employ more capital, and by
employing more capital you create the Marxist IRA. For workers who are employed
under the market system, not only are they invisibly coerced to work, but they must
maintain a high standard of work because if they begin to slack off, theres an army
of starving and desperate workers jumping to take their job at any notice.
Additionally, invisible coercion is incredibly effective because in the market
system because theres no ruling class to rebel against. In previous economic
systems, a ruling class was always present that decided the rules. When labor
eventually became embittered by its position, it would stage a revolt against the
ruling class. One of the biggest benefits of invisible coercion is that its coercion is
seen as part of the natural order. Because theres no ruling class in capitalism,
theres no physical being thats forcing you to work. Following this, if you dont work
in a capitalist society and end up unemployed and starving, society views this as
being a consequence of your own choice, since nobody was telling you to work or
not work. By motivating workers to labor without the threat of downward
harmonization or revolt, the invisible exploitation of capitalists creates an extremely
effective system.
Kalecki believed that the reason capitalists opposed the idea of a government
stepping in and pushing for full employment was because capitalists were afraid
they would lose this power of invisible coercion. Under capitalism, the greatest fear
of the worker is to be unemployed. When the government attempts to alleviate this
fear by funding public investment projects and generating labor demand, what it
inadvertently does is it removes the very system of motivation that capitalism relies
on to function. When an economy is at full employment, everyone who wants a job
will have one. The result is that the fear of being fired, or the invisible coercion just
discussed, is no longer present. People are no longer scared that if they arent
motivated and work hard, someone will come and take their job, because the
government will guarantee that they can find employment. By removing the
motivational mechanism of the market society, people arent scared to do a poor job
of their work and you lose the motivational property that sets capitalism apart from
command and tradition-based systems. In this way, capitalists will oppose
government intervention and the prospect of higher profits because they fear losing
their invisible whip of starvation.
Another threat to capitalism that Kalecki discusses is that not only does full
employment remove the whip of the sack, but when you have full employment,
labor becomes extremely strong. Because the labor force is so strong, it very easily
unionizes. As unions bargain for higher and higher wages, capitalists begin to lose
out on profits that they might have realized from government intervention. This
political tension is unhealthy for the economy as it makes labor even less
productive.
In conclusion, not only does Robinsons quote talk about the exploitation of
capitalism as a benefit to the worker, but its also a benefit to the political and
market economy as a whole. Without the invisible whip, workers would have no
motivation to work well in the market system, leading to downward harmonization.
Additionally, workers will unionize and squeeze out profits, which leads to the first
Marxian capitalist crisis and sets off the chain reaction that leads to the final crisis of
rising OCC and the inevitable fall of capitalism. After the fall of capitalism, if Marx is
believed, then society will revert back to the command system, which the masses
view as less favorable because of visible coercion. Invisible coercion by the
capitalists prevents this inevitable fall of capitalism (benefitting society as a whole
in the long run) and also gives workers a way to employ their labor and not starve
(benefits society within capitalism).

Essay Question

Prior to capitalism, the best way to economically describe the world was
boring. Especially under feudalism, there was no desire to grow and innovate.
Under command, visible and violent forms of coercion led to the problem of
downward harmonization, and under feudalism, the desire was to maintain the
status quo and its traditions, not to innovate it. Perhaps most importantly, both
systems shared the quality of having no social mobility. Without the ability to be
rewarded for your efforts by moving up the social ladder, individuals in lower levels
or castes of society never had any incentive to work any harder than what was the
bare minimum. This is why prior to Adam Smith and the market system, the world
economy was one of general stability, but also of incredible stagnation.
Eventually, feudalism began to give away to the market system through a
combination of many factors such as the rural/urban dichotomy, the enlightenment,
the enclosure movement, etc. As the market system arose, perhaps the most
important figure of this movement was Adam Smith. Adam Smiths vision was one of
incredible growth, prosperity, and most importantly, freedom. The key mechanism
of capitalism was the lack of a ruling class, and the opportunity for social mobility. In
capitalism, competition was the driving force of the economy, because through
innovation, one could not only garner profits, but also advance through social ranks.
Adam Smiths vision was that not only was capitalism inherently driven by
capitalism, but it was also a freely regulating market. There was no need for a ruling
class like in command or tradition, because the market ruled itself. Capitalism was a
system of natural liberty because people were free to choose whatever profession
they wanted, and because the market ruled itself, no one person could exert their
power over others.
In Adam Smiths version of capitalism, growth came from technological
innovation (motivated by desire to progress socially), the accumulation of capital by
producers, and the widening economic and geographical scope of markets. Not only
was the potential scope of capitalist growth only limited by physical boundaries, but
the hindrance of population was one that Smith also believed to be self-correcting. If
Adam Smiths vision were to be believed, capitalism was it it was utopia. Any
problems that arose in the system were naturally correcting and finally the people
were able to become truly free from the centuries of ruling classes and tradition that
they previously lived under. Free from this type of oppression and coercion, society
had become one of motivation and innovation. In their pursuit of profits, capitalists
created immense growth as they strove to capture more and more markets, to
produce more and more efficiently. However, from this inherently rampant growth
came inevitable instability. Adam Smiths vision wasnt perfectly realizable, as many
economists came to discover.
The first economists I would like to look at who refute Adam Smiths vision
are Malthus and Ricardo. The two of them believed that Smiths vision was
impossible to achieve due to factors that werent able to self-correct in the system.
For Malthus, this barrier was population, and especially the rampant population
boom that followed the industrial revolution. As population grew geometrically,
while agriculture grew arithmetically, the population would very quickly outstrip
food sources. Instead of it being an issue of wages self-correcting over time like it
was in Smiths vision, for Malthus, capitalism would grind to a halt as mass
starvation occurred. Malthus believed that the only way to realize Smiths vision
was by governing population with rules of its own through positive and
preventative checks.
Ricardo on the other hand believed that growing rents due to differential
land productivities squeezing out capitalist profits would stop capitalism. Stuck
between a rising rent and an ever-constant wage bill, the profit that capitalists
realized would grow smaller and smaller the more land it had to bring under
cultivation. Ricardo believed that under capitalism, the land-owning class, without
violating the laws of competition, would undermine the interests of every other
class in society, taking out profit from the only class that injected more growth into
capitalism, and eventually bringing the system down. For Ricardo, the only possible
solution to this problem was to get rid of the Corn Laws. By doing this, you stop
forcing excess land to be brought under cultivation and you allow cheap imports
start coming in. Additionally, if youre not forced to produce something that youre
not naturally competitive at, then you can focus production on industries you
actually have strong capabilities in.
The second two economists Id like to look at are Mill and Marx. Mill believed
there were inherent flaws in the way that Smiths system was supposed to naturally
govern itself. Marx on the other hand believed that not only was the system
inherently flawed, but there was no solution.
For Mill, Smiths system is flawed because of distribution. Prior to Mill,
production and distribution were seen to be tied together and to operate on natural
laws of economics. Says Law said that production would create its own demand,
and thereby the economy would never encounter a problem of sustained over or
underproduction. However, this argument relies on the idea that production and
distribution are very closely tied together and governed by the same variables. What
Mill comes to realize is that not only are distribution and production distinct
spheres, but distribution is governed by social norms and variables, whereas
production is governed by economic variables. Although what commodities were
produced were dictated by the functions of the market, how these commodities
were distributed to the population was solely dependent on the wealthy hands who
held the finished products.
Due to this disconnect between the realms of distribution and production,
Mill believed that society hadnt yet realized full economic prosperity and utility. He
believed that if the government intervenes to do away with feudal lords and rents
by adding laws and taxation on land owners, then through an essential transfer of
utility, you can achieve maximum utility for society. Once you reach this level of
prosperity, Mill believed that rational individual would continue to pursue
improvements on their status. What the eventual consequence would be is that the
land-owning classes should disappear and labor/capital classes will realize that
higher utility can be achieved through cooperation. So for Mill, the only way to fix
these newly discovered flaws of capitalism was through government intervention
on the taxation and legal systems.
Mills ideas on government intervention and attempting to equalize
distribution lead perfectly into the ideas of socialism. Although socialism isnt
something that I will be discussing in this essay, it segues very nicely into the ideas
of Karl Marx. However, the key distinction is that Marx doesnt think that capitalism
can be cured by any number of solutions, even socialism. For Marx, capitalism is
inherently flawed due to the very nature of what made it so appealing to Smith.
Marxs contributions were groundbreaking to the ideas of capitalism because prior
to Marx, the constraints that kept Smiths vision from being realized were external
to the market. What Marx now argued was that the system was inherently flawed,
and would grind to a halt due to roadblocks within its internal framework. Although
Marx believed that markets were a vast improvement of previous command and
tradition systems, he also thought that due to the dynamism of its competition, it
would never naturally stabilize.
The prime example that was reviewed in the class was the decision of two
capitalists to either use child labor or not use child labor. Because child labor is
cheaper, competition makes is to that using the child labor is clearly the better
option for capitalist profits. However in the long run, using child labor will just lead
to downward harmonization. If the other capitalist wants to prevent this downward
harmonization, he might choose not to use child labor but because he didnt use
cheaper labor, hes driven out of the market by the capitalist who did choose to use
it. Under this logic, while the invisible hand is causing something to happen in the
market, its not the utopian vision that Smith thought his competition would create.
Instead of widespread prosperity, widespread oppression would occur.
In addition to this, Marx also believed that there were three crises inevitable
to capitalism. The first is profit squeeze, where globalization led to labor meeting
labor and unionizing. By bargaining for higher wages, rising wage bills squeezes out
capitalist profits, and the solution is to increase labor-saving technology. The section
crisis is one of overproduction or underconsumption/lack of effective demand.
Because so many people are getting laid off by labor-saving technology, there arent
enough people to demand consumer goods that are being produced. To counter this,
capitalists will pull back on production, which only causes more people to be laid off.
The solutions to this are to intentionally destroy, or valorize, excess products,
capture new markets (limited by geographical scope), or do switch to financial
markets. However, these arent permanent solutions because eventually you arrive
at the third, and final crisis of capitalism. This crisis is caused by the rising organic
composition of capital. Because labor-saving technology is increasingly used, there
are fewer workers for capitalists to exploit and draw surplus value from. As this
source of value and profit becomes smaller and smaller, the capitalist system grinds
to a halt. Because Marx believed that capitalism was inherently flawed and
inherently doomed to fall by this third crisis, the solution was to skip ahead to
command societies and intense government control. Marx thought that because he
now understood why capitalism was flawed and how history was circular, you could
simply circumvent the process and jump to the highest level of the command
system.
Alongside Marx was an economist by the name of Keynes, who also argued
for government intervention (albeit not to do away with the system entirely).
Keynes thought that recessions happened because the savings and investment
nexus that the Says Law relied on would break down in a recession. Similar to Mills
realizations about distribution and production, Keynes realizes that Smiths vision
breaks down because savings and investments are no longer governed within the
same sphere of variables. Whereas investments are driven by the capitalist class
belief in profitability, savings are done by consumers who dont invest, and who
save primarily as a function of their income level. At the bottom of a recession,
people save excessively, and investment doesnt happen because investors dont
believe their ventures will be profitable. Through the paradox of thrift, and the
paradox of poverty amidst potential plenty, Keynes realizes that this irrational
saving not only reduces pools of savings for future generations, but it makes it
harder and harder for a government to pull an economy out of a recession the more
prosperous it was at its peak.
Keynes solution to these problems is to attempt to advocate for government
intervention to fill the gap between consumption and investment that occurs when
consumption falls and investors stop investing. He believes that through massive
government expenditure, you can fill the gap of effective demand that exists during
recessions.
However, government intervention has been, and will most likely always be,
heavily opposed by capitalists. Kalecki explains this when he says that capitalists
dont act rationally when government intervention is involved. Although
government intervention could actually help capitalists realize profits, if the
government intervenes to provide full employment, capitalists lose their only means
of controlling the masses the threat of the sack. Capitalists lose their system of
natural liberty because now theyre not longer free to make their own decisions, and
the invisible hand is no longer working.
As stated before in Question 4, in addition to losing their invisible whip,
when the government intervenes to bring about full employment, labor becomes
extremely strong. When labor becomes too strong, you fall into the first of the three
Marxian crises and capitalisms inevitable fall occurs.
 So in trying to end instability, Marx advocates to completely remove the
system, which involves a large curtailment of individual liberty. Keynes on the other
hand argues for government intervention to fix the system, but this once again
requires the government to infringe on natural liberties seen as inherent boons of
the market system. Friedman adds to this opposition by saying that government
intervention can only cause crowding out and rampant hyper inflation. This ends
economic growth all over again, so in the long run government intervention isnt a
solution.
Regardless of whether or not prior economists such as Malthus or Ricardo
can come up with solutions to the system, Marxs observations completely bring
capitalism to its knees. However, in order to fix the system, solutions presented by
either Marx or Keynes only lead to the destruction of capitalisms natural liberty.
Not only is natural liberty ruined, but Kalecki believes that much of the opposition
to government intervention comes from social factors of uncertainty. Regardless of
what the next government ends up doing, if capitalists believe that they will be
socialist, output will be affected in negative directions. Kalecki posits that a
command system doesnt encounter this problem because under command systems
such as Fascism, there never is a next government. However, the key to this
argument is that under governments such as fascism, you no longer have individual
liberty. So while the savings and investment nexus might not break down if you
follow Kalecki and Marxs logic, you no longer have natural liberty. In trying to fix
capitalisms inevitable problems, you end up destroying the entire system and doing
away with the liberty that made it so highly viewed by Smith. Once you revert back
to the system of command, you revert back to the era of no social mobility, no
incentive for innovation, and no growth. Although you may jump to a higher level of
command (if you follow Marxs ideas), you destroy natural liberty. This natural
liberty is what is believed to be the creation of innovation and growth, and
command systems are inherently lacking in it. The end result of this cycle is that
youre back in the place that you started and now have lost Smiths vision for
endless growth, prosperity, and liberty.

Extra Credit

I believe that Clara should be the one who receives the flute. Although she
might not be able to play the flute like Anne can, its not up to distribution based on
abilities to decide what gives society more utility. Anne didnt put work and value
into the product, and the production of the product is whats going to give utility to
it. Annes natural abilities to play the flute dont inherently give society and utility,
but Claras production will always give society some amount of utility in the form of
commodity production.
I also wouldnt give it to Bob, who might gain the highest marginal utility
from the flute. This is because like Anne, Bob didnt put in any work to creating the
flute. I think that rewards should be given based on effort. Although Anna may be
able to play the flute, and Bob may gain the most utility from the flute, neither of
them put in labor to producing the flute and therefore have no direct entitlements to
the flute. I side with the Marxian argument of the laborer receiving final surplus.

Adam Smith: Smith would give the flute to Anne. This is because producers dont
keep what they produce, they produce so they can buy something else and to realize
a profit. Clara doesnt realize a profit by simply producing the flute. The flue should
be given to Anne and not Bob because Anne has the abilities to use the flute to its
fullest potential whereas Bob might just be using it as a stick or a bat. Anne also has
the ability to use it as a stick or a bat, but should also be rewarded based on the time
shes put into learning how to play the flute.

Malthus: Malthus would be willing to give it to Anne or Clara, but not Bob. By giving
it to Bob, you reward him for being essentially useless hes poor, he doesnt have
the ability to play the flute, and he cant produce the flutes. He shouldnt be given a
crutch for not providing any useful abilities to society. If you give Bob the flute,
youre encouraging him to be poor because he will get the reward for being poor,
and in doing so, you take away resources from Anne or Clara, who actually provide
benefits to society.

Ricardo: Ricardo would advocate giving the flute to Clara, because in this case shes
the capitalist, the only class thats striving to create value for society. If you give
away her flute, you take away her profit, and she needs profit in order to continually
produce. Ricardos reason for Smiths vision failing is because capitalists arent able
to retain their profits.

Bentham: Bentham would give the flute to Bob, because he would realize the highest
utility from it. Bentham wouldnt make a distinction between Anne and Bobs usage
of the flute. Its not how you use it, but how much utility you gain from it. Because
Bob has nothing, he will gain the most from using the flute, and total utility will be
increased the most.

JS Mill: Mill would also give the flute to Bob, because if you maximize the utility of
the group thats the worst off, you maximize total utility since their marginal utility
will be so high. Additionally, by giving that first flute to Bob, Anne also has very little
disutility from losing it, because disutility increases with subsequent commodities
being sold. He would perhaps give future flutes to Anne, because she can use the
flute for higher pleasures than just using it as a stick or a bat like Bob would.

Marx: Marx would give Clara the flute because Marx believed that laborers should
be given the reward of the final surplus. Because Clara put her labor into producing
the flute and Anne/Bob didnt, she has the rights to the flute based on labor-input.

Keynes: Keynes would give the flute to Bob. Bob has the least purchasing power, so
he represents the biggest lack of effective demand. By forcing Clara to give him the
flute, you bridge this gap. Clara can always produce more flutes, Anne clearly has a
talent for music so she can translate this to an extent to other instruments, but Bob
has no abilities, and no purchasing power. By giving the flute to Bob, you right this
inequality.

Friedman: Friedman would say to give the flute to Clara. People should be rewarded
for their effort, so Clara should be rewarded for putting in the labor. If you give the
flute to Anne or Bob, youre rewarding them for something they didnt do youre
saying theyre essentially entitled to receiving a product that they put no value into.
If you keep the flute from Bob and Anne, you incentivize them to learn how to make
their own flutes.