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The Economic Way of Thinking: Eleventh Edition

by Paul Heyne; Peter J. Boettke - George Mason University; David L. Prychitko - Northern Michigan University

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Copyright, iv
A Tribute, vii
Preface, xiii
1. The Economic Way of Thinking, 2
Recognizing Order, 3
The Importance of Social Cooperation, 4
How Does It Happen?, 5
An Apparatus of the Mind—The Skill of the Economist, 6
Cooperation Through Mutual Adjustment, 9
Rules of the Game, 10
Property Rights as Rules of the Game, 11
The Biases of Economic Theory: A Weakness or A Strength?, 12
Biases or Conclusions?, 14
No Theory Means Poor Theory, 15
Once Over Lightly, 16
Questions for Discussion, 17
2. Efficiency, Exchange, and Comparative Advantage, 20
Goods and Bads, 22
The Myth of Material Wealth, 23
Trade Creates Wealth, 24
Is It Worth It? Efficiency and Values, 25
Recognizing Trade-Offs: Comparing Opportunity Costs of Production, 27
The Gains from Specialization and Exchange, 29
Why Specialize?, 29
From Individual Trade to International Trade, and Back Again, 30
Transaction Costs, 31
Incentives to Reduce Transaction Costs: Middlemen, 32
Middlemen Create Information, 33
Markets as Discovery Processes, 34
An Appendix: Economic Growth: Specialization, Exchange, and the Rule of Law, 35
Once Over Lightly, 38
Questions for Discussion, 40
3. Substitutes Everywhere: The Concept of Demand, 44
On the Notion of “Needs”, 45
Marginal Values, 47
Everyday Choices Are Marginal Choices, 48
The Demand Curve, 48
The Law of Demand, 51
Demand and Quantity Demanded, 51
Demand Itself Can Change, 52
Everything Depends Upon Everything Else, 54
Misperceptions Caused by Inflation, 56
Time Is on Our Side, 57
Price Elasticity of Demand, 58
Thinking About Elasticity, 60
Elasticity and Total Receipts, 61
The Myth of Vertical Demand, 62
All Scarce Goods Must Be Rationed Somehow, 63
Is Money All That Matters? Money Costs, Other Costs, and Economic Calculation, 65
Once Over Lightly, 66
Questions for Discussion, 67
4. Opportunity Cost and the Supply of Goods, 74
Refresher on Opportunity Costs, 75
Costs Are Tied to Actions, Not Things, 76
What Do I Do Now? The Irrelevance of “Sunk Costs”, 77
Producers’ Costs as Opportunity Costs, 78
Marginal Opportunity Costs, 80
Costs and Supply, 81
The Supply Curve, 83
Supply Itself Can Change, 85
Marginal and Average Costs, 86
The Cost of a Volunteer Military Force, 87
Price Elasticity of Supply, 90
Cost as Justification, 91
Once Over Lightly, 92
Questions for Discussion, 93
5. Supply and Demand: A Process of Cooperation, 98
The Market Is a Process of Competing Bids and Offers, 101
Transaction Costs, Again, 102
Property Rights and Institutions, 103
The Coordinating Role of Money Prices, 105
The Basic Process, 106
Competition, Cooperation, and Market Clearing, 109
Changing Market Conditions, 111
The Market for Credit, 111
Competition Results from Scarcity, 113
Surpluses and Scarcity, 115
Market Processes Versus Central Planning, 115
An Appendix: Time Preference and Interest Rates, 117
Once Over Lightly, 120
Questions for Discussion, 122
6. Supply and Demand: Issues and Applications, 126
The Urge to Fix Prices, 127
Competition When Prices Are Fixed, 129
Appropriate and Inappropriate Signals, 130
Looking for an Apartment in the City? Read the Obituary!, 131
Strong Booze, Stronger Drugs: Criminal Incentives, 133
Skim Milk, Whole Milk, and Gangster Milkmen, 135
Supports and Surpluses, 135
Supply, Demand, and the Minimum Wage, 136
Who Pays the Tax?, 139
High-Priced Sports, Low-Priced Poetry: Who’s to Blame?, 141
Do Costs Determine Prices?, 142
The Dropouts Release Their First CD, 143
“There’s Gold in Them Thar Hills!” So What?, 144
Even Butchers Don’t Have the Guts, 144
Why Does It Cost So Much to Change Bedpans?, 145
More, Please, Since It’s Free, 146
Costs and Ownership, 147
An Appendix: Framing Economic Questions Correctly, 149
Once Over Lightly, 153
Questions for Discussion, 154
7. Profit and Loss, 162
Wage, Rent, and Interest: Incomes Established in Advance by Contract, 163
Profit: Income That Can Be Positive or Negative, 164
Calculating Profit: What Should Be Included in Costs?, 165
Comparing Economic Profit and Accounting Profit, 166
Uncertainty: A Necessary Condition for Profit, 168
The Entrepreneur, 169
The Entrepreneur as Residual Claimant, 170
Where Does the Buck Stop?, 171
Not-for-Profit Institutions, 172
Entrepreneurship and the Market Process, 173
Mere Luck?, 175
Profit and Loss as Coordinating Signals: The Role of Monetary Calculation, 176
Varieties of Speculation, 177
Consequences of Entrepreneurial Speculation, 178
Commodity Speculators and Futures Markets, 179
Prophets and Losses, 182
Beware of Experts, 184
Restrictions on Competition, 185
Competition on Other Fronts, 186
Competition for the Key Resource, 187
Competition and Property Rights, 188
An Appendix: Discounting and Present Values, 189
Once Over Lightly, 195
Questions for Discussion, 196
8. Competition and Monopoly, 204
Who Qualifies as a Monopolist?, 205
Alternatives, Elasticity, and Market Power, 207
Privileges and Restrictions, 208
Price Takers and Price Searchers, 209
Price Takers’ Markets and “Optimal” Resource Allocation, 210
Competition as a Process, 213
Once Over Lightly, 215
Questions for Discussion, 216
9. Price Searching, 220
The Popular Theory of Price Setting, 221
Introducing Ed Sike, 222
The Basic Rule for Maximizing Net Revenue, 224
The Concept of Marginal Revenue, 224
Why Marginal Revenue Is Less Than Price, 225
Setting Marginal Revenue to Equal Marginal Cost, 226
What About Those Empty Seats?, 227
The Price Discriminator’s Dilemma, 227
The College as Price Searcher, 228
Some Strategies for Price Discrimination, 230
Ed Sike Finds a Way, 230
Resentment and Rationale, 232
Lunch and Dinner Prices, 232
Cost-Plus-Markup Reconsidered, 234
Once Over Lightly, 234
Questions for Discussion, 235
10. Competition and Government Policy, 242
The Pressures of Competition, 243
Controlling Competition, 245
The Ambivalence of Government Policies, 247
Selling Below Cost, 247
What Is the Appropriate Cost?, 248
“Predators” and Competition, 250
Regulating Prices, 251
“Antitrust” Policy, 252
Interpretations and Applications, 253
Vertical Restraints: Competitive or Anticompetitive, 254
The Range of Opinion, 256
Toward Evaluation, 256
Once Over Lightly, 257
Questions for Discussion, 258
11. The Distribution of Income, 264
Suppliers and Demanders, 265
Capital and Human Resources, 267
Human Capital and Investment, 267
Property Rights and Income, 268
Actual, Legal, and Moral Rights, 269
Expectations and Investment, 270
People or Machines?, 271
The Derived Demand for Productive Services, 272
Who Competes Against Whom?, 273
Unions and Competition, 273
Poverty and Inequality, 274
Why Inequality Is Increasing, 278
Redistributing Income, 278
Changing Rules and Social Cooperation, 280
Once Over Lightly, 281
Questions for Discussion, 282
12. Externalities and Conflicting Rights, 290
Externalities, Negative and Positive, 291
Perfection Is Unattainable, 292
Negotiation, 293
Reducing Externalities Through Adjudication, 294
The Case of the Complaining Homeowner, 295
The Importance of Precedents, 296
The Problem of Radical Change, 297
Reducing Externalities Through Legislation, 298
Minimizing Costs, 299
Another Approach: Taxing Emissions, 300
Licenses to Pollute?, 301
Efficiency and Fairness, 302
The Bubble Concept, 303
Rights and the Social Problem of Pollution, 305
Traffic Congestion as an Externality, 305
Once Over Lightly, 306
Questions for Discussion, 307
13. Markets and Government, 316
Private Versus Public?, 317
Competition and Individualism, 318
Economic Theory and Government Action, 319
The Right to Use Coercion, 320
Is Government Necessary?, 321
Excluding Nonpayers, 322
The Free-Rider Problem, 323
Positive Externalities and Free Riders, 323
Law and Order, 324
National Defense, 325
Roads and Schools, 325
Income Redistribution, 326
The Regulation of Voluntary Exchange, 327
Government and the Public Interest, 328
Information and Democratic Governments, 328
The Interests of Elected Officials, 329
Concentrated Benefits, Dispersed Costs, 331
Positive Externalities and Government Policies, 332
How Do People Identify the Public Interest?, 333
The Prisoners’ Dilemma, 334
The Limits of Political Institutions, 336
Once Over Lightly, 337
Questions for Discussion, 338
14. The Overall Performance of Economic Systems, 344
Gross Domestic Product, 345
GDP or GNP?, 347
GDP as Total Income Created in the Domestic Economy, 348
GDP Is Not a Measure of All Purchases in the Economy, 348
GDP as Total Value Added, 350
Is Value Added Always Positive?, 350
Loose Ends: Unsold Inventories and Used Goods, 352
Aggregate Fluctuations, 353
Inflation, 354
The Difficulties of Monetary Calculation, 355
Recession and Inflation Since 1960, 356
What Causes Aggregate Fluctuations?, 359
An Appendix: Limitations of National Income Accounting, 361
Once Over Lightly, 365
Questions for Discussion, 366
15. Employment and Unemployment, 370
Unemployment and Nonemployment, 371
Employed, Not Employed, and Unemployed, 372
Labor-Market Decisions, 373
Unemployment Rates and Employment Rates, 374
Costs and Decisions, 378
Unemployment and Recessions, 379
Why Does Unemployment Persist?, 380
The Phillips Curve, 383
Reducing Unemployment by Illusion: Inflation and the Misdirection of Labor, 384
Labor-Market Policies, 386
Once Over Lightly, 388
Questions for Discussion, 389
16. The Supply of Money, 394
Cigarettes as Money, 395
The Evolution of Money, 396
The Myth of Fiat Money, 398
The Nature of Money Today, 400
So How Much Money Is Out There?, 401
The Creation of Money, 403
What Can Be Created Can Be Destroyed, 404
Credibility and Confidence, 404
Banks Under Regulation: Legal Reserve Requirements, 405
The Fed as Monitor and Rule Enforcer, 406
The Tools Used by the Fed, 409
The Discount Rate, 409
Open Market Operations, 410
But Who Is Really in Charge?, 411
An Appendix: What About Gold?, 412
Once Over Lightly, 413
Questions for Discussion, 414
17. Monetary and Fiscal Policies, 418
The Great Depression, 419
The Incredible Japanese Economy, 420
What Happens in a Recession?, 422
A Cluster of Errors, 423
Monetary Mismanagement, Monetary Miscalculation, 424
Monetary Equilibrium, 426
The Demand for Money, 427
Why Do People Hold Money Balances?, 429
Actual and Preferred Money Balances, 429
How Stable Is the Demand for Money?, 431
Monetary Policy in Practice, 432
When Is Monetary Policy Effective?, 434
The Case for Fiscal Policy, 434
The Necessity of Good Timing, 436
The Federal Budget as a Policy Tool, 437
Unfinished Business, 439
Once Over Lightly, 440
Questions for Discussion, 442
18. Economic Performance and Political Economy, 448
The Political Setting, 449
Time Horizons and the Sequence of Effects, 450
Deficits Unlimited, 452
Why Not Government at All Levels?, 454
The Political Economy of Monetary Policy, 457
Discretion and Rules, 458
Who Is at the Controls?, 460
Renewal of the Debate, 461
What Lies Ahead?, 465
Once Over Lightly, 466
Questions for Discussion, 467
19. National Policies and International Exchange, 472
Accounting for International Transactions, 473
Why Credits Must Equal Debits, 474
Equilibrium and Disequilibrium, 475
The Ambiguities of International Disequilibrium, 477
Disequilibrium as a Disguised Policy Judgment, 478
But Will It Go on Forever?, 479
Foreign-Exchange Rates and Purchasing Power Parity, 480
The Bretton Woods System, 481
Fixed or Floating Exchange Rates?, 483
Nobody Knows, 484
The Trouble We’ve Seen, 485
The Case for a Common Currency, 487
Private Interests, National Interests, Public Interests, 488
In Defense of Comparative Advantage, 490
Globalization and Its Discontents, 492
The Power of Popular Opinion, 494
The Power of Special Interests, 495
The Outsourcing Controversy: Soundbytes vs. Analysis, 495
Once Over Lightly, 497
Questions for Discussion, 498
20. Promoting Economic Growth, 504
Who is Rich, Who is Poor?, 505
The Historical Record, 506
Sources of Economic Growth, 508
Foreign Investment, 510
Human Capital, 513
Oil Comes from Our Minds, 514
Economic Freedom Index, 514
The Developmental Power of Private Property Rights, 515
The Asian Record, 516
Outside of Asia, 519
An Appendix: The Difficulties of International GDP Comparisons, 521
Once Over Lightly, 523
Questions for Discussion, 524
21. The Limitations of Economics, 528
What Economists Know, 529
Beyond Mere Economics, 532
Glossary, 533
Photo Credits, 558
Index, I-1-1

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