Preface

As humanity welcomes the new century, economics as a science and as a subject continues to be central to concerns around the globe. The twentieth century witnessed a spectacular change in the living standards of most of the world, particularly those in the affluent countries of North America, Western Europe, and East Asia. While the first half of the century was marked by two world wars and one great depression, the last half has been one of virtually uninterrupted growth of living standards and the spread of free markets, democracy, and personal freedoms to many corners of the globe. The central question for the years ahead is, "Will the good fortune spread from the affluent minority to the poor majority?"

Fifty Years of Economics

Over the past two decades, there have been dramatic changes in both attitudes and in economic institutions. Dozens of countries have rejected socialist and collectivist approaches and adopted market systems. Strong economic growth has been experienced in countries as diverse as Ireland, Botswana, and the Philippines. At no time in recorded history have so many enjoyed such a sustained period of economic growth as they have during the Great Peace of the past half century.

You might think that prosperity would lead to a declining interest in economic affairs, but paradoxically, an understanding of the enduring truths of economics has become even more vital in the affairs of people and nations. The United States grappled with slow growth in living standards and large government budget deficits; but by the turn of the century budget deficits had turned to surpluses, productivity growth turned up, and real incomes were increasing at a healthy pace.

In the larger scene, the world has become increasingly interconnected as computers and communications create an ever-more-competitive global marketplace. Developing countries and countries like Russia and Poland, all of which are trying to develop the institutions of mature capitalism, need a firm understanding of the institutions of a market economy if they are to attain the living standards of the affluent. At the same time, there is growing concern about international environmental problems and the need to forge agreements to preserve our precious natural heritage. All these fascinating changes are part of the modern drama that we call economics.

Fifty Years of ECONOMICS

For more than half a century, this book has served as the standard bearer for the teaching of introductory economics in classrooms in America and throughout the world. Each new edition has distilled the best thinking of economists about how markets function and about what society can do to improve people's living standards. But economics has changed profoundly since the first edition of this text appeared in 1948. And because economics is above all a living and evolving organism, the need to keep Economics at the frontier in the rapidly evolving world economy affords the authors an exciting opportunity to present the latest thinking of modern economists and to show how the subject can contribute to a more prosperous world.

Our task then is this: We want to present a clear, accurate, and interesting introduction to the principles of modern economics and to the institutions of the American and world economies. Our primary goal is to survey economics, and in doing this we emphasize the basic economic principle that will endure beyond today's headlines.

THE SEVENTEENTH EDITION

Economics is a dynamic science - changing to reflect the shifting trends in economic affairs, in the environment, in the world economy, and in society at large. As economics and the world around it evolve, so does this book. These nine features differentiate this edition from other books:

1. The Core Truths of Economics.

Often, economics appears to be an endless procession of new puzzles, problems, and difficult dilemmas. But as experienced teachers have learned, there are a few basic concepts that underpin all of economics. Once these basic concepts have been mastered, learning is much quicker and more enjoyable. We have therefore chosen to focus on the central core of economics on those enduring truths that will be just as important in the twenty-first century as they were in the twentieth. Microeconomic concepts such as scarcity, efficiency, the gains from specialization, and the principle of comparative advantage will be crucial concepts as long as scarcity itself exists. And students of macroeconomics must receive a firm grounding in the concepts of aggregate supply and demand and must understand the role of national and international monies. Students will learn the widely accepted theory of economic growth, but they should also understand the controversial theories of the business cycle.

2. Innovation in the Economy.

One of the striking features of the modern economy is the rapidity of innovations in virtually every sector. We are accustomed to the dizzying speed of invention in computers, where new products and software appear monthly. The Internet is revolutionizing communications and making inroads into commerce. Nowhere in recorded history do we find such a rapid rate of improvement as has been seen for computers over the past three decades. But other sectors are also witnessing rapid innovation - we run in athletic equipment made of miraculous new materials and relax while listening to crystal-clear audio equipment. Our understanding of economic trends and policies must reflect this rapid change in our societies.

Economics is increasingly attentive to rapid innovation. In macroeconomics, new growth theories emphasize the importance of technology, invention, and human capital in the growth process. In microeconomics, we have included a new section on the economics of information, showing how externalities in the production of information and new technologies lead to market failures. And a case study of the economics of the Internet explores the dilemmas of pricing information.

3. Innovation in Economics.

In addition, we emphasize innovations in economics itself. Economists are tinkerers, innovators, and inventors in their own way. History shows that economic ideas can produce tidal waves when they are applied to real-world problems. Among the important innovations studied here is the application of economics to our environmental problems through "emissions trading" plans. Other important economic innovations discussed are improved regulatory mechanisms and the radical new step of European monetary unification. One of the most influential economic innovations of the last few years involves the measurement of consumer prices. We introduce the important notion of "network economics" and show how it affects economic efficiency and market power, and how it has entered into the debate about breaking up Microsoft. One of the most important innovations for our common future is dealing with global public goods like climate change, and we analyze new approaches to dealing with international environmental problems such as the Kyoto Protocol.

4. Small Is Beautiful.

Economics has increased its scope greatly over the past half-century. The flag of economics flies over its traditional territory of the marketplace, but it also covers the environment, legal studies, statistical and historical methods, art, gender and racial discrimination, and even family life. But at its core, economics is the science of choice, which means that we as authors, have to choose the most important and enduring issues for this text. In a survey, as in a meal, small is beautiful because it is digestible.

Choosing the subjects for this text required many hard choices. To select these topics, we continually survey teachers and leading scholars to determine the ones most crucial for an informed citizenry and a new generation of economists. We drew up a list of key ideas and bid adieu to many appendices and sections. At every stage, we asked whether the material was, as best we could predict, necessary for a student's understanding of the economics of the twenty-first century. Only when a subject passed this test was it included. The result of this campaign is a book that has lost more than one-quarter of its weight in the last two editions. Farming, labor unions, and Marxian economics have been trimmed to make room for environmental economics, network economics, and real business cycles.

5. Policy Issues at Century's Dawn.

Each generation of economists finds new challenges to contend with in the attempt to understand evolving economic policy problems. Two areas that have been at the forefront of economics in the past decade have received expanded treatment in the seventeenth edition. As human societies grow, they begin to overwhelm the environment and ecosystems of the natural world. Environmental economics, presented in Chapter 18, helps students understand the externalities associated with economic activity and analyzes different approaches to making human economies compatible with natural systems. A second important area is international economics. We have completely reorganized our treatment of international economics by integrating the theory of comparative advantage into the microeconomics sections while reorganizing and restructuring the macroeconomic sections. The new organization will allow students to get an appreciation of the global economy at an earlier stage in their studies.

6. The Incredible Shrinking Globe.

A century ago, the leading military strategist of the age, Captain A. T. Mahan, declared in his important book The Influence of Sea Power on History, "Whether they will or no, Americans must now begin to look outward." President William Jefferson Clinton echoed these words when he wrote about economic affairs, "There is simply no way to close our borders and return to the insular days. To try to do so would be an exercise in futility, doomed not only to fail but to lower living standards in the process." Americans are learning that no nation is an island. Immigration and international trade have profound effects on the goods that are available, the prices we pay, and the wages we earn. Labor economists have found that the surge of uneducated immigrants over the last two decades has been an important contributor to the declining real wages of unskilled workers. Development economists have found striking results regarding the impact of economic openness on economic growth. No complete understanding of modern economics is possible without a thorough grounding in the world economy. The seventeenth edition continues to increase the material devoted to international economics and the interaction between international trade and domestic economic events.

7. Advances in Modern Macroeconomics.

One of the major obstacles to understanding modern economics is the proliferation of contesting schools of macroeconomics. Teachers often wonder how students can understand the subject when macroeconomists themselves are so divided. While many fret about the divisiveness of modern macroeconomics, we think it is a sign of health and prefer lively debate to complacent consensus.

The seventeenth edition analyzes all major schools of modern macroeconomics within the clear organizing synthesis of aggregate supply and demand. We show how macroeconomics of the Keynesian, old and new classical, supply-side, and monetarist varieties can be understood as emphasizing different aspects of expectations, market clearing, and aggregate demand. Each school is clearly presented and compared with its competitors in a balanced and evenhanded way. For each, the empirical evidence is presented and evaluated. The major schools are presented in a chapter on "The Warring Schools of Macroeconomics." But we also emphasize the importance of the policy implications of the different approaches. And we also have reorganized and integrated the open-economy issues into the core chapters.

Although much macroeconomic combat is devoted to arguing about the sources of the business cycle, one of the major recent developments in economics has been the resurgence of attention to the forces underlying long-run economic growth. Economists are increasingly examining the determinants of long-run economic growth, the slowdown and recent rebound in productivity growth, and the generation of innovation and new technological knowledge. Putting economic growth front and center is necessary if students are to understand modern debates about the role of government debt and deficits. The seventeenth edition reflects this revival by synthesizing growth theories and findings into the central section on macroeconomics. We include growth theory as an integral part of aggregate supply and potential output and have revised and moved the chapter on economic development to follow the material on economic growth theory.

8. Emphasis on History and Policy.

Students study economics to understand the rapidly changing world around them. For this reason, economics is at its core an empirical science. It first aims to explain the world around us and then helps us devise economic policies, based on sound economic principles, that can enhance the living standards of people at home and abroad.

Drawing upon history, economic chronicles, and the experience of the authors, the seventeenth edition continues to emphasize the use of case studies and empirical evidence to illustrate economic theories. The dilemmas involved in combating poverty become real when we understand the 1996 welfare reforms or the problems of the current health-care system. Our appreciation of macroeconomic analysis increases when we see government deficits in the 1980s lowered national saving and how the current budget surpluses are increasing national saving. Macroeconomics can help explain the American economic miracle of the late 1990s.

The microeconomic chapters draw upon case studies, economic history, business decisions, and real-world experience to illustrate the fundamental principles. Examples such as the network economics, the Microsoft antitrust case, the flat tax, and the Kyoto Protocol on global warming, economics of addictive substances, the minimum-wage debate, trading pollution permits, and the history of stock markets help bring the theorems of microeconomics to life. Game theory becomes serious - and has striking implications - when applied to pollution or winner-take-all games.

This "hands-on" approach to economics allows students to understand better the relevance of economic analysis to real-world problems. The abstract notion of scarcity becomes concrete when we see its implications for whether we have a good job, a healthy environment, adequate health care, and a secure nest egg for our retirement.

9. Clarity.

Although there are many new features in the seventeenth edition, the pole star for our pilgrimage in preparing this edition has been to present economics clearly and simply. Students enter the classroom with a wide range of backgrounds and with many preconceptions about the way the world works. Our role is not to change their values, but to get them to understand the enduring economic principles and then to be able to apply them to make the world a better place for them, their families, and their communities. Nothing aids understanding better than clear, simple exposition. We have labored over every page to improve this survey of introductory economics. We have received thousands of comments and suggestions from teachers and students and have incorporated their counsel in the seventeenth edition.

Optional Matter

Economics courses range from one-quarter surveys to year-long intensive honors courses. This textbook has been carefully designed to meet all situations. The more advanced materials have been put in separate appendices or specially designated sections. These will appeal to curious students and to students in demanding courses that survey the entire discipline thoroughly. We have included advanced questions for discussion to test the mettle of the most dedicated student.

If yours is a fast-paced course, you will appreciate the careful layering of the more advanced material. Hard-pressed courses can skip the advanced sections, covering the core of economic analysis without losing the thread of the economic reasoning. This book will challenge the most advanced young scholar. Indeed, many of today's leading economists have written to say they've relied upon Economics all along their pilgrimage to the Ph.D.

Format

The seventeenth edition employs a greatly expanded set of in-text logos and material to help illustrate the central topics. You will find three distinctive logos: warnings for the fledgling economist, examples of economics in action, and biographical material on the great economists of the past and present. But these central topics are not drifting off by themselves in unattached boxes. Rather, they are integrated right into the chapter so that students can read them without breaking their train of thought.