Reasonably Simple Economics Why the World Works the Way It Does Evan Osborne
Reasonably Simple Economics: Why the World Works the Way It Does Copyright 2013 by Evan Osborne This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. ISBN-13 (pbk): 978-1-4302-5941-1 ISBN-13 (electronic): 978-1-4302-5942-8 Trademarked names, logos, and images may appear in this book. Rather than use a trademark symbol with every occurrence of a trademarked name, logo, or image we use the names, logos, and images only in an editorial fashion and to the benefit of the trademark owner, with no intention of infringement of the trademark. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. President and Publisher: Paul Manning Acquisitions Editor: Jeff Olson Editorial Board: Steve Anglin, Mark Beckner, Ewan Buckingham, Gary Cornell, Louise Corrigan, Morgan Ertel, Jonathan Gennick, Jonathan Hassell, Robert Hutchinson, Michelle Lowman, James Markham, Matthew Moodie, Jeff Olson, Jeffrey Pepper, Douglas Pundick, Ben Renow-Clarke, Dominic Shakeshaft, Gwenan Spearing, Matt Wade, Tom Welsh Coordinating Editor: Rita Fernando Copy Editor: Corbin Collins Compositor: SPi Global Indexer: SPi Global Cover Designer: Anna Ishchenko Distributed to the book trade worldwide by Springer Science+Business Media New York, 233 Spring Street, 6th Floor, New York, NY 10013. Phone 1-800-SPRINGER, fax (201) 348-4505, e-mail ordersny@springer-sbm.com, or visit www.springeronline.com. Apress Media, LLC is a California LLC and the sole member (owner) is Springer Science + Business Media Finance Inc (SSBM Finance Inc). SSBM Finance Inc is a Delaware corporation. For information on translations, please e-mail rights@apress.com, or visit www.apress.com. Apress and friends of ED books may be purchased in bulk for academic, corporate, or promotional use. ebook versions and licenses are also available for most titles. For more information, reference our Special Bulk Sales ebook Licensing web page at www.apress.com/bulk-sales. Any source code or other supplementary materials referenced by the author in this text is available to readers at www.apress.com. For detailed information about how to locate your book s source code, go to www.apress.com/source-code/.
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To my students, past, present, and future
Contents About the Author ix Acknowledgments xi Preface xiii Chapter 1: Introduction 1 Chapter 2: Supply and Demand, Considered Separately 15 Chapter 3: Supply and Demand, Considered Together 33 Chapter 4: The Economics of Information or Knowledge 61 Chapter 5: Public and Private Decision Making 95 Chapter 6: Who Makes How Much, and Why 125 Chapter 7: The Middleman and the Entrepreneur 153 Chapter 8: Time and Risk 171 Chapter 9: The Entrepreneur and Some Economics of the Future 181 Chapter 10: The Things Only Government Can Do 213 Chapter 11: Macroeconomics: The Big, Often Blurry Picture 241 Chapter 12: Macroeconomics: Stabilizing the Economy, or Not 265 Chapter 13: Macroeconomics: The Short and the Long Runs 289 Index 309
About the Author Evan Osborne is professor of economics at Wright State University. He has taught principles of economics for 20 years and has used economics to write about a wide array of topics. His current research interests involve the economics of sports and of ancient and contemporary China, and the history of individual liberty. But he is interested in everything.
Acknowledgments First and foremost, I owe a great deal of gratitude to those students who ask the most interesting questions and challenge me to back up what I claim. Much of what I have learned about how to teach is due to learning from them. In addition, teaching and learning do not end at the classroom door, and so I have also been very lucky to have two demanding children, the evercurious Weymar and the ever-skeptical Victoria, neither of whom will ever settle for a lazy answer. I am blessed every day to be able to watch and help you grow and to prepare to direct the grand journey of your lives. Writing a book is a pleasure, but the writer s ego is far too powerful a force to allow him to properly scrutinize his own writing. I thus also owe a lot to Jeff Olson and Corbin Collins, whose meticulous attention to every word made all those words taken together easier on the reader.
Preface This is a book originally written for students in the general-education course on economics at Wright State University, but my editor at Apress, Jeff Olson, told me that it might be helpful for those in the general public who wanted to understand economics better. It is not designed for the person who plans to major in economics in college, although I would be gratified if such students, and readers generally, also found it of use. It is also not written as a standard textbook, with a lot of text boxes, mathematicized problem sets, and fancy graphics (although there are some simple graphs for discussing supply and demand, because I use them in class). It is rather designed to emphasize the fundamentals that, I have noticed over the years, some students tend not to remember at exam time, perhaps because of the overall volume of material. Much of economics seems easy, obvious even, when you learn how to use it, but unless you constantly remind yourself about the essentials, it is equally easy to forget how to do so. This text, I hope, provides some of the fundamentals of economic thinking as I teach it. I include some questions in the text, with the answers at the end of each chapter. These are not questions about solving supply/demand intersections, calculating the optimal amount of output, or doing the other sorts of exercises that clog standard undergraduate textbooks. They are usually just extensions of what I am discussing in the text, or ways to get students in the habit of applying economic reasoning outside its normal domain. There are also questions concerning readings that that I have found over the years to be vivid illustrations of some of the principles discussed in each chapter (though the reader is supposed to figure out why). This book has been a lot of fun to write. It has also been a relief to get my increasingly chaotically edited notes down on record. I must also note forcefully that there is no engaged teaching without engaged students, and I have been blessed to have many of those over the years. In addition, I have drawn on the wisdom of many others. The thing about being a teacher of college economics is that one both makes up and picks up many good stories over the years that can be used to illustrate economic ideas. However, with the passage of time, it is hard to remember what one came up with on one s own and what one got from elsewhere. So, know that I have been influenced in particular by Paul Heyne s The Economic Way of Thinking (Prentice Hall), particularly the long out-of-print eighth edition, Thomas Sowell s Basic Economics (Basic Books, 2010), Steven E. Landsburg s The Armchair Economist: Economics and Everyday Life (Free Press, 2012), and the many insightful posts and stories at Don Boudreaux s and Russ Roberts terrific Café Hayek blog. I have tried to credit these authors and others whenever I know
xiv Preface I have taken a story or example from them, but it is possible but I have missed some. If so, I apologize. As a final note, I have one compositional eccentricity. I do not believe in using he or she, s/he, or they when what is called for is a singular pronoun. I follow the lead of the writer Charles Murray, who believes that sentences calling for a singular pronoun ought to have one, and for convenience s sake that that pronoun should just have the same sex as the writer. So when I use he, I am making no statements about the roles of men and women in economic theory, or in society. Anyone with comments approving, dismissive, argumentative, error-flagging (including dead web links), curious, or other is welcome to contact me at evan.osborne@wright.edu.