The Economy: Economics for a Changing World

17: History, instability, and growth 17 Capstone: The Great Depression, golden age, and global financial crisis Introduction
18: Global economy 18 Capstone: The nation and the world economy Introduction
19: Inequality 19 Capstone: Economic inequality Introduction
20: Environment 20 Capstone: Economics of the environment Introduction
21: Innovation 21 Capstone: Innovation, information, and the networked economy Introduction
22: Politics and policy 22 Capstone: Economics, politics, and public policy Introduction
Preface
A note to instructors
Producing The Economy
List of resources
1 The capitalist revolution Introduction
1.1 Income inequality 18 19
1.2 Measuring income and living standards
1.3 History’s hockey stick: Growth in income 17 18 19 21
1.4 The permanent technological revolution 17 21
1.5 The economy and the environment 20
1.6 Capitalism defined: Private property, markets, and firms 17
1.7 Capitalism as an economic system 17
1.8 The gains from specialization 17 18
1.9 Capitalism, causation and history’s hockey stick 17 18 21
1.10 Varieties of capitalism: Institutions, government, and the economy 17 18 22
1.11 Economics and the economy
1.12 Conclusion
1.13 References
2 Technology, population, and growth Introduction
2.1 Economists, historians, and the Industrial Revolution 17 18 21
2.2 Economic models: How to see more by looking at less
2.3 Basic concepts: Prices, costs, and innovation rents 21
2.4 Modelling a dynamic economy: Technology and costs 21
2.5 Modelling a dynamic economy: Innovation and profit 21
2.6 The British Industrial Revolution and incentives for new technologies 17 19 21
2.7 Malthusian economics: Diminishing average product of labour
2.8 Malthusian economics: Population grows when living standards rise 17 21
2.9 The Malthusian trap and long-term economic stagnation 17 21
2.10 Escaping from Malthusian stagnation 17 19 21
2.11 Conclusion
2.12 References
3 Scarcity, work, and choice Introduction
3.1 Labour and production
3.2 Preferences
3.3 Opportunity costs
3.4 The feasible set
3.5 Decision making and scarcity
3.6 Hours of work and economic growth 18 21
3.7 Income and substitution effects on hours of work and free time
3.8 Is this a good model?
3.9 Explaining our working hours: Changes over time 17 21
3.10 Explaining our working hours: Differences between countries 18 22
3.11 Conclusion
3.12 References
4 Social interactions Introduction
4.1 Social interactions: Game theory
4.2 Equilibrium in the invisible hand game
4.3 The prisoners’ dilemma 20
4.4 Social preferences: Altruism 19
4.5 Altruistic preferences in the prisoners’ dilemma 19
4.6 Public goods, free riding, and repeated interaction 19
4.7 Public good contributions and peer punishment
4.8 Behavioural experiments in the lab and in the field 22
4.9 Cooperation, negotiation, conflicts of interest, and social norms 19 20
4.10 Dividing a pie (or leaving it on the table) 19
4.11 Fair farmers, self-interested students? 18
4.12 Competition in the ultimatum game
4.13 Social interactions: Conflicts in the choice among Nash equilibria 18 19 20 21
4.14 Conclusion
4.15 References
5 Property and power: Mutual gains and conflict Introduction
5.1 Institutions and power 17 19
5.2 Evaluating institutions and outcomes: The Pareto criterion 17
5.3 Evaluating institutions and outcomes: Fairness 17 19
5.4 A model of choice and conflict 17 19
5.5 Technically feasible allocations
5.6 Allocations imposed by force 17
5.7 Economically feasible allocations and the surplus 19
5.8 The Pareto efficiency curve and the distribution of the surplus 19 22
5.9 Politics: Sharing the surplus 22
5.10 Bargaining to a Pareto-efficient sharing of the surplus
5.11 Angela and Bruno: The moral of the story 17 19 22
5.12 Measuring economic inequality 19 22
5.13 A policy to redistribute the surplus and raise efficiency 19 22
5.14 Conclusion
5.15 References
6 The firm: Owners, managers, and employees Introduction
6.1 Firms, markets, and the division of labour
6.2 Other people’s money: The separation of ownership and control
6.3 Other people’s labour
6.4 Employment rents 19
6.5 Determinants of the employment rent 22
6.6 Work and wages: The labour discipline model 22
6.7 Wages, effort, and profits in the labour discipline model 19
6.8 Putting the model to work: Owners, employees, and the economy 22
6.9 Another kind of business organization 19 22
6.10 Principals and agents: Interactions under incomplete contracts
6.11 Conclusion
6.12 References
7 The firm and its customers Introduction
7.1 Breakfast cereal: Choosing a price
7.2 Economies of scale and the cost advantages of large-scale production 21
7.3 Production: The cost function for Beautiful Cars
7.4 Demand and isoprofit curves: Beautiful Cars
7.5 Setting price and quantity to maximize profit
7.6 Looking at profit maximization as marginal revenue and marginal cost
7.7 Gains from trade
7.8 The elasticity of demand
7.9 Using demand elasticities in government policy 22
7.10 Price-setting, competition, and market power 22
7.11 Product selection, innovation, and advertising 21
7.12 Prices, costs, and market failure
7.13 Conclusion
7.14 References
8 Supply and demand: Price-taking and competitive markets Introduction
8.1 Buying and selling: Demand and supply
8.2 The market and the equilibrium price
8.3 Price-taking firms
8.4 Market supply and equilibrium
8.5 Competitive equilibrium: Gains from trade, allocation, and distribution
8.6 Changes in supply and demand 18
8.7 The effects of taxes 22
8.8 The model of perfect competition
8.9 Looking for competitive equilibria
8.10 Price-setting and price-taking firms 22
8.11 Conclusion
8.12 References
9 The labour market: Wages, profits, and unemployment Introduction
9.1 The wage-setting curve, the price-setting curve, and the labour market
9.2 Measuring the economy: Employment and unemployment 18
9.3 The wage-setting curve: Employment and real wages
9.4 The firm’s hiring decision
9.5 The price-setting curve: Wages and profits in the whole economy
9.6 Wages, profits, and unemployment in the whole economy
9.7 How changes in demand for goods and services affect unemployment 22
9.8 Labour market equilibrium and the distribution of income 19 22
9.9 Labour supply, labour demand, and bargaining power 18 22
9.10 Labour unions: Bargained wages and the union voice effect 17 18 22
9.11 Labour market policies to address unemployment and inequality 19 22
9.12 Looking backward: Baristas and bread markets
9.13 Conclusion
9.14 References
10 Banks, money, and the credit market Introduction
10.1 Money and wealth
10.2 Borrowing: Bringing consumption forward in time
10.3 Impatience and the diminishing marginal returns to consumption
10.4 Borrowing allows smoothing by bringing consumption to the present
10.5 Lending and storing: Smoothing and moving consumption to the future
10.6 Investing: Another way to move consumption to the future 19
10.7 Assets, liabilities, and net worth
10.8 Banks, money, and the central bank 17 22
10.9 The central bank, the money market, and interest rates 17 22
10.10 The business of banking and bank balance sheets
10.11 The central bank’s policy rate can affect spending 22
10.12 Credit market constraints: A principal–agent problem 19
10.13 Inequality: Lenders, borrowers, and those excluded from credit markets 19
10.14 Conclusion
10.15 References
11 Rent-seeking, price-setting, and market dynamics Introduction
11.1 How people changing prices to gain rents can lead to a market equilibrium
11.2 How market organization can influence prices
11.3 Short-run and long-run equilibria
11.4 Prices, rent-seeking, and market dynamics at work: Oil prices 17 18 22
11.5 The value of an asset: Basics
11.6 Changing supply and demand for financial assets
11.7 Asset market bubbles
11.8 Modelling bubbles and crashes 17
11.9 Non-clearing markets: Rationing, queuing, and secondary markets 22
11.10 Markets with controlled prices 22
11.11 The role of economic rents 19 21 22
11.12 Conclusion
11.13 References
12 Markets, efficiency, and public policy Introduction
12.1 Market failure: External effects of pollution 20
12.2 External effects and bargaining 20
12.3 External effects: Policies and income distribution 19 20 22
12.4 Property rights, contracts, and market failures 17 20 22
12.5 Public goods 20 21 22
12.6 Missing markets: Insurance and lemons 22
12.7 Incomplete contracts and external effects in credit markets 19 22
12.8 The limits of markets 17 19 22
12.9 Market failure and government policy 22
12.10 Conclusion
12.11 References
13 Economic fluctuations and unemployment Introduction
13.1 Growth and fluctuations 17 22
13.2 Output growth and changes in unemployment 18
13.3 Measuring the aggregate economy
13.4 Measuring the aggregate economy: The components of GDP 22
13.5 How households cope with fluctuations 17 22
13.6 Why is consumption smooth?
13.7 Why is investment volatile? 17 18 21
13.8 Measuring the economy: Inflation 17 18
13.9 Conclusion
13.10 References
14 Unemployment and fiscal policy Introduction
14.1 The transmission of shocks: The multiplier process
14.2 The multiplier model
14.3 Household target wealth, collateral, and consumption spending 17 22
14.4 Investment spending 21 22
14.5 The multiplier model: Including the government and net exports 22
14.6 Fiscal policy: How governments can dampen and amplify fluctuations 17 22
14.7 The multiplier and economic policymaking 22
14.8 The government’s finances 17 18 22
14.9 Fiscal policy and the rest of the world 18 22
14.10 Aggregate demand and unemployment 22
14.11 Conclusion
14.12 References
15 Inflation, unemployment, and monetary policy Introduction
15.1 What’s wrong with inflation? 19
15.2 Inflation results from conflicting and inconsistent claims on output
15.3 Inflation, the business cycle, and the Phillips curve
15.4 Inflation and unemployment: Constraints and preferences 22
15.5 What happened to the Phillips curve? 17 22
15.6 Expected inflation and the Phillips curve
15.7 Supply shocks and inflation 17 18 22
15.8 Monetary policy 18 22
15.9 The exchange rate channel of monetary policy 18 22
15.10 Demand shocks and demand-side policies 21
15.11 Macroeconomic policy before the global financial crisis: Inflation-targeting policy 17 18 22
15.12 Another reason for rising inflation at low unemployment
15.13 Conclusion
15.14 References
16 Technological progress, employment, and living standards in the long run Introduction
16.1 Technological progress and living standards 17 21
16.2 The job creation and destruction process 18 19 21
16.3 Job flows, worker flows, and the Beveridge curve 22
16.4 Investment, firm entry, and the price-setting curve in the long run 21
16.5 New technology, wages, and unemployment in the long run 17 21 22
16.6 Technological change and income inequality 19 21
16.7 How long does it take for labour markets to adjust to shocks? 17 18 21
16.8 Institutions and policies: Why do some countries do better than others? 17 18 19 21 22
16.9 Technological change, labour markets, and trade unions 17 18 19 21 22
16.10 Changes in institutions and policies 17 22
16.11 Slower productivity growth in services, and the changing nature of work 17 18 21
16.12 Wages and unemployment in the long run 21 22
16.13 Conclusion
16.14 References
17.1 Three economic epochs
17.2 The Great Depression, positive feedbacks, and aggregate demand
17.3 Policymakers in the Great Depression
17.4 The golden age of high growth and low unemployment
17.5 Workers and employers in the golden age
17.6 The end of the golden age
17.7 After stagflation: The fruits of a new policy regime
17.8 Before the financial crisis: Households, banks, and the credit boom
17.9 Modelling housing bubbles
17.10 The financial crisis and the great recession
17.11 The role of banks in the crisis
17.12 The economy as teacher
17.13 Conclusion
17.14 References
18.1 Globalization and deglobalization in the long run
18.2 Globalization and investment
18.3 Globalization and migration
18.4 Specialization and the gains from trade among nations
18.5 Specialization, factor endowments, and trade between countries
18.6 Winners and losers from trade and specialization
18.7 Winners and losers in the very long run and along the way
18.8 Migration: Globalization of labour
18.9 Globalization and anti-globalization
18.10 Trade and growth
18.11 Conclusion
18.12 References
19.1 Inequality across the world and over time
19.2 Accidents of birth: Another lens to study inequality
19.3 What (if anything) is wrong with inequality?
19.4 How much inequality is too much (or too little)?
19.5 Endowments, technology, and institutions
19.6 Inequality, endowments, and principal–agent relationships
19.7 Putting the model to work: Explaining changes in inequality
19.8 Predistribution
19.9 Explaining recent trends in inequality in market income
19.10 Redistribution: Taxes and transfers
19.11 Equality and economic performance
19.12 Conclusion
19.13 References
20.1 Recap: External effects, incomplete contracts, and missing markets
20.2 Climate change
20.3 The abatement of environmental damages: Cost-benefit analysis
20.4 Conflicts of interest: Bargaining over wages, pollution, and jobs
20.5 Cap and trade environmental policies
20.6 The measurement challenges of environmental policy
20.7 Dynamic environmental policies: Future technologies and lifestyles
20.8 Environmental dynamics
20.9 Why is addressing climate change so difficult?
20.10 Policy choices matter
20.11 Conclusion
20.12 References
21.1 The innovation process: Invention and diffusion
21.2 Innovation systems
21.3 External effects: Complements, substitutes, and coordination
21.4 Economies of scale and winner-take-all competition
21.5 Matching (two-sided) markets
21.6 Intellectual property rights
21.7 Optimal patents: Balancing the objectives of invention and diffusion
21.8 Public funding of basic research, education, and information infrastructure
21.9 Conclusion
21.10 References
22.1 The government as an economic actor
22.2 Government acting as a monopolist
22.3 Political competition affects how the government will act
22.4 Why an erstwhile dictator might submit to political competition
22.5 Democracy as a political institution
22.6 Political preferences and electoral competition: The median voter model
22.7 A more realistic model of electoral competition
22.8 The advance of democracy
22.9 Varieties of democracy
22.10 Democracy makes a difference
22.11 A puzzle: The persistence of unfairness and market failures in democracies
22.12 Economic infeasibility
22.13 Administrative infeasibility
22.14 Special interests
22.15 Policy matters and economics works
22.16 Conclusion
22.17 References
Looking forward to economics after CORE
Glossary
Bibliography
Copyright acknowledgements
2.2.1 Introducing the Leibnizes
2.7.1 The production function
3.1.1 Average and marginal productivity
3.1.2 Diminishing marginal productivity
3.1.3 Concave and convex functions
3.2.1 Indifference curves and the marginal rate of substitution
3.4.1 Marginal rate of transformation
3.5.1 Optimal allocation of free time: MRT meets MRS
3.6.1 Modelling technological change
3.7.1 Mathematics of income and substitution effects
4.4.1 Altruistic preferences: Finding the optimal distribution
5.4.1 Quasi-linear preferences
5.4.2 Angela’s choice of working hours
5.7.1 Angela’s choice of working hours when she pays rent
5.8.1 The Pareto efficiency curve
6.6.1 The worker’s best response function
6.7.1 Profit, wages, and effort
7.3.1 Average and marginal cost functions
7.4.1 Isoprofit curves and their slopes
7.5.1 The profit-maximizing price
7.6.1 Marginal revenue and marginal cost
7.8.1 The elasticity of demand
8.4.1 The firm and market supply curves
8.4.2 Market equilibrium
8.5.1 Gains from trade
8.6.1 Shifts in demand and supply
11.8.1 Price bubbles
12.1.1 External effects of pollution
12.3.1 Pigouvian taxes
22.2.1 Expected duration of the dictator or governing elite
22.2.2 How the monopolist sets the rent-maximizing level of taxes
22.3.1 The income and substitution effect of an increase in political competition