The American Economy

How it Works and How it Doesn't

Wade L. Thomas, Robert B. Carson

• Publisher: Routledge
• Year: 2014
• Print ISBN:
  9780765607584
• eBook ISBN:
  9781317458746
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This groundbreaking principles of economics text is devoted to explaining basic economics with an issues and policy focus to undergraduates in survey and other introductory economics courses. It offers the optimal blend of theory, issues, and policy analysis, and covers micro-, macro, and international aspects of America's economy.

Conceptual Foundations

Toward a Twenty-First Century Economic Agenda: Goals and Possibilities

Chapter Outline

Getting Oriented

The Nature of Economic Reasoning

The Scarcity Problem

Economics as the Science of Choice

Economic Thinking and Methodology

Why Do Economists Disagree?

The Efficiency Versus Equity Question

The Basic Economic Problem Examined

The Central Economic Problem and the Basic Economic Questions

The Factors of Production

Varieties of Answers to the Basic Economic Questions

Production Possibilities and Opportunity Costs

Future Versus Present Outputs

The American Economic Agenda

What Is an Economic Agenda?

The Economic Agenda as Choices

A Potential Agenda

Back to “The Science of Choice”

Chapter Summary

Key Terms

Questions and Exercises

GETTING ORIENTED

It is hard to overestimate the importance of economic matters and the “things” that economists study. Even mildly perceptive citizens notice how the nightly news programs devote enormous time to economic and business topics. Admitting the importance of economic events and inquiry does not equate with understanding what economics is really about. Before proceeding very far into contemporary economic problems and consideration of means for solving them, it is necessary to uncover precisely what economists do.

There is no neat and inclusive definition of economics. The simple fact is that economists have never been of one mind in their views on what the discipline encompasses. Some of the many definitions offered over the years have been pretentious, long-winded efforts. Other definitions have been narrow, emphasizing individual aspects of economic thinking or methodology. For Adam Smith (1723–1790), economics was “an inquiry into the nature and causes of the wealth of nations.” Karl Marx (1818–1883) saw it as the science of production and the study of the social relationships produced by economic activity. These definitions are straightforward enough, but they do not clarify what economists do. And those definitions that do describe the functions of economists are often mind-numbing in their obscurity. Take, for instance, the attempt offered by the British economist Lionel Robbins: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” The American economist Paul Samuelson (1915–2009) modified this definition slightly: “Economics is the study of how societies use scarce resources to provide valuable commodities and distribute them among different people.” But even Samuelson’s widely accepted definition is too stilted to capture the attention of most ordinary people who ponder the question “What do economists do?” Nor do we gain greater insight from the remark of Jacob Viner (1892–1970) to the effect that “economics is what economists do.”

While these definitions do not deserve rejection, perhaps the most impressive is the simple and thought-provoking observation of the great British economist Alfred Marshall (1842–1924). To Marshall, “economics is the study of mankind in the ordinary business of life.” In short: Economics is the study of almost everything humans must do as they attempt to live their lives. The simplicity and the breadth of the observation goes a long way toward explaining why economics is both so important and so difficult to comprehend. Economics is, in one way or another, about almost everything.

A sunny day in September 2001 turned dark in the wake of terrorist attacks on the World Trade Center in New York and the Pentagon in Arlington, Virginia, provided evidence to validate Marshall’s definition. Turning hijacked airliners into suicide missiles appeared at first to be a simple case of fanaticism and moral depravity. However, the course of events soon revealed how the “ordinary business of life” was penetrated and dominated by matters that had a fundamentally economic foundation.

An already financially troubled airline industry was grounded. After air service resumed, passenger lists were lean and so too the revenues of the industry. The tourism and hospitality industries suffered. New York City’s financial center was disrupted. Then anthrax attacks roiled the U.S. Postal Service. Events cascaded into a general economic slowdown that clearly affected “the ordinary business of life” in terms of joblessness and lower living standards. For hundreds of millions of people, the economics of terror and “the ordinary business of life” were inseparable.

After Afghanistan was quickly identified as the premier haven for terrorists and a military campaign was launched to overthrow the ruling Taliban, the simple fact was that terrorist actions and the world’s reaction were not narrow political matters at all. Nor were they to be understood simply by studying the psychological profiles of terrorist leaders or perpetrators of suicide attacks. The events of September 11, 2001, and the war that followed in their wake were fundamentally the stuff of economics and economic reasoning. Ordinary life for much of the world’s population was intricately tied to the decisions and outcomes of political and military events in a distant, backward country.

THE NATURE OF ECONOMIC REASONING

It is not surprising that economists enjoy considerable public attention. Any significant shift in general economic conditions produces a rash of appearances by members of the profession on the television news and late-night talk shows. The public, after all, wants to know why the stock market is in a nosedive or how deep an expected recession might be. These events affect people directly. And who should have better insight into such matters than economists?

At the same time, economists as a group are not noted for creating much public confidence in their pronouncements. This tends to be especially true when the economic news is bleak. In part, this problem occurs because economists might be easily confused in the public mind with the economic problem itself. To a greater extent, however, public reaction probably reflects dismay with the tendency of economists to disagree with one another over the interpretation of a certain set of economic facts and the resulting translation of these “facts” into economic policy. An irritated President John F. Kennedy, confronted by a stagnating economy and widely divergent recommendations from economists, once lamented that if you laid all economists end to end all you would reach is confusion.

The fact that economists often disagree is a very real phenomenon. Although contention over how the economy works or bickering over economic policies may seem frustrating and inconvenient to the ordinary citizen who would like to see solutions to routine economic difficulties, one must not overlook the fundamental areas of agreement. The simple fact is that economic reasoning—both as a process and as a professional activity—rests on certain shared or common perspectives.

Beginning by viewing the world as it isn’t rather than as it actually is can be instructive. Consider, for instance, a world in which all goods are instantly available upon request. If you want the newest cell phone or a pizza or a new Porsche, you simply go to a central distribution site and pick it up, or, more simply, you place an order either by phone or online and await prompt delivery. Most important, all goods are free. Ah, this is the stuff that dreams are made of. And that, of course, is the point. In such a make-believe world, all material wants are satisfied. Moreover, the pain, inconvenience, and uncertainty of earning income does not exist. In such a world, there is no reason at all to study economics.

The real world, of course, is quite different. Wants are not instantly gratified. Little that we desire to consume is free. From the richest to the poorest, we are constrained in our consumption of goods by the income or wealth that we can command. In the real world, goods are scarce and purchasing ability is limited. We are forever making choices among alternative expenditures. These facts of everyday life are the foundations upon which the study of economics rests, and they determine the content and extent of economic reasoning. Hence, economic reasoning is something that we all must do; economics is not the special and private domain of economists. This point is worth recalling from time to time as we embark on a study of the contemporary economy. Although it may be true that a huge share of economic analysis seems excessively complex, for the most part the economics profession merely takes up questions that are part of “the ordinary business of life.”

The Scarcity Problem

Two undeniable facts of human existence provide the essential framework for economic reasoning. First, the earth is indeed a small planet, which is limited in its supply of physical resources. Second, human beings continue to place increasing demands upon these limited resources. To be sure, the limits of our resources and the types of pressures placed upon them have varied over time. In a simple pastoral society, the problem may have been insufficient grazing land to sustain cattle and hence the society’s food supplies. More recently, the problem has involved sustaining sufficient energy sources to maintain a complex industrial society. In a word, the overarching problem is scarcity, the fact that the supply of the world’s resources is limited.

While the physical resource base of the planet has remained fixed, science and technology have compensated for these limits by introducing new materials and methods for production. For example, the relative scarcity of copper mattered less after iron production...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• List of Tables and Figures
• Preface
• Part 1 Conceptual Foundations
• PART 2 Microeconomics
• PART 3 Macroeconomics
• PART 4 International Economics
• Glossary
• Index
• About the Authors