The Economics Book: The Big Ideas Simply Explained
by DK Publishing
CONTENTS
10 INTRODUCTION
LET THE TRADING BEGIN 400 BCE–1770 CE
20 Property should be private Property rights
22 What is a just price? Markets and morality
24 You don’t need to barter when you have coins The function of money
26 Make money from money Financial services
30 Money causes inflation The quantity theory of money
34 Protect us from foreign goods
Protectionism and trade
36 The economy can be counted Measuring wealth
38 Let firms be traded
Public companies
39 Wealth comes from the land
Agriculture in the economy
40 Money and goods flow between producers and consumers The circular flow of the economy
46 Private individuals never pay for street lights
Provision of public goods and services
THE AGE OF REASON 1770–1820
52 Man is a cold, rational calculator
Economic man
54 The invisible hand of the market brings order
Free market economics
62 The last worker adds less to output than the first
Diminishing returns
63 Why do diamonds cost more than water?
The paradox of value
64 Make taxes fair and efficient
The tax burden
66 Divide up pin production, and you get more pins
The division of labor
68 Population growth keeps us poor
Demographics and economics
70 Meetings of merchants end in conspiracies to raise prices
Cartels and collusion
74 Supply creates its own demand
Gluts in markets
76 Borrow now, tax later
Borrowing and debt
78 The economy is a yo-yo
Boom and bust
80 Trade is beneficial for all
Comparative advantage
INDUSTRIAL AND ECONOMIC REVOULTIONS 1820–1929
90 How much should I produce, given the competition?
Effects of limited competition
92 Phone calls cost more without competition
Monopolies
98 Crowds breed collective insanity
Economic bubbles
100 Let the ruling classes tremble at a communist revolution
Marxist economics
106 The value of a product comes from the effort needed to make it
The labor theory of value
108 Prices come from supply and demand
Supply and demand
114 You enjoy the last chocolate less than the first
Utility and satisfaction
116 When the price goes up, some people buy more
Spending paradoxes
118 A system of free markets is stable
Economic equilibrium
124 If you get a pay raise, buy caviar not bread
Elasticity of demand
126 Companies are price takers not price makers
The competitive market
130 Make one person better off without hurting the others
Efficiency and fairness
132 The bigger the factory, the lower the cost
Economies of scale
133 The cost of going to the movies is the fun you’dhave had at an ice rink
Opportunity cost
134 Workers must improve their lot together
Collective bargaining
136 People consume to be noticed
Conspicuous consumption
137 Make the polluter pay
External costs
138 Protestantism has made us rich
Religion and the economy
140 The poor are unlucky, not bad The poverty problem
142 Socialism is the abolition of rational economy
Central planning
148 Capitalism destroys the old and creates the new
Creative destruction
WAR AND DEPRESSIONS 1929–1945
154 Unemployment is not a choice Depressions and unemployment
162 Some people love risk, others avoid it
Risk and uncertainty
164 Government spending boosts the economy by more than what is spent
The Keynesian multiplier
166 Economies are embedded in culture
Economics and tradition
168 Managers go for perks, not their company’s profits
Corporate governance
170 The economy is a predictable machine
Testing economic theories
171 Economics is the science of scarce resources
Definitions of economics
172 We wish to preserve a free society
Economic liberalism
178 Industrialization creates sustained growth
The emergence of modern economies
180 Different prices to different
people Price discrimination
POST-WAR ECONOMICS 1945–1970
186 In the wake of war and depression, nations must cooperate
Bretton Woods
188 All poor countries need
is a big push
Development economics
194 People are influenced by
irrelevant alternatives
Irrational decision making
196 Governments should do
nothing but control the
money supply
Monetarist policy
202 The more people at work,
the higher their bills
Inflation and unemployment
204 People smooth
consumption over their
life spans Saving to spend
206 Institutions matter
Institutions in economics
208 People will avoid work if
they can Market information
and incentives
210 Theories about market
efficiency require many
assumptions
Markets and social outcomes
214 There is no perfect voting
system Social choice theory
216 The aim is to maximize
happiness, not income
The economics of
happiness
220 Policies to correct markets
can make things worse
The theory of the second best
222 Make markets fair
The social market economy
224 Over time, all countries
will be rich
Economic growth theories
226 Globalization is not
inevitable Market integration
232 Socialism leads to
empty shops Shortages in
planned economies
234 What does the other man
think I am going to do?
Game theory
242 Rich countries impoverish
the poor Dependency theory
244 You can’t fool the people
Rational expectations
248 People don’t care
about probability
when they choose
Paradoxes in decision making
250 Similar economies can
benefit from a single
currency Exchange rates
and currencies
256 Famine can happen
in good harvests
Entitlement theory
CONTEMPORARY
ECONOMICS
1970–PRESENT
262 It is possible to invest
without risk
Financial engineering
266 People are not
100 percent rational
Behavioral economics
270 Tax cuts can increase
the tax take
Taxation and
economic incentives
272 Prices tell you everything
Efficient markets
273 Over time, even the
selfish cooperate with
others Competition
and cooperation
274 Most cars traded will
be lemons
Market uncertainty
276 The government’s
promises are incredible
Independent central banks
278 The economy is chaotic
even when individuals
are not
Complexity and chaos
280 Social networks are
a kind of capital
Social capital
281 Education is only a
signal of ability
Signaling and screening
282 The East Asian state
governs the market
Asian Tiger economies
288 Beliefs can trigger
currency crises
Speculation and
currency devaluation
294 Auction winners pay
over the odds
The winner’s curse
296 Stable economies contain
the seeds of instability
Financial crises
302 Businesses pay more
than the market wage
Incentives and wages
303 Real wages rise during
a recession
Sticky wages
304 Finding a job is like
finding a partner or a
house Searching and
matching
306 The biggest challenge
for collective action is
climate change
Economics and
the environment
310 GDP ignores women
Gender and economics
312 Comparative advantage
is an accident
Trade and geography
313 Like steam, computers
have revolutionized
economies
Technological leaps
314 We can kick-start poor
economies by writing
off debt
International debt relief
316 Pessimism can destroy
healthy banks
Bank runs
322 Savings gluts abroad fuel speculation at home
Global savings imbalances
326 More equal societies grow faster
Inequality and growth
328 Even beneficial economic reforms can fail
Resisting economic change
330 The housing market mirrors boom and bust
Housing and the economic cycle
332 DIRECTORY
340 GLOSSARY
344 INDEX
351 ACKNOWLEDGMENTS