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 Is Facebook free? Is college worth it? Second Edition
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 Dedication

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 About the Authors

Daron Acemoglu is the Elizabeth and James Killian Professor of Economics in the Depart-
ment of Economics at the Massachusetts Institute of Technology. He has received a B.A.
in economics from the University of York, 1989; an M.Sc. in mathematical economics and
econometrics from the London School of Economics, 1990; and a Ph.D. in economics from
the London School of Economics in 1992.
He is an elected fellow of the National Academy of Sciences, the American Academy of
Arts and Sciences, the Econometric Society, the European Economic Association, and the
Society of Labor Economists. He has received numerous awards and fellowships, including
the inaugural T. W. Schultz Prize from the University of Chicago in 2004, the inaugural
Sherwin Rosen Award for outstanding contribution to labor economics in 2004, the Distin-
guished Science Award from the Turkish Sciences Association in 2006, and the John von
Neumann Award, Rajk College, Budapest, in 2007.
He was also the recipient of the John Bates Clark Medal in 2005, awarded every two
years to the best economist in the United States under the age of 40 by the American Eco-
nomic Association, and the Erwin Plein Nemmers Prize, awarded every two years for work
of lasting significance in economics. He holds honorary doctorates from the University of
Utrecht and Bosporus University.
His research interests include political economy, economic development and growth,
human capital theory, growth theory, innovation, search theory, network economics, and
learning.
His books include Economic Origins of Dictatorship and Democracy ( jointly with
James A. Robinson), which was awarded the Woodrow Wilson and the William Riker
prizes, Introduction to Modern Economic Growth, and Why Nations Fail: The Origins of
Power, Prosperity, and Poverty ( jointly with James A. Robinson), which has become a New
York Times bestseller.

David Laibson is the Chair of the Harvard Economics Department and the Robert I.
Goldman Professor of Economics at Harvard University. He is also a member of the Na-
tional Bureau of Economic Research, where he is Research Associate in the Asset Pricing,
Economic Fluctuations, and Aging Working Groups. His research focuses on the topics
of behavioral economics, intertemporal choice, macroeconomics, and household finance,
and he leads Harvard University’s Foundations of Human Behavior Initiative. He serves
on several editorial boards, as well as the Pension Research Council (Wharton), Harvard’s
Pension Investment Committee, and the Board of the Russell Sage Foundation. He has
previously served on the boards of the Health and Retirement Study (National Institutes of
Health) and the Academic Research Council of the Consumer Financial Protection Bureau.
He is a recipient of a Marshall Scholarship and a Fellow of the Econometric Society and
the American Academy of Arts and Sciences. He is also a recipient of the T. W. Schultz
Prize from the University of Chicago and the TIAA-CREF Paul A. Samuelson Award for
Outstanding Scholarly Writing on Lifelong Financial Security. Laibson holds degrees
from Harvard University (A.B. in economics), the London School of Economics (M.Sc. in
econometrics and mathematical economics), and the Massachusetts Institute of Technol-
ogy (Ph.D. in economics). He received his Ph.D. in 1994 and has taught at Harvard since
then. In recognition of his teaching excellence, he has been awarded Harvard’s Phi Beta
Kappa Prize and a Harvard College Professorship.

vi

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 John A. List is the Kenneth C. Griffin Distinguished Service Professor in Economics at
the University of Chicago, and Chairman of the Department of Economics. He received
his B.S. in economics from the University of Wisconsin–Stevens Point and his Ph.D. in
economics from the University of Wyoming. Before joining the University of Chicago in
2005, he was a professor at the University of Central Florida, University of Arizona, and
University of Maryland. He also served in the White House on the Council of Economic
Advisers from 2002–2003, and is a Research Associate at the NBER.
List was elected a Member of the American Academy of Arts and Sciences in 2011, and
a Fellow of the Econometric Society in 2015. He also received the Arrow Prize for Senior
Economists in 2008, the Kenneth Galbraith Award in 2010, the Yrjo Jahnsson Lecture Prize
in 2012, and the Klein Lecture Prize in 2016. He received an honorary doctorate from
Tilburg University in 2014 and from the University of Ottawa in 2017. In addition, List
was named a Top 50 Innovator in the Non-Profit Times for 2015 and 2016 for his work on
charitable giving.
His research focuses on questions in microeconomics, with a particular emphasis on
using field experiments to address both positive and normative issues. For decades his field
experimental research has focused on issues related to the inner workings of markets, the
effects of various incentive schemes on market equilibria and allocations, and how behav-
ioral economics can augment the standard economic model. This includes research into
why inner city schools fail, why people discriminate, why people give to charity, why firms
fail, why women make less money than men in labor markets, and why people generally
do what they do.
His research includes over 200 peer-reviewed journal articles and several published
books, including the 2013 international best-seller, The Why Axis: Hidden Motives and the
Undiscovered Economics of Everyday Life (with Uri Gneezy).

About the Authors vii

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 Brief Contents

PART I Introduction to Economics 2

Chapter 1 The Principles and Practice of Economics 2
Chapter 2 Economic Methods and Economic Questions 20
Chapter 3 Optimization: Doing the Best You Can 42
Chapter 4 Demand, Supply, and Equilibrium 58

PART II Foundations of Microeconomics 86

Chapter 5 Consumers and Incentives 86
Chapter 6 Sellers and Incentives 114
Chapter 7 Perfect Competition and the Invisible Hand 144
Chapter 8 Trade 172
Chapter 9 Externalities and Public Goods 200
Chapter 10 The Government in the Economy: Taxation and
Regulation 230
Chapter 11 Markets for Factors of Production 260

PART III Market Structure 284

Chapter 12 Monopoly 284
Chapter 13 Game Theory and Strategic Play 310
Chapter 14 Oligopoly and Monopolistic Competition 334

PART IV Extending the Microeconomic Toolbox 360

Chapter 15 Trade-offs Involving Time and Risk 360
Chapter 16 The Economics of Information 378
Chapter 17 Auctions and Bargaining 396
Chapter 18 Social Economics 416

PART V Introduction to Macroeconomics 438

Chapter 19 The Wealth of Nations: Defining and Measuring
Macroeconomic Aggregates 438
Chapter 20 Aggregate Incomes 468

PART VI Long-Run Growth and Development 492

Chapter 21 Economic Growth 492
Chapter 22 Why Isn’t the Whole World Developed? 528

 ix

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 PART VII Equilibrium in the Macroeconomy 554
Chapter 23 Employment and Unemployment 554
Chapter 24 Credit Markets 580
Chapter 25 The Monetary System 604

PART VIII Short-Run Fluctuations and Macroeconomic

Policy 632
Chapter 26 Short-Run Fluctuations 632
Chapter 27 Countercyclical Macroeconomic Policy 660

PART IX Macroeconomics in a Global Economy 688

Chapter 28 Macroeconomics and International Trade 688
Chapter 29 Open Economy Macroeconomics 712

Chapters on the Web

Web chapters are available on MyEconLab.

WEB Chapter 1 Financial Decision Making

WEB Chapter 2 Economics of Life, Health, and the Environment
WEB Chapter 3 Political Economy

x Brief Contents

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 Contents

PART I Introduction to Economics 2 Evidence-Based Economics: How much do

wages increase when mandatory schooling laws
force people to get an extra year of schooling? 30
Chapter 1: The Principles and Practice 2.3 Economic Questions and Answers 31
of Economics 2 Summary 32
Key Terms 33
1.1 The Scope of Economics 3
Questions 33
Economic Agents and Economic Resources 3
Problems 33
Definition of Economics 4
Appendix: Constructing and Interpreting
Positive Economics and Normative Economics 5
Charts and Graphs 35
Microeconomics and Macroeconomics 6
A Study about Incentives 35
1.2 Three Principles of Economics 6 Experimental Design 35
1.3 The First Principle of Economics: Describing Variables 36
Optimization 7
Cause and Effect 38
Trade-offs and Budget Constraints  8
Appendix Key Terms 41
Opportunity Cost  9
Appendix Problems 41
Cost-Benefit Analysis  10
Evidence-Based Economics: Is Facebook
free?  11
Chapter 3: Optimization: Doing
1.4 The Second Principle of Economics:
the Best You Can 42
Equilibrium  13
3.1 Optimization: Choosing the Best Feasible
The Free-Rider Problem  14 Option 43
1.5 The Third Principle of Economics: Empiricism 15 Choice & Consequence: Do People Really
1.6 Is Economics Good for You?  16 Optimize? 44
Summary  17 3.2 Optimization Application: Renting the
Key Terms  17 Optimal Apartment 44
Questions  17 Before and After Comparisons 47
Problems  18 3.3 Optimization Using Marginal Analysis 48
Marginal Cost 49
Chapter 2: Economic Methods and Evidence-Based Economics: How does
Economic Questions 20 location affect the rental cost of housing? 52
Summary 55
2.1 The Scientific Method 21 Key Terms 56
Models and Data 21 Questions 56
An Economic Model 23 Problems 56
Evidence-Based Economics: How much more
do workers with a college education earn?  24 Chapter 4: Demand, Supply, and
Means and Medians 25 Equilibrium 58
Argument by Anecdote 25
2.2 Causation and Correlation 26 4.1 Markets 59
The Red Ad Blues 26 Competitive Markets 60
Causation versus Correlation 26 4.2 How Do Buyers Behave? 61
Choice & Consequence: Spend Now and Pay Demand Curves 62
Later? 29 Willingness to Pay 62
Experimental Economics and Natural Experiments 29

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 From Individual Demand Curves to Aggregated The Income Elasticity of Demand 106
Demand Curves 63 Letting the Data Speak: Should McDonald’s
Building the Market Demand Curve 64 Be Interested in Elasticities? 107
Shifting the Demand Curve 65 Summary 107
Evidence-Based Economics: How much more Key Terms 108
gasoline would people buy if its price were lower? 67 Questions 108
4.3 How Do Sellers Behave? 69 Problems 109
Supply Curves 69 Appendix: Representing Preferences
Willingness to Accept 69 with Indifference Curves: Another Use
From the Individual Supply Curve to the of the Budget Constraint 111
Market Supply Curve 70 Appendix Questions 113
Shifting the Supply Curve 71 Appendix Key Terms 113
4.4 Supply and Demand in Equilibrium 73
Curve Shifting in Competitive Equilibrium 75 Chapter 6: Sellers and Incentives 114
Letting the Data Speak: Technological
Breakthroughs Drive Down the Equilibrium 6.1 Sellers in a Perfectly Competitive Market 115
Price of Oil 76 6.2 The Seller’s Problem 115
4.5 What Would Happen If the Government Making the Goods: How Inputs Are Turned into
Tried to Dictate the Price of Gasoline? 78 Outputs 116
Choice & Consequence: The Unintended The Cost of Doing Business: Introducing Cost Curves 118
Consequences of Fixing Market Prices 80 The Rewards of Doing Business: Introducing
Summary 81 Revenue Curves 120
Key Terms 82 Putting It All Together: Using the Three
Questions 82 Components to Do the Best You Can 121
Problems 83 Choice & Consequence: Maximizing Total
Profit, Not Per-Unit Profit 123
6.3 From the Seller’s Problem to the
PART II Foundations of Supply Curve 124
Microeconomics 86 Price Elasticity of Supply 124
Shutdown 125
Choice & Consequence: Marginal Decision
Chapter 5: Consumers and Incentives 86 Makers Ignore Sunk Costs 127
5.1 The Buyer’s Problem 87 6.4 Producer Surplus 127
What You Like 87 6.5 From the Short Run to the Long Run 129
Prices of Goods and Services 88 Long-Run Supply Curve 130
Choice & Consequence: Absolutes Versus Choice & Consequence: Visiting a Car
Percentages 88 Manufacturing Plant 130
How Much Money You Have to Spend 89 6.6 From the Firm to the Market: Long-Run
5.2 Putting It All Together 90 Competitive Equilibrium 131
Price Changes 92 Firm Entry 131
Income Changes 93 Firm Exit 133
Zero Profits in the Long Run 133
5.3 From the Buyer’s Problem to the Demand
Curve 94 Economic Profit Versus Accounting Profit 134
5.4 Consumer Surplus 95 Evidence-Based Economics: How would an
ethanol subsidy affect ethanol producers? 135
An Empty Feeling: Loss in Consumer Surplus When
Price Increases 96 Summary 138
Evidence-Based Economics: Would a smoker Key Terms 139
quit the habit for $100 per month? 97 Questions 139
5.5 Demand Elasticities 100 Problems 140
The Price Elasticity of Demand 100 Appendix: When Firms Have Different Cost
The Cross-Price Elasticity of Demand 105 Structures 142

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 Chapter 7: Perfect Competition Determinants of a Country’s Comparative Advantage 190
and the Invisible Hand 144 8.5 Arguments Against Free Trade 190
National Security Concerns 190
7.1 Perfect Competition and Efficiency 145 Fear of Globalization 191
Social Surplus 146 Environmental and Resource Concerns 191
Pareto Efficiency 147 Infant Industry Arguments 191
7.2 Extending the Reach of the Invisible Hand: The Effects of Tariffs 191
From the Individual to the Firm 148 Choice & Consequence: Tariffs Affect Trade
7.3 Extending the Reach of the Invisible Hand: Between Firms 193
Allocation of Resources Across Industries 152 Evidence-Based Economics: Will free trade
7.4 Prices Guide the Invisible Hand 154 cause you to lose your job? 194
Deadweight Loss 156 Summary 196
Evidence-Based Economics: Do companies Key Terms 196
like Uber make use of the invisible hand? 157 Questions 196
The Command Economy 161 Problems 197
Choice & Consequence: FEMA and
Walmart After Katrina 161 Chapter 9: Externalities and
The Central Planner 163 Public Goods  200
Choice & Consequence: Command
and Control at Kmart 164 9.1 Externalities  201
7.5 Equity and Efficiency 164 A “Broken” Invisible Hand: Negative Externalities 202
Evidence-Based Economics: Can markets A “Broken” Invisible Hand: Positive Externalities 204
composed of only self-interested people Pecuniary Externalities 206
maximize the overall well-being of society? 165
Choice & Consequence: Positive Externalities
Summary 169 in Spots You Never Imagined 206
Key Terms 169 9.2 Private Solutions to Externalities 207
Questions 169 Private Solution: Bargaining 208
Problems 170 The Coase Theorem 208
Private Solution: Doing the Right Thing 209
Chapter 8: Trade 172 9.3 Government Solutions to Externalities 210
Government Regulation:
8.1 The Production Possibilities Curve 173
Command-and-Control Policies 210
Calculating Opportunity Cost 175
Evidence-Based Economics: What can the
8.2 The Basis for Trade: Comparative government do to lower the number of
Advantage 176 earthquakes in Oklahoma? 211
Specialization 177 Government Regulation: Market-Based Approaches 213
Absolute Advantage 177 Corrective Taxes 213
Choice & Consequence: An Experiment Corrective Subsidies 214
on Comparative Advantage 178
Letting the Data Speak: How to Value
The Price of the Trade 179 Externalities 215
8.3 Trade Between States 180 Letting the Data Speak: Pay as You Throw:
Choice & Consequence: Should LeBron James Consumers Create Negative Externalities Too! 216
Paint His Own House? 181 9.4 Public Goods 216
Economy-Wide PPC 182 Government Provision of Public Goods 218
Comparative Advantage and Specialization Choice & Consequence: The Free-Rider’s
Among States 183 Dilemma 218
8.4 Trade Between Countries 184 Private Provision of Public Goods 220
Determinants of Trade Between Countries 186 9.5 Common Pool Resource Goods 222
Letting the Data Speak: Fair Trade Products 187 Choice & Consequence: Tragedy of
Exporting Nations: Winners and Losers 187 the Commons 223
Importing Nations: Winners and Losers 188 Choice & Consequence: The Race to Fish 224
Where Do World Prices Come From? 189

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 Evidence-Based Economics: How can the Choice & Consequence: Producing Web
Queen of England lower her commute time to Sites and Computer Programs 266
Wembley Stadium? 225 Labor Market Equilibrium: Supply Meets Demand 266
Summary 226 Letting the Data Speak: “Get Your Hot
Key Terms 227 Dogs Here!” 266
Questions 227 Labor Demand Shifters 267
Problems 227 Factors That Shift Labor Supply 268
Letting the Data Speak: Do Wages Really
Chapter 10: The Government in the Go Down If Labor Supply Increases? 269
Economy: Taxation and Regulation 230 11.3 Wage Inequality 269
Differences in Human Capital 270
10.1 Taxation and Government Spending Choice & Consequence: Paying for Worker
in the United States 231 Training 271
Where Does the Money Come From? 232 Differences in Compensating Wage Differentials 271
Why Does the Government Tax and Spend? 234 Discrimination in the Job Market 271
Choice & Consequence: The Government Choice & Consequence: Compensating
Budget Constraint 235 Wage Differentials 273
Letting the Data Speak: Understanding Changes in Wage Inequality over Time 274
Federal Income Tax Brackets 236 Letting the Data Speak: Broadband
Letting the Data Speak: Reducing and Inequality 275
Inequality the Scandinavian Way 239 11.4 The Market for Other Factors
Taxation: Tax Incidence and Deadweight Losses 240 of Production: Physical Capital and Land 275
Choice & Consequence: The Deadweight Letting the Data Speak: The Top 1 Percent
Loss Depends on the Tax 243 Share and Capital Income 277
10.2 Regulation 245 Evidence-Based Economics: Is there
Direct Regulation 245 discrimination in the labor market? 278
10.3 Government Failures 248 Summary 280
The Direct Costs of Bureaucracies 249 Key Terms 280
Corruption  249 Questions 281
Underground Economy 250 Problems 281
10.4 Equity Versus Efficiency 250
10.5 Consumer Sovereignty and Paternalism 252 PART III Market Structure 284
The Debate 252
Evidence-Based Economics: What is the
optimal size of government? 253 Chapter 12: Monopoly  284
Letting the Data Speak: The Efficiency of
Government Versus Privately Run Expeditions 255 12.1 Introducing a New Market Structure 285
Choice & Consequence: Taxation 12.2 Sources of Market Power 285
and Innovation 255 Legal Market Power 286
Summary 256 Natural Market Power 287
Key Terms 256 Control of Key Resources 287
Questions 256 Choice & Consequence: Barriers to
Problems 257 Entry Lurk Everywhere 287
Economies of Scale 288
Chapter 11: Markets for Factors 12.3 The Monopolist’s Problem 289
Revenue Curves 290
of Production 260
Price, Marginal Revenue, and Total Revenue 292
11.1 The Competitive Labor Market 261 12.4 Choosing the Optimal Quantity and Price 294
The Demand for Labor 261 Producing the Optimal Quantity 294
11.2 The Supply of Labor: Your Setting the Optimal Price 294
Labor-Leisure Trade-off 264

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 How a Monopolist Calculates Profits 296 Chapter 14: Oligopoly and
Does a Monopoly Have a Supply Curve? 296 Monopolistic Competition 334
12.5 The “Broken” Invisible Hand: The Cost
of Monopoly 297 14.1 Two More Market Structures 335
12.6 Restoring Efficiency 298 14.2 Oligopoly 336
Three Degrees of Price Discrimination 299 The Oligopolist’s Problem 337
Letting the Data Speak: Third-Degree Oligopoly Model with Homogeneous Products 337
Price Discrimination in Action 301 Doing the Best You Can: How Should You
12.7 Government Policy Toward Monopoly 302 Price to Maximize Profits? 338
The Microsoft Case 302 Oligopoly Model with Differentiated Products 339
Price Regulation 303 Letting the Data Speak: Airline Price Wars 341
Evidence-Based Economics: Can a Collusion: Another Way to Keep Prices High 341
monopoly ever be good for society? 304 Letting the Data Speak: Apple versus
Summary 306 Samsung 342
Key Terms 306 Letting the Data Speak: To Cheat or
Questions 307 Not to Cheat: That Is the Question 344
Problems 307 Choice & Consequence: Collusion in Practice 346
14.3 Monopolistic Competition 346
Chapter 13: Game Theory and The Monopolistic Competitor’s Problem 346
Strategic Play 310 Doing the Best You Can: How a
Monopolistic Competitor Maximizes Profits 347
13.1 Simultaneous-Move Games 311 Letting the Data Speak: Why Do Some
Best Responses and the Prisoners’ Dilemma 312 Firms Advertise and Some Don’t? 348
Dominant Strategies and Dominant How a Monopolistic Competitor Calculates Profits 348
Strategy Equilibrium 313 Long-Run Equilibrium in a Monopolistically
Games without Dominant Strategies 313 Competitive Industry 349
13.2 Nash Equilibrium 315 14.4 The “Broken” Invisible Hand 351
Finding a Nash Equilibrium 316 Regulating Market Power 352
Choice & Consequence: Work or Surf? 317 14.5 Summing Up: Four Market Structures 353
13.3 Applications of Nash Equilibria 317 Evidence-Based Economics: How many firms
are necessary to make a market competitive? 354
Tragedy of the Commons Revisited 318
Summary 356
Zero-Sum Games 318
Key Terms 357
13.4 How Do People Actually
Play Such Games? 320 Questions 357
Game Theory in Penalty Kicks 320 Problems 357
Evidence-Based Economics: Is there value in
putting yourself in someone else’s shoes? 321
PART IV Extending the
13.5 Extensive-Form Games 323
Microeconomic Toolbox 360
Backward Induction 324
First-Mover Advantage, Commitment, and Vengeance 325
Evidence-Based Economics: Is there value Chapter 15: Trade-offs Involving
in putting yourself in someone else’s shoes Time and Risk 360
in extensive-form games? 326
Choice & Consequence: There Is More to Life 15.1 Modeling Time and Risk 361
Than Money 329 15.2 The Time Value of Money 362
Summary 330 Future Value and the Compounding of Interest 362
Key Terms 330 Borrowing Versus Lending 364
Questions 330 Present Value and Discounting 365
Problems 331

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 15.3 Time Preferences 367 Letting the Data Speak: Moral Hazard
Time Discounting 367 Among Job Seekers 392
Preference Reversals 368 Crime and Punishment as a Principal–Agent
Choice & Consequence: Failing to Problem 392
Anticipate Preference Reversals 369 Summary 393
Evidence-Based Economics: Do people exhibit Key Terms 393
a preference for immediate gratification? 369 Questions 393
15.4 Probability and Risk 370 Problems 393
Roulette Wheels and Probabilities 370
Independence and the Gambler’s Fallacy 371 Chapter 17: Auctions and Bargaining  396
Letting the Data Speak: Roulette
Wheels and Elections 371 17.1 Auctions 398
Expected Value 372 Types of Auctions 399
Extended Warranties 373 Open Outcry: English Auctions 400
Choice & Consequence: Is Gambling Letting the Data Speak: To Snipe or
Worthwhile? 373 Not to Snipe? 401
15.5 Risk Preferences 374 Open Outcry: Dutch Auctions 401
Summary 375 Sealed Bid: First-Price Auctions 403
Key Terms 376 Sealed Bid: Second-Price Auctions 403
Questions 376 The Revenue Equivalence Theorem 405
Problems 376 Evidence-Based Economics: How should
you bid in an eBay auction? 406
17.2 Bargaining 407
Chapter 16: The Economics of
What Determines Bargaining Outcomes? 407
Information  378
Bargaining in Action: The Ultimatum Game 408
16.1 Asymmetric Information 379 Bargaining and the Coase Theorem 410
Hidden Characteristics: Adverse Selection Evidence-Based Economics: Who determines
in the Used Car Market 380 how the household spends its money? 411
Hidden Characteristics: Adverse Letting the Data Speak: Sex Ratios Change
Selection in the Health Insurance Market 381 Bargaining Power Too 413
Market Solutions to Adverse Selection: Signaling 382 Summary 413
Choice & Consequence: Are You Key Terms 413
Sending a Signal Right Now? 383 Questions 413
Evidence-Based Economics: Why do Problems 414
new cars lose considerable value the
minute they are driven off the lot? 383 Chapter 18: Social Economics 416
Choice & Consequence: A Tale of a Tail 385
16.2 Hidden Actions: Markets with 18.1 The Economics of Charity and Fairness 417
Moral Hazard 385 The Economics of Charity 417
Letting the Data Speak: Moral Hazard Letting the Data Speak: Do People
on Your Bike 386 Donate Less When It’s Costlier to Give? 419
Market Solutions to Moral Hazard in the Labor Letting the Data Speak: Why Do People
Market: Efficiency Wages 386 Give to Charity? 420
Market Solutions to Moral Hazard in the The Economics of Fairness 421
Insurance Market: “Putting Your Skin in the Game” 387 Letting the Data Speak: Dictators in the Lab 424
Letting the Data Speak: Designing Evidence-Based Economics: Do people
Incentives for Teachers 388 care about fairness? 424
Evidence-Based Economics: Why is 18.2 The Economics of Trust and Revenge 426
private health insurance so expensive? 389
The Economics of Trust 426
16.3 Government Policy in a The Economics of Revenge 428
World of Asymmetric Information 390
Choice & Consequence: Does Revenge
Government Intervention and Moral Hazard 391
Have an Evolutionary Logic? 429
The Equity-Efficiency Trade-off 391

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 18.3 How Others Influence Our Decisions 430 The Consumer Price Index 461
Where Do Our Preferences Come From? 430 Inflation 462
The Economics of Peer Effects 430 Adjusting Nominal Variables 462
Letting the Data Speak: Is Economics Summary 463
Bad for You? 431 Key Terms 464
Following the Crowd: Herding 432 Questions 464
Letting the Data Speak: Your Peers Problems 464
Affect Your Waistline 433
Choice & Consequence: Are You
an Internet Explorer? 434 Chapter 20: Aggregate Incomes 468
Summary 434
20.1 Inequality Around the World 469
Key Terms 434
Measuring Differences in GDP per Capita 469
Questions 435
Letting the Data Speak: The
Problems 435 Big Mac Index 471
Inequality in GDP per Capita 471
PART V Introduction to GDP per Worker 471
Macroeconomics 438 Productivity 472
GDP and the Standard of Living 473
Chapter 19: The Wealth of Nations: Choice & Consequence: Dangers of
Just Focusing on GDP per Capita 475
Defining and Measuring
20.2 Productivity and the Aggregate
Macroeconomic Aggregates 438 Production Function 477
Productivity Differences 477
19.1 Macroeconomic Questions 439
The Aggregate Production Function 477
19.2 National Income Accounts: Production =
Expenditure = Income 441 Labor 478
Production 441 Physical Capital and Land 478
Expenditure 442 Technology 478
Income 442 Representing the Aggregate Production Function 479
Circular Flows 443 20.3 The Role and Determinants
of Technology 480
National Income Accounts: Production 444
Technology 480
National Income Accounts: Expenditure 446
Dimensions of Technology 480
Evidence-Based Economics: In the
United States, what is the total market value Letting the Data Speak: Moore’s Law 482
of annual economic production? 448 Choice & Consequence: Academic
Letting the Data Speak: Saving versus Misallocation in Nazi Germany 483
Investment 450 Letting the Data Speak: Efficiency of
National Income Accounting: Income 451 Production and Productivity at the Company Level 483
19.3 What Isn’t Measured by GDP? 451 Entrepreneurship 484
Physical Capital Depreciation 452 Letting the Data Speak: Monopoly
and GDP 484
Home Production 452
Evidence-Based Economics: Why
The Underground Economy 453
is the average American so much richer
Negative Externalities 454 than the average Indian? 485
Gross Domestic Product versus Gross Summary 487
National Product 454
Key Terms 487
The Increase in Income Inequality 455
Questions 487
Leisure 456
Problems 488
Does GDP Buy Happiness? 456
Appendix: The Mathematics of Aggregate
19.4 Real versus Nominal 457 Production Functions 490
The GDP Deflator 459

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 PART VI Long-Run Growth and Calculating Average (Compound) Growth Rates 526
Appendix Key Terms 527
Development 492
Appendix Problems 527

Chapter 21: Economic Growth 492 Chapter 22: Why Isn’t the Whole
21.1 The Power of Economic Growth 493 World Developed? 528
A First Look at U.S. Growth 493
22.1 Proximate Versus Fundamental
Exponential Growth 494 Causes of Prosperity 529
Choice & Consequence: The Power Geography 530
of Exponential Growth 496
Culture 531
Patterns of Growth 497
Institutions 531
Letting the Data Speak: Levels
A Natural Experiment of History 532
versus Growth 500
21.2 How Does a Nation’s Economy Grow? 502
22.2 Institutions and Economic Development 534
Inclusive and Extractive Economic Institutions 534
Optimization: The Choice Between Saving and
Consumption 502 How Economic Institutions Affect
Economic Outcomes 535
What Brings Sustained Growth? 503
Letting the Data Speak: Democracy
Choice & Consequence: Is Increasing
and Growth 536
the Saving Rate Always a Good Idea? 504
Letting the Data Speak: Divergence
Knowledge, Technological Change, and Growth 504
and Convergence in Eastern Europe 538
Letting the Data Speak: Technology
The Logic of Extractive Economic Institutions 541
and Life Expectancy 506
Inclusive Economic Institutions and the
Letting the Data Speak: The Great
Industrial Revolution 541
Productivity Puzzle 507
Letting the Data Speak: Blocking
Evidence-Based Economics: Why are you
the Railways 542
so much more prosperous than your great-
great-grandparents were? 508 Evidence-Based Economics: Are
tropical and semitropical areas condemned
21.3 The History of Growth and Technology 510
to poverty by their geographies? 543
Growth Before Modern Times 510
22.3 Is Foreign Aid the Solution to
Malthusian Limits to Growth 511 World Poverty? 548
The Industrial Revolution 512 Choice & Consequence: Foreign Aid
Growth and Technology Since the Industrial and Corruption 549
Revolution 512 Summary 550
21.4 Growth, Inequality, and Poverty 512 Key Terms 551
Growth and Inequality 512 Questions 551
Letting the Data Speak: Income Problems 551
Inequality in the United States 513
Choice & Consequence: Inequality
versus Poverty 514 PART VII Equilibrium in the
Growth and Poverty 514 Macroeconomy 554
How Can We Reduce Poverty? 515
Summary 516
Key Terms 516
Chapter 23: Employment and
Questions 517 Unemployment 554
Problems 517
23.1 Measuring Employment and
Appendix: The Solow Growth Model 519 Unemployment 555
The Three Building Blocks of the Solow Model 519 Classifying Potential Workers 555
Steady-State Equilibrium in the Solow Model 520 Calculating the Unemployment Rate 556
Determinants of GDP 521 Trends in the Unemployment Rate 557
Dynamic Equilibrium in the Solow Model 523 23.2 Equilibrium in the Labor Market 558
Sources of Growth in the Solow Model 524 The Demand for Labor 558

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 Shifts in the Labor Demand Curve 560 Bank Regulation and Bank Solvency 596
The Supply of Labor 561 Evidence-Based Economics: How
Shifts in the Labor Supply Curve 562 often do banks fail? 597
Letting the Data Speak: Who Is Choice & Consequence: Too Big to Fail 599
Unemployed? 563 Choice & Consequence: Asset Price
Equilibrium in a Competitive Labor Market 564 Fluctuations and Bank Failures 600
23.3 Why Is There Unemployment? 565 Summary 600
Voluntary Unemployment 565 Key Terms 601
Job Search and Frictional Unemployment 565 Questions 601
23.4 Wage Rigidity and Structural Problems 602
Unemployment 566
Minimum Wage Laws 566 Chapter 25: The Monetary System 604
Choice & Consequence: Luddites and Robots 567
Labor Unions and Collective Bargaining 569 25.1 Money 605
The Functions of Money 605
Efficiency Wages 569
Types of Money 606
Choice & Consequence: Minimum Wage
Laws and Employment 570 The Money Supply 606
Downward Wage Rigidity 571 Choice & Consequence: Non-Convertible
Currencies in U.S. History 607
23.5 Cyclical Unemployment and the
Natural Rate of Unemployment 572 25.2 Money, Prices, and GDP 608
Evidence-Based Economics: What Nominal GDP, Real GDP, and Inflation 608
happens to employment and unemployment The Quantity Theory of Money 609
if local employers go out of business? 574 25.3 Inflation 610
Summary 576 What Causes Inflation? 610
Key Terms 577 The Consequences of Inflation 610
Questions 577 The Social Costs of Inflation 612
Problems 577 The Social Benefits of Inflation 613
Evidence-Based Economics: What
Chapter 24: Credit Markets 580 caused the German hyperinflation
of 1922–1923? 614
24.1 What Is the Credit Market? 581 25.4 The Federal Reserve 615
Borrowers and the Demand for Loans 581 The Central Bank and the Objectives of
Real and Nominal Interest Rates 582 Monetary Policy 615
The Credit Demand Curve 583 What Does the Central Bank Do? 616
Saving Decisions 585 25.5 Bank Reserves and the Plumbing of
The Credit Supply Curve 585 the Monetary System 617
Choice & Consequence: Why Do Bank Reserves and Liquidity 618
People Save? 586 The Demand Side of the Federal Funds Market 619
Equilibrium in the Credit Market 588 The Supply Side of the Federal Funds Market and
Credit Markets and the Efficient Allocation Equilibrium in the Federal Funds Market 620
of Resources 589 Choice & Consequence: Obtaining
24.2 Banks and Financial Intermediation: Reserves Outside the Federal Funds Market 624
Putting Supply and Demand Together 589 The Fed’s Influence on the Money Supply
Letting the Data Speak: Financing and the Inflation Rate 624
Start-Ups 591 The Relationship Between the Federal Funds
Assets and Liabilities on the Balance Rate and the Long-Term Real Interest Rate 625
Sheet of a Bank 591 Choice & Consequence: Two Models
24.3 What Banks Do 593 of Inflation Expectations 626
Identifying Profitable Lending Opportunities 593 Summary 629
Maturity Transformation 593 Key Terms 629
Management of Risk 594 Questions 630
Bank Runs 595 Problems 630

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 PART VIII Short-Run Fluctuations Fiscal Policies That Directly Target the
Labor Market 678
and Macroeconomic Letting the Data Speak: A Different
Policy 632 Type of Fiscal Policy 679
Policy Waste and Policy Lags 680
Chapter 26: Short-Run Fluctuations 632 Evidence-Based Economics: How
much does government expenditure
26.1 Economic Fluctuations and stimulate GDP? 681
Business Cycles 633 Choice & Consequence: The New
Patterns of Economic Fluctuations 635 Administration’s Fiscal Policies 683
The Great Depression 637 Summary 683
Key Terms 684
26.2 Macroeconomic Equilibrium and
Economic Fluctuations 639 Questions 684
Labor Demand and Fluctuations 639 Problems 685
Sources of Fluctuations 641
Letting the Data Speak: Unemployment PART IX Macroeconomics in a
and the Growth Rate of Real GDP: Okun’s Law 642
Multipliers and Economic Fluctuations 646
Global Economy 688
Equilibrium in the Medium Run: Partial
Recovery and Full Recovery 647 Chapter 28: Macroeconomics and
26.3 Modeling Expansions 651 International Trade 688
Evidence-Based Economics: What
caused the recession of 2007–2009? 652 28.1 Why and How We Trade 689
Summary 656 Absolute Advantage and Comparative
Key Terms 658 Advantage 689
Questions 658 Comparative Advantage and International
Problems 658 Trade 692
Efficiency and Winners and Losers from
Trade 693
Chapter 27: Countercyclical How We Trade 695
Macroeconomic Policy 660 Letting the Data Speak: Living in
an Interconnected World 696
27.1 The Role of Countercyclical Policies in Trade Barriers: Tariffs 696
Economic Fluctuations 661
Choice & Consequence: Trade
27.2 Countercyclical Monetary Policy 662 Policy and Politics 697
Controlling the Federal Funds Rate 663 28.2 The Current Account and the
Other Tools of the Fed 666 Financial Account 698
Expectations, Inflation, and Monetary Policy 667 Trade Surpluses and Trade Deficits 699
Contractionary Monetary Policy: Control International Financial Flows 699
of Inflation 667 The Workings of the Current Account
Letting the Data Speak: Managing and the Financial Account 700
Expectations 668
28.3 International Trade, Technology
Zero Lower Bound 670 Transfer, and Economic Growth 704
Choice & Consequence: Policy Mistakes 671 Letting the Data Speak: From IBM
Policy Trade-offs 672 to Lenovo 705
27.3 Countercyclical Fiscal Policy 673 Evidence-Based Economics: Are
Fiscal Policy Over the Business Cycle: Automatic companies like Nike harming workers
and Discretionary Components 673 in Vietnam? 706
Analysis of Expenditure-Based Fiscal Policy 674 Summary 709
Analysis of Taxation-Based Fiscal Policy 676 Key Terms 709
Letting the Data Speak: The Response Questions 709
of Consumption to Tax Cuts 678 Problems 710

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 Chapter 29: Open Economy Interest Rates, Exchange Rates, and
Net Exports 729
Macroeconomics 712
Letting the Data Speak: The
29.1 Exchange Rates 713 Costs of Fixed Exchange Rates 731
Nominal Exchange Rates 713 Summary 732
Flexible, Managed, and Fixed Exchange Rates 715 Key Terms 732
29.2 The Foreign Exchange Market 716 Questions 733
How Do Governments Intervene in the Problems 733
Foreign Exchange Market? 718
Defending an Overvalued Exchange Rate 719 Endnotes  737
Choice & Consequence: Fixed Exchange Glossary  745
Rates and Corruption 721 Credits  757
Evidence-Based Economics: How Index  759
did George Soros make $1 billion? 722
29.3 The Real Exchange Rate and Exports 724
From the Nominal to the Real Exchange Rate 724 CHAPTERS ON THE WEB
Co-Movement Between the Nominal and the Web chapters are available on MyEconLab.
Real Exchange Rates 725
WEB Chapter 1 Financial Decision Making
The Real Exchange Rate and Net Exports 726
Letting the Data Speak: Why Did the WEB Chapter 2 Economics of Life, Health, and
Chinese Authorities Keep the Yuan Undervalued? 727 the Environment
29.4 GDP in the Open Economy 728 WEB Chapter 3 Political Economy
Revisiting Black Wednesday 729

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Another random document with
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Almighty in what they were about to do; then they went forth
heartened and emboldened by the conviction that the coming battle
was the Lords, and to fall therein would be a sure passport to
heaven. It would be untrue to say that all the Africanders were of this
belief and practice, but undoubtedly the majority of them so believed
and so acted.

Many of the whites quarreled with their ministers because they

persisted in teaching Christianity to the people held to be accursed—
by their masters. The Dutch term Zendeling, originally signifying
“missionary,” was turned into an epithet of reproach, bearing the new
interpretation of a petty artisan and pedlar, who, under pretense of
instructing the natives, wandered [127]about prosecuting a secular
business for gain—a man to be despised and shunned.

Instances are not wanting in the records of this period to show that
the spirit and practice of some Africanders were as set forth above.
Mr. Holden, in the appendix to his “History of Natal,” quotes from a
friend of the enslaved blacks as follows:

“As to slavery, in spite of the treaty with the Assistant Commissioner, two
Kaffir boys have this very week been sold here—the one for a hundred rix-
dollars to a Boer, and the other for a hundred and fifty rix-dollars to a
dealer at Rustenburg. Last month, also, two were sold to Messrs. S. and
G. Maritz, traders of Natal, and were immediately ‘booked’ (ingeboekt)
with the Landdrost of Potchefstroom for twenty-five years each! Is this
according to treaty? If not, why does not Governor Cathcart interfere by
force, if reasoning be unavailing? For, without some force, I see little
prospect of the natives being saved from utter and universal slavery.”

Mr. Holden also quotes from the “Grahamstown Journal” of

September 24, 1853, the following significant incident:

“We are credibly informed that, in a private interview with Sir G. R. Clark,
one of the most [128]respectable and loyal Boers, resident on a
 confiscated farm in the most disaffected district, ‘inter alias res,’ plainly
told Sir George that he had some twenty or thirty Bushman children on his
place; and that if government withdrew he must sell them, as, if he did not
do so, other persons would come and take them, and sell them. The reply,
as stated to us, was to the effect, ‘You have been too long a good subject
to lead me to think you would do such a thing now.’ To this the answer
was, ‘I have been a good subject; but if government will make me a rascal,
I cannot help it’ ”

These testimonies coming from separate and widely distant sources,

and giving the particulars of direct and positive slavery practiced
under another name, leave no reasonable doubt that the spirit of the
compact between the British government and the Africanders was
being violated.

It has been thought that the account of the same matter given by Mr.
Theal, in his “South Africa,” puts an entirely different aspect on the
practice of “apprenticeship.”

“At this time,” he writes (1857), “complaints were beginning to be heard

that the practice of transferring apprentices, or selling indentures, was
becoming frequent. It was rumored also [129]that several lawless
individuals were engaged in obtaining black children from neighboring
tribes, and disposing of them under the name of apprentices. How many
such cases occurred cannot be stated with any pretension to accuracy,
but the number was not great. The condition of the country made it almost
impossible to detain any one capable of performing service longer than he
chose to remain with a white master, so that even if the farmers in general
had been inclined to become slaveholders, they could not carry such
inclinations into practice. The acts of a few of the most unruly individuals
in the country might, however, endanger the peace and even the
independence of the republic. The president, therefore, on the 29th of
September, 1857, issued a proclamation pointing out that the sale or
barter of black children was forbidden by the recently adopted constitution,
and prohibiting transfers of apprenticeships, except when made before
landdrosts.”
Treating of a later period (1864–65), he returns to this matter, saying:

“A subject that was much discussed in Europe, as well as in South Africa,

during this period was the existence of slavery in the republic. Charges
against the burghers of reducing [130]weak and helpless blacks to a
condition of servitude were numerous and boldly stated on one side, and
were indignantly denied on the other. That the laws were clearly against
slavery goes for nothing, because in a time of anarchy law is a dead letter.
There is overwhelming evidence that blacks were transferred openly from
one individual to another, and there are the strongest assertions from men
of undoubted integrity that there was no slavery. To people in Europe it
seemed impossible that both should be true, and the opinion was
generally held that the farmers of the interior of South Africa were certainly
slave-holders.

“Since 1877 much concerning this matter that was previously doubtful has
been set at rest. On the 12th of April of that year the South African
republic was proclaimed British territory, and when, soon afterward,
investigation was made, not a single slave was set free, because there
was not one in the country. In the very heart of the territory kraals of
blacks were found in as prosperous a condition as in any part of South
Africa. It was ascertained that these blacks had always lived in peace with
the white inhabitants, and that they had no complaints to make. Quite as
strong was the evidence afforded by the number [131]of the Bantu. In 1877
there were, at the lowest estimate, six times as many black people living in
a state of semi-independence within the borders of the South African
Republic as there had been on the same ground forty years before. Surely
these people would not have moved in if the character of the burghers
was such as most Englishmen believed it to be. A statement of actual
facts is thus much more likely now to gain credence abroad than would
have been the case in 1864.

“The individuals who were termed slaves by the missionary party were
termed apprentices by the farmers. The great majority—probably nineteen
out of every twenty—were children who had been made prisoners in the
wars which the tribes were continually waging with each other. In olden
days it had been the custom for the conquering tribe to put all the
conquered to death, except the girls and a few boys who could be made
useful as carriers. More recently they had become less inhuman, from
 having found out that for smaller children they could obtain beads and
other merchandise.

“With a number of tribes bordering on the republic ready to sell their

captives, with the Betshuana everywhere prepared to dispose of the
[132]children of their hereditary slaves, a few adventurous Europeans were
found willing to embark in the odious traffic. Wagon loads of children were
brought into the republic, where they were apprenticed for a term of years
to the first holder, and the deeds of apprenticeship could afterward be
transferred before a landdrost. This was the slavery of the South African
Republic. Its equivalent was to be found a few years earlier in the Cape
colony, when negroes taken in slave-ships were apprenticed to
individuals. There would have been danger in the system if the demand
for apprentices had been greater. In that case the tribes might have
attacked each other purposely to obtain captives for sale. But the demand
was very limited, for the service of a raw black apprentice was of no great
value. A herd boy might be worth something more than his food, clothing,
and a few head of cattle which were given him when his apprenticeship
expired; but no other class of raw native was.

“It is an open question whether it was better that these children should
remain with the destroyers of their parents, and according to chance grow
up either as slaves or as adopted members of the conquering tribe; or that
they should serve ten or fifteen years as apprentices to white people,
[133]acquire some of the habits of European life, and then settle down as
freemen with a little property. It was answered in 1864, and will be
answered to-day according to the bias of the individual.”

After all, Mr. Theal’s account of it does not materially change the
aspect of the system of enforced servitude that prevailed in the
Africander communities after they became independent. These
bond-children were either captured or bought from dealers in
children; they were held under bill of sale and indenture; and they
were sold from master to master by legal transfer of indenture before
a magistrate.

Mr. Theal’s low estimate of the value of the services that could be
rendered by raw black children, and of the limited demand for them,
is not in harmony with his own statement that such children were
brought into the republic in wagon loads, nor with the testimony,
quoted by Mr. Holden, covering two specific cases wherein one Kaffir
boy was sold for one hundred, and another for one hundred and fifty
rix-dollars. And his averment that in 1877 the British authorities could
not find a single slave to liberate in all the territory of the South
African Republic is simply amusing when viewed in the light of what
he states on the next page—that this system of enforced
[134]servitude under indentures that were legally merchantable “was
the slavery of the South African Republic.” Undoubtedly; and, so far
as is known, no other form of slavery was ever seriously charged
against the Africanders after their independence was established. It
is matter of surprise, however, that the British conscience of this
period was not able to scent the malodor of slavery under the new
form and title of “apprenticeship” which covered a marketable
property-right in the human chattel. [135]
[Contents]
CHAPTER IX.
 THIRD CONTACT OF AFRICANDER AND BRITON—IN THE
ORANGE FREE STATE.

The “Great Trek” of 1836 and 1838 removed from the old colony at the Cape an
element in the population which, however worthy in some regards, was unrestful
and disaffected, leaving abundant room for a new immigration from Europe. It was
some years, however, before there was any considerable influx from continental
Europe. Judged by the grim rumors that were afloat everywhere, South Africa was a
dangerous country to live in because of the warlike and merciless Kaffirs; and the
trend of British emigration was yet towards America.

About 1845 the tide of fortune-seeking people was turned towards Cape Colony.
The British government of this time stimulated immigration to that field so liberally
that in five years between four and five thousand loyal subjects from the mother
country removed to the Cape. Later, [136]a considerable number of disbanded
German soldiers who had served under the British colors in the Crimean war were
sent there as citizens, and in 1858 over two thousand German civilians of the
peasant order were settled along the south coast on lands once occupied by the
Kaffirs.
 GENERAL JOUBERT.

Industries natural to the climate and soil were slowly but steadily developed. Sheep
and cattle raising, and agriculture to a limited extent, became sources of wealth,
and correspondingly expanded the export trade. Public finances were gradually
restored to a healthy state, churches and schools sprang up, and there was no
serious drawback to the progress of the colony but the frequent Kaffir invasions
across the eastern border. These cost much loss of life and property to the raided
settlements, but the expense of the resulting wars was borne by the home
government. Under British rule the population had increased from 26,000
Europeans in 1806 to 182,000 in 1865.
With the growth of population there came changes in the form of government. The
earlier governors exercised almost autocratic power, fearing nothing but a possible
appeal against their acts to the Colonial Office in London. It should be stated,
however, that the colonists [137]found as frequent cause to complain of the home
government as of their governors. The occasional irritation which broke out into
open protest was caused, for the most part, by difficulties with the natives. The
Europeans, dwelling among an inferior race, naturally looked upon the natives as
existing for their benefit, and bitterly resented the disposition of both the imperial
authorities and the governors to give equal civil rights and protection to the blacks.
The missionaries were the special objects of this resentment, because they held
themselves bound by their sacred office to denounce the wrongs inflicted on the
Kaffirs, and to even defend their conduct in rebelling against oppression.

These unfortunate dissensions had the effect of uniting the English and the Dutch
colonists in questions of policy and government regarding the natives. After various
attempts to satisfy the people with a governor appointed by the crown and a
Legislative Council constituted by the governor’s nomination and imperial
appointment, the home authorities, in 1854, yielded to the public demand for
representative institutions.

A legislature, consisting of a Legislative Council and a House of Assembly, was

established, both to be elected on a franchise wide [138]enough to include people of
any race or color holding the reasonable property qualification. The sole check upon
the colonial legislature retained by the imperial government was the right of the
British crown to disallow any of its acts considered objectionable, on constitutional
or other grounds, by her Majesty’s ministers. The executive power remained, for a
time, with the governor and his council, who were appointed by the crown and in no
way responsible to the colonial houses. Later, the executive power was taken from
the governors and vested in a cabinet of ministers responsible to the colonial
legislature and holding office during its pleasure.

The range of industries followed by the people of Cape Colony was not enlarged
until the discovery of diamonds in 1869. This brought in a sudden rush of population
from Europe and America and so inflated trade that the colonial revenue was more
than doubled in the next five years. Then began that unparalleled development of
mineral resources in South Africa which created immense wealth and furnished the
elements of a political situation whose outcome the wisest cannot foresee.

With this general view of the condition of Cape Colony in the three decades
succeeding the [139]Great Trek of the Africanders, we turn again to the special study
proposed and consider the chain of events that led up to the third unfriendly contact
between Boer and Briton—this time beginning in the Orange Free State.

By the conventions of 1852 and 1854 Great Britain formally relinquished all claim to
that part of the interior of South Africa lying to the north of Cape Colony, and
recognized the republics of the Orange Free State and the Transvaal. There can be
no doubt of the sincerity of the British government in taking this action. The
prevailing desires actuating both the parliament and the executive were to be rid of
the responsibility and expense of governing these regions, and to leave the two new
Africander republics to work out their own destiny in their own way.

For a few years the relations of the Cape government and its northern neighbors
were friendly. The first occurrence that disturbed the welcome peace and harmony
was a serious war which broke out in 1858 between the Basutos under Moshesh
and the Orange Free State. The Basutos laid claim to certain farms, held under
English titles, in Harrismith, Wynberg and Smithfield districts. These were taken
possession [140]of by the petty Basuto captains, and when attempts were made to
eject the intruders, Moshesh, the paramount chief, and his eldest son Letsie,
assumed the right to interfere. This episode, together with other unfriendly acts on
the part of the Basutos, brought on a condition which, it became evident, nothing
but war could remedy. Accordingly, the Volksraad of the Orange Free State
authorized the President, Mr. Boshof, to take any steps necessary to prevent
intrusion upon the territory of the State. After much and very insincere diplomatic
correspondence, the time of which was used by the Free State government in
collecting the forces of its western and northern divisions, and by the Basutos in
assembling their warriors, petty raids began the conflict and led on to hostilities on a
larger scale near the end of March, 1858.

By the 26th of April Mr. Boshof became convinced that the Free State could not
hold its own against the Basutos, and that the salvation of the country from being
overrun by its enemies depended upon obtaining aid from some quarter. Acting on
this conviction, on the 24th of April Mr. Boshof wrote Sir George Grey, governor of
Cape Colony, informing him of the critical condition of the Free State, and imploring
his mediation. [141]Sir George, after obtaining the sanction of the House Assembly
to such a course, immediately tendered his services as mediator to Mr. Boshof and
Moshesh, and was unconditionally and cordially accepted by both. Thereupon a
cessation of hostilities was agreed to pending the arrangement of final terms of
peace by Sir George.

In the meantime, the Free State was being ravaged on its western border by petty
chiefs, who saw in the struggle between the whites and the powerful Basutos a
favorable opportunity to enrich themselves with spoil. In the distress occasioned by
these forays the Free State was aided by a force of burghers from the Transvaal
Republic, under Commandant Paul Kruger.

Out of this friendly act there grew up a desire and even a proposition to unite the
two republics in one. President Pretorius, Commandant Paul Kruger, and about
twenty other representatives from the Transvaal visited Bloemfontein to confer with
the Free State Volksraad on the matter of union—a measure considered by many
the only means of saving the country from its savage foes.

While the conference on union was in progress there arrived, on the 11th of June, a
letter [142]from Sir George Grey announcing that in case an agreement to unite the
two republics were concluded, the conventions of 1852 and 1854—guaranteeing
their separate independence—would no longer be considered binding by Great
Britain. Undoubtedly this action evinced a desire, not to say a determination, that
the Free State should find safety not by union with the sister republic to the north,
but by coming again under British sovereignty and forming one of a group of
colonies to be united in a great British Dominion in South Africa. The negotiations
for union were dropped on the receipt of Sir George’s letter, and both parties
resolved to appoint commissioners to confer with him after peace with the Basutos
should be arranged.

It was not until the 20th of August that Sir George Grey arrived at Bloemfontein to
act as mediator between Moshesh and the Free State. While preliminaries were
being discussed the governor received urgent dispatches from London ordering him
to send all available troops to India, where the Sepoy rebellion was raging. It
became, therefore, a matter of supreme importance to establish peace between the
Free State and the Basutos at once—for not a soldier could safely be spared until
that was accomplished. [143]On the 29th of September the treaty was completed
and signed. It settled a new frontier for the Free State next to Basutoland, and
bound Moshesh to either punish marauders of his people himself, or consent that
the Free State authorities should do so.

This peace lasted only seven years. In 1865 new troubles arose leading to a
renewal of war between the Free State and Moshesh. Again the governor of Cape
Colony acted as mediator, but his decisions were rejected by the Basutos, and new
hostilities began. This time, by a heroic effort made in 1868, the whites defeated
and scattered the Basutos with great slaughter, and were at the point of utterly
breaking their power, when the always politic Moshesh appealed to the British High
Commissioner at the Cape to take his people under British protection.
The commissioner doubtless considered the interests of Cape Colony which, in the
event of a dispersion of the Basutos, might be overrun by the fugitives, and suffer
injury thereby. And it is evident that he was unwilling that the Free State should
strengthen itself, beyond the necessity of ever seeking readmission to the British
dominions, by the annexation of Basutoland. So, looking to the safety of the old
colony, and to the [144]hope of some day adding thereto the Orange Free State, the
commissioner took the defeated Basutos under the wing of the imperial government
and declared them British subjects.

The Free State was allowed to retain a considerable area of good land which it had
conquered on the north side of the Caledon River, but the adjustment reached was
anything but satisfactory. The British had now established their authority to the
south of the republic all the way from Cape Colony to Natal, and, thus, had
extinguished a second time the persistent Africander hope of extending their
territory to the sea. Thus, in 1869, recommenced the British advance toward the
interior.

Another momentous step towards enlarging the sphere of British influence was
taken almost immediately. Diamonds were discovered in 1869, in a district lying
between the Modder and the Vaal rivers, where the present town of Kimberley
stands. Within a few months thousands of diggers and speculators from all parts of
South Africa, Europe, America, and from some parts of Asia, thronged into the
region and transformed it into a place of surpassing value and interest. The
question of ownership was raised at once. The Orange Free State claimed it. The
Transvaal [145]Republic claimed it. It was claimed by Nicholas Waterboer, a Griqua
captain, son of old Andries Waterboer; his claim being based on an abortive treaty
made with the elder Waterboer in 1834, when, at Doctor Philip’s suggestion, the
attempt was made to interpose between the old colony and the northern
populations a line of three native states under British protection. And it was claimed
by a native Batlapin chief.

Three of these claimant—the Transvaal Republic, Nicholas Waterboer for the

Griquas, and the Batlapin chief for his clan—agreed to settle the conflict by
arbitration, naming the governor of Natal as arbitrator. The governor promptly
awarded the disputed ownership to Nicholas Waterboer the Griqua, who as
promptly placed himself under the British government, which, with equal
promptitude, constituted the district a crown colony under the name of Griqualand.
The Orange Free State, not having been a party to the arbitration, protested, and
was afterwards sustained by the decision of a British court, which found that
Waterboer’s claim to the territory was null and void. But the colony had been
constituted and the British flag unfurled over it before the finding of the court could
stay proceedings. [146]

Without admitting or denying the Free State’s contention, the British government
obtained a quitclaim title for a money consideration. It was represented that a
district so difficult to keep in order, because of the transient and turbulent character
of the population, should be under the control of a more vigorous government than
that of the Free State. Finally, the British offered and the Free State authorities
accepted, £90,000 in settlement of any claim the republic might have to the territory
of Griqualand.

The incident closed with the payment and acceptance, in 1876, of the price agreed
upon. But the Africanders of the Free State had the feeling at the time—and it never
ceased to rankle in their breasts—that they had been made the victims of sharp
practice; that the diamond-bearing territory had been rushed into the possession of
the British and made a crown colony without giving them a fair opportunity to prove
their claim to it; and that, while the price offered and paid was a tacit recognition of
the validity of their claim, it was so infinitesimal in proportion to the rights conveyed
as to imply that in British practice not only is possession nine points in ten of the law
but that it also justifies the holder in keeping back nine parts out of ten of the value.
[147]

Nor was this the only British grievance complained of at this time by the Free State.
The project of uniting the two republics for greater strength and mutual safety had
been vetoed for no apparent reason than to keep them weak so that they might the
sooner become willing to re-enter the British dominions in South Africa. And the
British High Commissioner at the Cape had taken the vanquished Basutos and their
territory under imperial protection at the moment when the victorious Free State
was about to reduce them to permanent submission, and to extend its territory to
the sea—again interposing the arm of Great Britain to prevent the strengthening of
the republic by its proposed acquisition of Basutoland and the gaining of a seaport
at the mouth of the St. John River.

Nevertheless, the Orange Free State accepted the situation philosophically and,
outwardly, continued on friendly terms with the British government until the outbreak
of war between that power and the Africanders of the Transvaal in 1899. [148]
[Contents]
CHAPTER X.
THIRD CONTACT OF AFRICANDER AND BRITON—IN THE
TRANSVAAL.

The aggressive policy of the British, which had served to widen and deepen the
breach between them and the Africanders of the Free State, was felt in the
Transvaal Republic, also, and led to an open rupture in 1880. It will be
necessary to trace somewhat carefully the conditions and events which brought
on that conflict.

The Africanders who had settled beyond the Vaal River were of a ruder sort than
their brethren of the Orange River district. Moreover, the reckless, unprincipled,
and even criminal classes were attracted to the Transvaal from various parts of
South Africa, seeking freedom from the restraints experienced under the stricter
government prevailing in the British colonies. These occasioned much scandal,
and provoked many conflicts with the Kaffirs by their lawlessness and violence
along the border and in the wilder districts of the territory. [149]

The farmers of the Vaal in a general way considered themselves one people, but
had become grouped in several districts separated by considerable distances.
Thus, in 1852, there were four separate communities—Potchefstroom, Utrecht,
Lyndenburg, and Zoutspansberg, each having its volksraad and president.
There was no co-ordinate action of the whole for internal administration and
public improvement, but for defense against the natives there was a sort of
federative union—more a matter of mutual understanding and consent than of
loyalty to a formal written document. That there was occasional independent
action by a single community in reference to outside matters is evident from the
invasion of the Orange Free State by the people of the Potchefstroom district in
1857, under the leadership of Mr. Pretorius. The object was to conquer the Free
State, and was abandoned only when it was found that the young sister republic
was disposed and prepared to defend itself. This invasion resulted in a treaty by
which the independence, boundaries and mutual obligations of the two republics
were fully defined and recognized.

In 1858 a single volksraad was chosen for all the four districts north of the Vaal,
and the [150]“Grondwet” on Fundamental Law—an instrument in the nature of a
federal constitution—was prepared by delegates specially elected for that
purpose. This was adopted at once by Potchefstroom and Zoutspansberg. In
1860 Lyndenburg and Utrecht followed their example. Although it has been
contended that the “Grondwet” is not to be regarded as a fixed constitution, like
that of the United States of America, the people of the Transvaal have looked
upon it as a sufficient federative bond for the union of the four semi-independent
districts in one nationality. The practical union of all was delayed, however, by a
civil war which broke out in 1862, and had a most disastrous influence on the
future of the country.

This internal strife grew out of the election of the president of the Transvaal
Republic, the younger Pretorius, to the presidency of the Orange Free State. It
was hoped by his partisans in both republics that the dual presidency would help
to bring about the desired union of the Free State and the Transvaal under one
government. While Mr. Pretorius was absent in the Free State, on a six months’
leave granted by the volksraad of the Transvaal, a faction hostile to him began
to protest against this double dignity [151]being enjoyed by any one man, and to
argue that the advantages of union would be largely with the Free State.
Hostility to Mr. Pretorius grew apace until it was strong enough to get a
resolution passed in the volksraad forbidding him to perform any executive act
north of the Vaal during the six months of his stay in the Free State, and
requiring him to give an account of his proceedings at the expiration of his leave.

On the 10th of September, 1860, Mr. Pretorius appeared before the volksraad of
the Transvaal, accompanied by a commission from the Free State appointed to
ask for a further leave of absence for the president, and to further the interests
of union. When Pretorius offered to give an account of his proceedings as
president of the Free State, the opposition raised the point that it was manifestly
illegal for any one to be president of the Transvaal Republic and of the Orange
Free State at the same time, for it was provided in their constitution that during
his term of office the president should follow no other occupation, and Mr.
Pretorius was pressed to resign one office or the other.

Pretorius at once resigned the presidency of the Transvaal; but his partisans
held a mass meeting at Potchefstroom, on the 8th and 9th of [152]October, at
which revolutionary proceedings were taken. It was resolved, almost
unanimously, that the volksraad no longer enjoyed the confidence of the people
they represented and must be held as having ceased to exist; that Mr. Pretorius
should remain president of the Transvaal Republic and have a year’s leave of
absence to bring about union with the Free State, Mr. Stephanas Schoeman—
instead of Mr. Grobbelear—to be acting president during his absence; and that
before the return of Mr. Pretorius to resume his duties a new volksraad should
be elected.

PIETERMARITZBURG.

The new election was so manipulated that only a thousand burghers voted, and
of these more than seven hundred declared in favor of the resolutions of the
Potchefstroom meeting. The committee that effected this clever political strategy
was composed of Messrs. D. Steyn, Preller, Lombard, Spruyt, and Bodenstein.
The new acting president, Mr. Schoeman, assumed official duty immediately.

With amazing inconsistency—for he was thought to be a loyal friend of Mr.

Pretorius—Schoeman called a meeting of the old volksraad that had been
dissolved by the revolution. He held his office from the same authority that had
declared this body to have forfeited confidence, [153]and to be non-existent, and
yet he acknowledged its legal existence. The old volksraad met on the 14th of
January, 1861, and after a session of two hours the majority of the members
resigned, being convinced of the general antagonism of the people. Not content
to let matters rest in a peaceful acquiescence in the revolution, Mr. Schoeman
called the old volksraad together a second time, under armed protection, and
procured an order for legal proceedings to be instituted against the committee
that had carried out the Potchefstroom resolutions. A court consisting of two
landdrosts—one of whom was Cornelius Potgieter, their bitterest political enemy
—tried the committee for sedition, on the 14th of February, found them guilty and
sentenced each to pay a fine of £100, except Mr. Bodenstein, whose fine was
only £15.

These proceedings led to great disturbances throughout the republic, and,

finally, to war. Schoeman assembled an armed force to support his authority.
Thereupon, Commandant Paul Kruger, of Rustenburg, called out the burghers of
his district and marched to Pretoria for the purpose of driving out Schoeman and
establishing a better government.

Among the expedients resorted to to prevent [154]bloodshed, a new volksraad

was elected, a new acting president was appointed, and for several months
there were two rival governments in the Transvaal. Acting President Schoeman,
supported by a strong party, persisted in endeavors to rule the country. So
grievous a state of anarchy prevailed that Kruger resolved to put an end to it by
the strong hand. Schoeman and his partisans retreated from Pretoria to
Potchefstroom, where he was besieged by the burgher force under Kruger. The
loss of life in the bombardment, and one sortie by the garrison, was not great;
but Schoeman became disheartened and fled, on the night of the 9th of October,
into the Free State, accompanied by his principal adherents.

A few days later, Kruger having moved his force to Klip River, Schoeman re-
entered Potchefstroom, rallied some eight hundred men around him, and Kruger
returned to give him battle. At this critical point President Pretorius interposed as
mediator, and an agreement was reached by which immediate hostilities were
prevented. Schoeman, however, continued to agitate.

Under the terms of agreement new elections were held by which W. C. Janse
Van Rensburg [155]was chosen president over Mr. Pretorius, and Paul Kruger
was made Commandant-General.

But the tribulations of the Transvaal were by no means over. On the pretense
that the ballot papers had been tampered with the standard of revolt was again
raised—this time by Jan Viljoen. The first encounter was against Kruger, who
had underestimated the strength of the new rebellion. Later, on the 5th of
January, 1864, a battle was fought in which Viljoen was defeated and compelled
to retreat to a fortified camp on the Limpopo.