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 tHird edition

principles of
economics
A streamlined ApproAch

Frank | Bernanke | antonovics | HeFFetz

 THIRD EDITION

Principles of
ECONOMICS
A STREAMLINED APPROACH
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 THIRD EDITION

Principles of
ECONOMICS
A STREAMLINED APPROACH
ROBERT H. FRANK
Cornell University

BEN S. BERNANKE
Brookings Institution [affiliated]
Former Chairman, Board of Governors of the Federal Reserve System

KATE ANTONOVICS
University of California, San Diego

ORI HEFFETZ
Cornell University
PRINCIPLES OF ECONOMICS, A STREAMLINED APPROACH, THIRD EDITION
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D E D I C AT I O N

For Ellen
R. H. F.

For Anna
B. S. B.

For Fiona and Henry

K. A.

For Katrina, Eleanor, and Daniel

O. H.
 A BOUT THE AUTHOR S
ROBERT H. FRANK
Robert H. Frank is the H. J.
Louis Professor of Manage-
ment and Professor of Eco-
nomics at Cornell’s Johnson
School of Management, where
he has taught since 1972. His
“Economic View” column ap-
pears regularly in The New
York Times. He is a Distin-
guished Senior Fellow at
Demos. After receiving his
B.S. from Georgia Tech in 1966, he taught math and science for
two years as a Peace Corps Volunteer in rural Nepal. He re-
ceived his M.A. in statistics in 1971 and his Ph.D. in economics
in 1972 from The University of California at Berkeley. During
leaves of absence from Cornell, he has served as chief econo-
mist for the Civil Aeronautics Board (1978–1980), a Fellow at
the Center for Advanced Study in the Behavioral Sciences
(1992–93), Professor of American Civilization at l’École des
Hautes Études en Sciences Sociales in Paris (2000–01), and the
Peter and Charlotte Schoenfeld Visiting Faculty Fellow at the
NYU Stern School of Business in 2008–09. His papers have
appeared in the American Economic Review, Econometrica, the
Journal of Political Economy, and other leading professional
journals.
Professor Frank is the author of a best-selling intermediate
economics textbook—Microeconomics and Behavior, Ninth
Edition (Irwin/McGraw-Hill, 2015). His research has focused
on rivalry and cooperation in economic and social behavior. His
books on these themes include Choosing the Right Pond (Ox-
ford, 1995), Passions Within Reason (W. W. Norton, 1988),
What Price the Moral High Ground? (Princeton, 2004), Falling
Behind (University of California Press, 2007), The Economic
Naturalist (Basic Books, 2007), The Economic Naturalist’s
Field Guide (Basic Books, 2009), and The Darwin Economy
(Princeton, 2011), which have been translated into 22 lan-
guages. The Winner-Take-All Society (The Free Press, 1995),
co-authored with Philip Cook, received a Critic’s Choice
Award, was named a Notable Book of the Year by The New
York Times, and was included in BusinessWeek’s list of the 10
best books of 1995. Luxury Fever (The Free Press, 1999) was
named to the Knight-Ridder Best Books list for 1999.
Professor Frank has been awarded an Andrew W. Mellon
Professorship (1987–1990), a Kenan Enterprise Award (1993),
and a Merrill Scholars Program Outstanding Educator Citation
(1991). He is a co-recipient of the 2004 Leontief Prize for Ad-
vancing the Frontiers of Economic Thought. He was awarded
the Johnson School’s Stephen Russell Distinguished Teaching
Award in 2004, 2010, and 2012, and the School’s Apple Distin-
guished Teaching Award in 2005. His introductory microeco-
nomics course has graduated more than 7,000 enthusiastic
economic naturalists over the years.
vi
BEN S. BERNANKE
Professor Bernanke received
his B.A. in economics from
Harvard University in 1975
and his Ph.D. in economics
from MIT in 1979. He taught
at the Stanford Graduate
School of Business from
1979 to 1985 and moved to
Princeton University in 1985,
where he was named the
H owa r d H a r r i s o n a n d
­Gabrielle Snyder Beck Professor of Economics and Public
Affairs, and where he served as Chairman of the Economics
Department.
Professor Bernanke was sworn in on February 1,
2006, as Chairman and a member of the Board of Gover-
nors of the Federal Reserve System—his second term ex-
pired January 31, 2014. Professor Bernanke also serves as
Chairman of the Federal Open Market Committee, the
Fed’s principal monetary policymaking body. He was ap-
pointed as a member of the Board to a full 14-year term,
which expires January 31, 2020. Before his appointment as
Chairman, Professor Bernanke was Chairman of the Presi-
dent’s Council of Economic Advisers, from June 2005 to
January 2006.
Professor Bernanke’s intermediate textbook, with
­Andrew Abel and Dean Croushore, Macroeconomics, Eighth
Edition (Addison-Wesley, 2011), is a best seller in its field.
He has authored more than 50 scholarly publications in mac-
roeconomics, macroeconomic history, and finance. He has
done significant research on the causes of the Great Depres-
sion, the role of financial markets and institutions in the busi-
ness cycle, and measurement of the effects of monetary
policy on the economy.
Professor Bernanke has held a Guggenheim Fellowship
and a Sloan Fellowship, and he is a Fellow of the Economet-
ric Society and of the American Academy of Arts and Sci-
ences. He served as the Director of the Monetary Economics
Program of the National Bureau of Economic Research
(NBER) and as a member of the NBER’s Business Cycle
Dating Committee. In July 2001, he was appointed editor of
the American Economic Review. Professor Bernanke’s work
with civic and professional groups includes having served
two terms as a member of the Montgomery Township (N.J.)
Board of Education. Visit Professor Bernanke’s blog at www.
brookings.edu/blogs/ben-bernanke.

KATE ANTONOVICS
 rofessor Antonovics received
P and universities, the return on this investment has been dis-
her B.A. from Brown Univer-
sity in 1993 and her Ph.D. in
economics from the University
of Wisconsin in 2000. Shortly
thereafter, she joined the fac-
ulty in the Economics Depart-
ment at the University of
California, San Diego, where
she has been ever since.
Professor Antonovics is known for her superb teaching and
her innovative use of technology in the classroom. Her highly
popular introductory-level microeconomics course regularly
enrolls over 450 students each fall. She also teaches labor eco-
nomics at both the undergraduate and graduate level. In 2012,
she received the UCSD Department of Economics award for
best undergraduate teaching.
Professor Antonovics’s research has focused on racial discrim-
ination, gender discrimination, affirmative action, intergenerational
income mobility, learning, and wage dynamics. Her papers have
appeared in the American Economic Review, the Review of Eco-
nomics and Statistics, the Journal of Labor Economics, and the
Journal of Human Resources. She is a member of both the Ameri-
can Economic Association and the Society of Labor Economists.
ORI HEFFETZ
Professor Heffetz received his
B.A. in physics and philosophy
from Tel Aviv University in
1999 and his Ph.D. in econom-
ics from Princeton University
in 2005. He is an Associate
Professor of Economics at the
Samuel Curtis Johnson Gradu-
ate School of Management at
Cornell University, where he
has taught since 2005.
Bringing the real world into the classroom, Professor
­Heffetz has created a unique macroeconomics course that intro-
duces basic concepts and tools from economic theory and ap-
plies them to current news and global events. His popular
classes are taken by hundreds of students every year, on the
Cornell Ithaca campus and, via live videoconferencing, in doz-
ens of cities across the U.S., Canada, and beyond.
Professor Heffetz’s research studies the social and cultural
aspects of economic behavior, focusing on the mechanisms that
drive consumers’ choices and on the links between economic
choices, individual well-being, and policymaking. He has pub-
lished scholarly work on household consumption patterns, indi-
vidual economic decision making, and survey methodology and
measurement. He was a visiting researcher at the Bank of Israel
during 2011, is currently a Faculty Research Fellow at the Na-
tional Bureau of Economic Research (NBER), and serves on
the editorial board of Social Choice and Welfare.
PR EFAC E
Although many millions of dollars are spent each year on
introductory economics instruction in American colleges
turbingly low. Studies have shown, for example, that several
months after having taken a principles of economics course,
former students are no better able to answer simple eco-
nomics questions than others who never even took the
course. Most students, it seems, leave our introductory
courses without having learned even the most important ba-
sic economic principles.
The problem, in our view, is that these courses almost
always try to teach students far too much. In the process,
really important ideas get little more coverage than minor
ones, and everything ends up going by in a blur. The human
brain tends to ignore new information unless it comes up
repeatedly. That’s hardly surprising, since only a tiny frac-
tion of the terabytes of information that bombard us each
day is likely to be relevant for anything we care about. Only
when something comes up a third or fourth time does the
brain start laying down new circuits for dealing with it.
Yet when planning their lectures, many instructors ask
themselves, “How much can I cover today?” And because mod-
ern electronic media enable them to click through upwards of
100 PowerPoint slides in an hour, they feel they’ve better served
their students the more information they’ve put before them.
But that’s not the way learning works. Professors should instead
be asking, “How much can my students absorb?”
Our approach to this text was inspired by our conviction
that students will learn far more if we attempt to cover much
less. Our basic premise is that a small number of basic prin-
ciples do most of the heavy lifting in economics, and that if
we focus narrowly and repeatedly on those principles, stu-
dents can actually master them in just a single semester.
The enthusiastic reactions of users of previous editions
of our textbook affirm the validity of this premise. Avoid-
ing excessive reliance on formal mathematical derivations,
we present concepts intuitively through examples drawn
from familiar contexts.
ADAPTING TO CLASSROOM TRENDS
Baumol’s cost disease refers to the tendency for costs to rise
more rapidly for goods and services for which growth in
labor productivity is either slow or nonexistent. For exam-
ple, it still takes four musicians to perform Beethoven’s
String Quartet Number 14 in C-sharp Minor today, just as
when the piece debuted in 1826, even though labor produc-
tivity has risen hundreds-fold for many other goods during
the same period. It is thus no surprise that the cost of stag-
ing live music performances has been rising so much faster
than the cost of producing many manufactured goods.
vii
viii PREFACE
To date, Baumol’s cost disease has applied with con-
siderable force in the case of classroom instruction, where
tuition increases have far exceeded even the rapid growth in
the cost of health care. This is what we would expect if the
dominant teaching model remains as it was a century ago,
in which a learned instructor stands in front of a class recit-
ing truths cataloged in the assigned text.
But as the late Herb Stein once remarked, “If something
cannot go on forever, it will stop.” And so it is with rising
tuitions. Universities are already facing strong pressure to
moderate their rates of tuition growth. An inevitable result
of this pressure will be that much of the content that profes-
sors have traditionally delivered in live lecture will instead
be delivered electronically. Indeed, technological advances
have given today’s students an unparalleled ability to access
information via the Internet, YouTube, and social media.
If early experience is any indication, the “flipped-­
classroom” model is one of the most promising adaptations
to this new environment. In this approach, students are ex-
pected to study basic concepts before coming to class and
then deepen their understanding of them through structured
classroom exercises and discussion. The logic of the flipped
classroom is compelling because under this approach, stu-
dents have access to instructors precisely when students are
engaged in those activities that students find the most chal-
lenging (for example, problem solving and policy evalua-
tion). Indeed, numerous studies have found that the
flipped-classroom approach increases both student satisfac-
tion and student learning.
The streamlined approach of this text is aligned with
the goals of the flipped classroom. Rather than trying to
bombard students with information they can easily access
online, our book seeks to promote a deeper understanding
of economics by focusing on core concepts. In addition, one
of our central goals has been to create resources to help
­instructors adopt the flipped-classroom approach, which
enables instructors to spend class time engaging,
­facilitating, and answering questions related to higher-level
content and critical thinking. Some instructors may find
these resources useful in completely overhauling the way
they teach, while others may be interested in using them to
make a few minor changes to their current courses. In other
words, this edition is intended to support a variety of teach-
ing styles (and, indeed, our team of authors varies consider-
ably in our pedagogical approach).
The traditional approach has, of course, been to ask
students to read the relevant sections from the textbook be-
fore coming to class. But instructors report that today’s stu-
dents are far less likely than their predecessors to complete
such assignments. To ensure compliance, stronger incentives
are needed. One effective approach has employed brief tests
administered at the start of class. These might involve two
or three simple multiple-choice questions on the assigned
material that are administered and graded electronically.
Some professors have used purpose-built clickers (inexpen-
sive handheld devices that enable students to transmit infor-
mation to a server that tabulates it), while others use
smartphone apps for this purpose.
Perhaps the biggest hurdle to effective implementation
of the flipped-classroom approach has been a dearth of
effective pre-class concept-delivery materials. To help fill
this gap, we have created a library of short videos that focus
on basic economic concepts. Many students have found
these videos and animations engaging enough to watch
even if they’re not going to be tested on them, but we’ve
also provided easily administered in-class questions that
can boost compliance still further.
The big payoff from the flipped-classroom approach
comes from being able to use limited class time to actually
apply and discuss the concepts that students have studied
before coming to class. One approach begins by asking stu-
dents to answer a multiple-choice question requiring appli-
cation of a concept, and then reporting the frequencies with
which students selected the various multiple-choice op-
tions. Students are then given a few moments to discuss the
question with their neighbors before having an opportunity
to change the answers they originally submitted. Professors
then call on students who’ve offered both correct and incor-
rect answers to the question to defend their answers to the
class and lead the ensuing discussion. We’ve spent consid-
erable effort drafting the kinds of questions that reliably
provoke animated discussions of this sort.
In summary, here are the resources we have developed
to support the flipped-classroom experience, all available
within McGraw-Hill Connect® specific to the third edition:
Before Class (Exposure)
∙ SmartBook® Adaptive Reading Assignments: Smart-
Book® contains the same content as the print book, but
actively tailors that content to the needs of the individ-
ual through adaptive probing and integrated learning
resources. Instructors can assign SmartBook reading
assignments for points to create incentives for students
to come to class prepared.
∙ Learning Glass Lecture Videos: A series of 3-5 minute
lecture videos featuring the authors and utilizing excit-
ing learning glass technology provide students with an
overview of important concepts before coming to class.
These videos can be accessed as resources within
SmartBook or are available for stand-alone assignments.
In Class (Engagement)
∙ Clicker Questions: Classroom-tested by the authors,
these multiple-choice questions are designed to facili-
tate discussion and group work in class.

∙ Economic Naturalist Application-Focused Videos: A
known hallmark of this franchise, the Economic Natu-
ralist examples are now available as short, engaging
video vignettes within Connect and SmartBook.
After Class (Reinforcement)
∙ Connect Exercises: All end-of-chapter homework ex-
ercises are available to be assigned within Connect.
Many of these exercises include algorithmic variations
and require students to interact with the graphing tool
within the platform.
∙ Test Bank Assessment: Hundreds of multiple-choice
questions are available for summative assessments of
the chapter content.
All of the above assets can be implemented by instruc-
tors as preferred in order to satisfy as much or as little of the
flipped-classroom approach as is desired.
AN EXPANDED TEAM OF AUTHORS
We are pleased to announce that we have expanded the list
of authors. In addition to Robert Frank and Ben Bernanke,
Kate Antonovics, University of California, San Diego, and
Ori Heffetz, Cornell University, have joined the team. These
two younger-generation authors bring with them a fresh
touch, side by side with many years of classroom experience
using previous editions of Principles of Economics and Con-
nect in their microeconomics (Kate) and macroeconomics
(Ori) classes. Our expanded team of authors has enabled us
to increase the quality and range of digital materials that
­accompany the textbook, keeping us at the forefront of the
latest developments in educational technology.
KEY THEMES AND FEATURES
Economic Naturalism
In launching this new edition of a streamlined version of
our original text, we’ve doubled down on our efforts to
present concepts in narrative form. Relying on examples
drawn from familiar contexts, we encourage students to be-
come “economic naturalists,” people who employ basic
economic principles to understand and explain what they
observe in the world around them. An economic naturalist
understands, for example, that infant safety seats are re-
quired in cars but not in airplanes because the marginal cost
of space to accommodate these seats is typically zero in
cars but often hundreds of dollars in airplanes. Scores of
such examples are sprinkled throughout the text. Each one,
we believe, poses a question that should make any curious
person eager to learn the answer.
These examples stimulate interest while encouraging
students to see each feature of their economic landscape as
the reflection of an explicit or implicit weighing of costs
PREFACE ix
and benefits. Students talk about these examples with their
friends and families. Learning economics is like learning a
language. In each case, there is no substitute for actually
speaking. By inducing students to speak economics, the
Economic Naturalist examples serve this purpose. (For
those who would like to learn more about the role of exam-
ples in learning economics, Bob Frank’s lecture on this
topic is posted on YouTube’s “Authors @ Google” series:
www.youtube.com/watch?v=QalNVxeIKEE; or search
“Authors @ Google Robert Frank.”)
The economic naturalist sees mundane details of ordinary
existence in a new light and becomes actively engaged in the
attempt to understand them. Some representative examples:
In Micro:
∙ Why do movie theaters offer discount tickets to students?
∙ Why do we often see convenience stores located on ad-
jacent street corners?
∙ Why do supermarket checkout lines all tend to be
roughly the same length?
In Macro:
∙ Why has investment in computers increased so much in
recent decades?
∙ Why does news of inflation hurt the stock market?
∙ Why do almost all countries provide free public education?
We are very excited to offer for the first time an entire
video series based on Economic Naturalist examples not
found in this edition. A series of videos covering some of our
favorite micro- and macro-focused examples can be used as
part of classroom presentations, or assigned for homework
within Connect. All of these videos can be shared on social
media to encourage students to share these fascinating and
thought-provoking applications of economics in everyday life.
Active Learning Stressed
The only way to learn to hit an overhead smash in tennis is
through repeated practice. The same is true for learning eco-
nomics. Accordingly, we consistently introduce new ideas in
the context of simple examples and then follow them with
applications showing how they work in familiar settings. At
frequent intervals, we pose concept checks that both test and
reinforce the understanding of these ideas. The end-of-­
chapter questions and problems are carefully crafted to help
students internalize and extend basic concepts, and are avail-
able within Connect as assignable content so that instructors
can require students to engage with this material. Experience
with earlier editions confirms that this approach really does
prepare students to apply basic economic principles to solve
economic puzzles drawn from the real world.
x PREFACE
Modern Microeconomics
∙ The cost-benefit principle, which tells us to take only
those actions whose benefits exceed their costs, is the
core idea behind the economic way of thinking. Intro-
duced in Chapter 1 and employed repeatedly thereafter,
this principle is more fully developed here than in any
other text. It underlies the argument for economic effi-
ciency as an important social goal. Rather than speak
of trade-offs between efficiency and other goals, we
stress that maximizing economic surplus—that is, tak-
ing those actions whose benefits exceed their costs—
facilitates the achievement of every goal we care about.
∙ One of the biggest hurdles to the fruitful application of
cost-benefit thinking is to recognize and measure the
relevant costs and benefits. Common decision pitfalls
identified by 2002 Nobel Laureate Daniel Kahneman
and others—such as the tendency to ignore implicit
costs, the tendency not to ignore sunk costs, and the
tendency to confuse average and marginal costs and
benefits—are introduced early in Chapter 1 and in-
voked repeatedly in subsequent chapters.
∙ There is perhaps no more exciting toolkit for the eco-
nomic naturalist than a few principles of elementary
game theory. In Chapter 8, we show how these princi-
ples enable students to answer a variety of strategic
questions that arise in the marketplace and everyday
life. We believe that the insights of the Nobel Laureate
Ronald Coase are indispensable for understanding a
host of familiar laws, customs, and social norms. In
Chapter 9 we show how such devices function to mini-
mize misallocations that result from externalities.
Modern Macroeconomics
The severe economic downturn that began in late 2007 has
renewed interest in cyclical fluctuations without challenging
the importance of such long-run issues as growth, produc-
tivity, the evolution of real wages, and capital formation.
Our treatment of these issues is organized as follows:
∙ A four-chapter treatment of long-run issues, followed by
a modern treatment of short-term fluctuations and stabi-
lization policy, emphasizes the important distinction be-
tween short- and long-run behavior of the economy.
∙ Designed to allow for flexible treatment of topics, these
chapters are written so that short-run material (Chap-
ters 18–20) can be used before long-run material
(Chapters 14–17) with no loss of continuity.
∙ This book places a heavy emphasis on globalization,
starting with an analysis of its effects on real wage in-
equality and progressing to such issues as the costs and
benefits of trade, the role of capital flows in domestic
capital formation, and the links between exchange rates
and monetary policy.
ORGANIZATION OF THE THIRD EDITION
In Microeconomics
∙ More and clearer emphasis on and repetition of ba-
sic concepts: If we asked a thousand economists to
provide their own versions of the most important eco-
nomic principles, we’d get a thousand different lists.
Yet to dwell on their differences would be to miss their
essential similarities. It is less important to have ex-
actly the best short list of principles than it is to use
some well-thought-out list of this sort.
∙ An introduction to macroeconomics: In Chapter 3
we provide a sneak peak into macroeconomics, espe-
cially useful for students who won’t move on to take
this portion of the course. It provides some context
around economics concepts that are widely discussed
in media today like the causes and aftermath of the
Great Recession and actions taken by the Fed.
∙ Strong connection drawn between core concepts:
Chapter 6 makes strong connections among market equi-
librium and efficiency, the cost of preventing price ad-
justments, economic profit, and the invisible hand theory.
∙ Using economics to help make policy decisions:
Chapter 10 features important policy decisions and
uses economics to sort out the best options. Health
care, environmental regulation, international trade, and
income redistribution are all discussed in this relevant
and interesting chapter.
∙ Flexible coverage of international economics: Chap-
ter 11 introduces the concept of comparative advantage
as a basis for trade. Because international trade in-
volves important micro principles and policy issues,
this chapter is presented earlier in the book and is in-
cluded in both the macro and micro splits.
In Macroeconomics
∙ A preview of key macroeconomic material: Chapter
12 is new to this edition and serves to provide an over-
view of core macroeconomic concepts that are to be
discussed in further detail.
∙ Flexible presentation: Part 6, “Macroeconomics: Is-
sues and Data,” is a self-contained group of chapters
that cover definition and measurement issues. This al-
lows instructors to proceed to a discussion of either
long-run concepts as discussed in Part 7 or short-run
concepts as covered in Part 8 with no loss of continuity.

∙ Thorough discussion of labor markets: Trends in
employment, wages, and unemployment are covered
together in Chapter 15 to help students understand and
distinguish between long-term trends and short-term
fluctuations in the labor market.
∙ Strong connection drawn between financial markets
and money: Chapter 17 brings together information on
financial intermediaries, bond and stock markets, and
money so that students can make the connections
among stock markets, bond markets, commercial
banks, and money.
∙ Modular presentation of money and monetary policy:
Chapter 17 introduces students to the concepts of money
and financial intermediaries, which can be covered sepa-
rately or in direct conjunction with the discussion of
monetary policy in Chapter 19.
∙ The presentation of aggregate demand and aggregate
supply: Chapter 20 has been completely rewritten. The
AD-AS model is developed systematically (based on con-
cepts introduced in Chapters 18 and 19) using a graphical/
verbal approach, allowing students to better understand
the link among economic theory, real-world macroeco-
nomic behavior, and macroeconomic policymaking.
∙ Flexible coverage of international economics: Chap-
ter 21 is a self-contained discussion of exchange rates
that can be used whenever an instructor thinks it best to
introduce this important subject.
CHANGES IN THE THIRD EDITION
Changes Common to All Chapters
In all chapters, the narrative has been tightened and shortened
slightly. Many of the examples have been updated, with a fo-
cus on examples that connect to current events such as the fi-
nancial crisis of 2008 and the Great Recession of 2007–2009.
The examples and exercises from the previous edition have
been redesigned to provide more clarity and ease of use. A
majority of the appendixes have been removed. Several num-
bered examples in the macro portion of the book have been
turned back into Economic Naturalist examples as they were
originally intended. Data have been updated throughout.
Chapter-by-Chapter Changes
∙ Chapter 2: This is Chapter 3 from the previous edi-
tion. The comparative advantage material that was in
the former Chapter 2 now appears in Chapter 11.
∙ Chapter 3: New to this edition, this chapter serves as
an introduction to macroeconomics for those who will
PREFACE xi
not continue to take this course. It provides context
around economics concepts that are widely discussed
in the media.
∙ Chapters 4–10: Content and data updates have been
added as needed.
∙ Chapter 11: International trade material previously in
Chapter 10 has been moved here along with the oppor-
tunity cost discussion that appeared in the former
Chapter 2 on comparative advantage. Production pos-
sibilities curve material has been eliminated.
∙ Chapter 12: New to this edition, this chapter serves to
provide a preview to the upcoming macroeconomic
material that is to follow.
∙ Chapter 13: Combining material from previous Chap-
ters 11, 12, and 13 this new chapter is entitled “Mea-
suring Economic Activity: GDP, Unemployment, and
Inflation.” Women’s labor participation data have been
added in the GDP section. Economic well-being mate-
rial has been moved to Chapter 14. The “Unemployment
and the Unemployment Rate” section from the previous
Chapter 13 has been retained here. “The True Costs of
Inflation” section has been streamlined. Hyperinflation
and the inflation and interest rates sections of the pre-
vious Chapter 12 have been moved to Chapter 20.
∙ Chapter 14: Economic well-being material from
the previous Chapter 11 has been moved here. The
“Promoting Economic Growth” and “Costs of Eco-
nomic Growth” sections have been switched.
∙ Chapter 15: This chapter is now entitled “Workers,
Wages, and Unemployment in the Modern Economy”
and features content primarily from the previous Chap-
ter 13. A fifth labor market trend and discussion of Eu-
ropean unemployment has been added back into this
chapter. The “Unemployment and the Unemployment
Rate” section has been moved to Chapter 13. Material
on minimum wage laws and unions has been deleted.
∙ Chapter 16: Previously Chapter 15, the financial mar-
kets discussion has been moved to Chapter 17. The
“Why Do People Save” and “National Saving and Its
Components” sections have been switched. A new
Economic Naturalist on why Chinese households save
so much has been added. A portion of the “Inflation
and Interest Rate” section from the previous Chapter
12 has been included here to highlight real interest
rates and nominal interest rates.
∙ Chapter 17: Combining material from previous Chap-
ters 16, 19, and 21, this new chapter is entitled “Money,
the Federal Reserve, and Global Financial Markets.”
xii PREFACE
We start with a discussion of money and its uses, fol-
lowed by commercial banks and the creation of money
from the previous Chapter 16. We then turn to previous
Chapter 19 and the discussion of the Fed, controlling
the money supply through open-market operations, but
we delay the mention of discount window lending and
changing reserve requirements to Chapter 19. Then we
return to previous Chapter 16 and discuss the financial
system and the allocation of saving. We finish the
chapter with a discussion of trade balance and interna-
tional capital flows from the previous Chapter 21. Im-
provements to Economic Naturalist examples include a
discussion of Bitcoins and a new Economic Naturalist
that details what happens to national economies during
banking crises. Velocity material has been deleted.
∙ Chapter 18: Combining material from previous Chap-
ters 17 and 18, this new chapter is entitled “Short-Term
Economic Fluctuations and Fiscal Policy.” A new Eco-
nomic Naturalist examines the effect of economic fluc-
tuations on presidential elections. Okun’s law coverage
has been removed. The Economic Naturalist on menu
costs has been revised to include Uber and Lyft.
Planned aggregate expenditure material has been
­removed and replaced with a new section on aggregate
output and spending to help simplify the math. Con-
sumption function coverage has also been streamlined
and shortened.
∙ Chapter 19: This chapter has been renamed “Stabiliz-
ing the Economy: The Role of the Fed.” We start with
a discussion of the Federal Reserve and interest rates
which features new Examples 19.1 and 19.2. An ex-
ample of the effects of high inflation in Zimbabwe was
added to an Economic Naturalist example. The section
on how the Fed controls the money supply has been
substantially revised. A new subsection answers the
question “Do interest rates always move together?”
helps students understand what the Fed has been doing
“unconventionally” since 2008. Material on the zero
lower bound, quantitative easing, forward guidance,
and interest on reserves and monetary-policy normal-
ization has been added. Planned aggregate expenditure
material has been revised to appear as aggregate ex-
penditure. A discussion of the Fed’s policy reaction
function and the Taylor rule has been added.
∙ Chapter 20: This chapter has been largely rewritten
and is now entitled “Inflation and Aggregate Supply.”
We have reverted back to the way this material was pre-
sented in the second edition of Principles of Economics.
∙ Chapter 21: This chapter is now entitled “Exchange
Rates and the Open Economy.” The section on
e­ xchange rate determination in the long run has been
moved toward the beginning of the chapter, with the
real exchange rate material now appearing as part of
the first section on exchange rates. We then move to a
discussion of exchange rate determination in the short
run, followed by monetary policy and the exchange
rate. A new section on fixed exchange rates has been
added. Again, trade balance and international capital
flow material has been moved to Chapter 17.
ORGANIZED LEARNING IN THE
THIRD EDITION
Chapter Learning Objectives
Students and professors can be confident that the organiza-
tion of each chapter surrounds common themes outlined by
four to seven learning objectives listed on the first page of
each chapter. These objectives, along with AACSB and
Bloom’s Taxonomy Learning Categories, are connected to
all test bank questions and end-of-chapter material to offer
a comprehensive, thorough teaching and learning experi-
ence. Reports available within Connect allow instructors to
easily output data related to student performance across
chapter learning objectives, AACSB criteria, and Bloom’s
Taxonomy Learning Categories.
Assurance of Learning Ready
Many educational institutions today are focused on the notion
of assurance of learning, an important element of some accred-
itation standards. Principles of Economics, A Streamlined Ap-
proach, 3/e, is designed specifically to support your assurance
of learning initiatives with a simple, yet powerful, solution.
Instructors can use Connect to easily query for learning
objectives that directly relate to the objectives of the course
and then use the reporting features of Connect to aggregate
student results in a similar fashion, making the collection and
presentation of assurance of learning data simple and easy.
AACSB Statement
The McGraw-Hill Companies is a proud corporate member
of AACSB International. Recognizing the importance and
value of AACSB accreditation, the authors of Principles of
Economics, A Streamlined Approach, 3/e, have sought to
recognize the curricula guidelines detailed in AACSB stan-
dards for business accreditation by connecting questions in
the test bank and end-of-chapter material to the general
knowledge and skill guidelines found in AACSB standards.
It is important to note that the statements contained in
­Principles of Economics, A Streamlined Approach, 3/e are
provided only as a guide for the users of this text.

A NOTE ON THE WRITING OF THIS EDITION
Ben Bernanke was sworn in on February 1, 2006, as Chair-
man and a member of the Board of Governors of the Fed-
eral Reserve System, a position to which he was reappointed
in January 2010. From June 2005 until January 2006, he
served as chairman of the President’s Council of Economic
Advisers. These positions have allowed him to play an ac-
tive role in making U.S. economic policy, but the rules of
government service have restricted his ability to participate
in the preparation of previous editions. Now that his second
term as Chairman of the Federal Reserve is complete, we
are happy to a­ nnounce that Ben has been actively involved
in the revision of the macro portion of the third edition.
ACKNOWLEDGMENTS
Our thanks first and foremost go to our brand manager, ­Katie
Hoenicke, and our product developer, Christina Kouvelis.
­Katie encouraged us to think deeply about how to improve
the book and helped us transform our ideas into concrete
changes. Christina shepherded us through the revision pro-
cess with intelligence, sound advice, and good humor. We
are grateful as well to the production team, whose profes-
sionalism (and patience) was outstanding: Harvey Yep, con-
tent project manager; Kristin Bradley, assessment project
manager; Matt Diamond, lead designer; and all of those who
worked on the production team to turn our manuscript into
the book you see now. Finally, we also thank Virgil Lloyd,
marketing manager, and Dave O’Donnell, marketing spe-
cialist, for getting our message into the wider world.
Special thanks to Per Norander, University of North
Carolina at Charlotte, for his energy, creativity, and help in
refining the assessment material in both the text and Con-
nect; Sukanya Kemp, University of Akron, for her detailed
accuracy check of the learning glass videos; Anna T ­ hompson
and Eric Schulman, Cornell University, for their efforts in
researching and collecting macro data updates; Alvin
­Angeles and team at the University of California, San Diego,
for their efforts in the production and editing of the learning
glass videos; and Kevin Bertotti and the team at ITVK for
their creativity in transforming Economic Naturalist exam-
ples into dynamic and engaging video vignettes.
Finally, our sincere thanks to the following teachers
and colleagues, whose thorough reviews and thoughtful
suggestions led to innumerable substantive improvements
to Principles of Economics, A Streamlined Approach, 3/e.
Mark Abajian, San Diego Mesa College
Richard Agesa, Marshall University
Seemi Ahmad, Dutchess Community College
Chris Azevedo, University of Central Missouri
Narine Badasyan, Murray State University
PREFACE xiii
Sigridur Benediktsdottir, Yale University
Brian C. Brush, Marquette University
Giuliana Campanelli Andreopoulos, William Paterson
University
J. Lon Carlson, Illinois State University
Joni Charles, Texas State University
Anoshua Chaudhuri, San Francisco State University
Nan-Ting Chou, University of Louisville
Manabendra Dasgupta, University of Alabama at Birmingham
Craig Dorsey, College of DuPage
Dennis Edwards, Coastal Carolina University
Roger Frantz, San Diego State University
Mark Frascatore, Clarkson University
Greg George, Macon State College
Seth Gershenson, Michigan State University
Amy D. Gibson, Christopher Newport University
Rajeev Goel, Illinois State University
Susan He, Washington State University
John Hejkal, University of Iowa
Kuang-Chung Hsu, Kishwaukee College
Greg Hunter, California State University–Pomona
Derek Johnson, University of Connecticut
Sukanya Kemp, University of Akron
Brian Kench, University of Tampa
Fredric R. Kolb, University of Wisconsin–Eau Claire
Donald J. Liu, University of Minnesota–Twin Cities
Ida Mirzaie, The Ohio State University
Diego Nocetti, Clarkson University
Stephanie Owings, Fort Lewis College
Martin Pereyra, University of Missouri
Ratha Ramoo, Diablo Valley College
Bill Robinson, University of Nevada–Las Vegas
Brian Rosario, University of California–Davis
Elyce Rotella, Indiana University
Jeffrey Rubin, Rutgers University
Naveen Sarna, Northern Virginia Community College
Sumati Srinivas, Radford University
Thomas Stevens, University of Massachusetts
Carolyn Fabian Stumph, Indiana University and Purdue
University–Fort Wayne
Markland Tuttle, Sam Houston State University
David Vera, California State University–Fresno
Nancy Virts, California State University–Northridge
Elizabeth Wheaton, Southern Methodist University
William C. Wood, James Madison University
 have chosen to order a navigation system had it been sold as an option. Because
of the savings made possible when all cars are produced with the same equip-
ment, it would have actually cost BMW more to supply cars for the few who would
want them without navigation systems.
Buyers of the least-expensive makes of car have much lower incomes on

DI STI NGUI SHI NG F EAT U RE S

average than BMW 750i buyers. Accordingly, most of them have more pressing
alternative uses for their moneyAPPLYING
than to THE
buy COST-BENEFIT PRINCIPLE
navigation systems 3
for their cars,
this explains why some inexpensive makes continue to offer navigation systems
and

only as options. But as incomes continue to grow, new cars without navigation
Scarcity and the trade-offs that result systems
also applywill
to eventually
resources other than money. Bill
disappear.
Gates is one of the richest men on Earth. His wealth was once estimated at over $100 bil-
lion. That’s more than the combined wealth of the poorest 40 percent of Americans.
Gates could buy more houses, cars, vacations, and other consumer goods than he could
The insights afforded by The Economic Naturalist 1.2 suggest an answer to the
possibly use. Yet he, like the rest of us, has only 24 hours each day and a limited amount of
following strange question:
energy. So even he confronts trade-offs. Any activity he pursues—whether it be building
Economic Naturalist
his business empire or redecorating his mansion or tending to his charitable foundation—
uses up time and energy that he could otherwise spend on other things. Indeed, someone The Economic Naturalist 1.3
Examples
once calculated that the value of Gates’s time is so great that pausing to pick up a $100 bill

Ian Langsdon/Epa/Landov
from the sidewalk simply wouldn’t be worth his while.
Each Economic Naturalist ex- Why do the keypad buttons on drive-up automated teller machines
have Braille dots?
ample starts withTHE
APPLYING a question
COST-BENEFIT PRINCIPLE
Braille dots on elevator buttons and on the keypads of walk-up automated teller
to spark interest in learning an
In studying choice under scarcity, we’ll usually beginenable
with theblind
premise that people are
machines people to participate more fully in the normal flow
answer. These
rational, whichexamples fuelwell-defined
means they have goals
of daily and tryBut
activity. to fulfill them as best
even though blindthey
people can do many remarkable things,
interest while
can. The teaching
Cost-Benefit stu-
Principle is a fundamental tool for drive
they cannot the study of how rational
automobiles on people If Bill Gates
public roads. Why,saw a $100
then, dobillthe
lying
on the sidewalk, would it be worth
manufac-
make choices. turers of automated teller machines install his Braille dots on the machines at
dents toAssee economics in the
in the class-size example, often drive-up
the only real difficulty in applying the cost-
time to pick it up?
locations?
world around
benefit rule isthem.
to come Videos
up with ofreasonable measures of the relevant benefits and costs. rationalmoldspersonhave
someone
The answer to this riddle is thatBut
oncethethe keypad been manufac-
select
OnlyEconomic
in rare instancesNaturalist
will exact dollar measures
tured, the
be conveniently
cost of producing
available.
buttons with with
Braille dots well-defined
is no goals
higher thanwho the cost of
cost-benefit framework can lend structure to your thinking even when no relevant
examples can be found
market data are available.
within producing smooth buttons. Making both would tries to fulfill
require
PrEDiCtiNg
those sets
separate
ANDcan
goalsof asmolds and
ExPLAiNiNg ChANgES iN PriCES AND qUANtitiES 51
best he or she
Connect. To illustrate how we proceed in such cases, the following example asks you to decide
whether to perform an action whose cost is described only in vague, qualitative terms.

S S9 Numbered
S Examples
FIGURE 2.18
EX A MPLE 1.1 Comparing Costs and Benefits S9 The Effects of Simultaneous
fra21820_ch01_001-028.indd 15 Throughout the text,
Shifts numbered
in Supply and Demand.
11/26/15 9:16 AM
P P
and titled examples are refer-
Price ($/bag)
Price ($/bag)

Should you walk downtown to save $10 on a $25 computer game? When demand shifts left and
Imagine you are about to buy a $25 computer game at the nearby campus store enced and called
supplyout to right,
shifts further
equilibrium
price falls, but equilibrium
when a friend tells you that the same gameP9 is on sale at a downtown store for only P9 illustrate concepts. With our
quantity may either rise (b) or
$15. If the downtown store is a 30-minute walk away, where should you buyDthe game? use Dof engaging questions and
fall (a).
D9
The Cost-Benefit Principle tells us that you should buy it downtown if the ben- examples from everyday life to
efit of doing so exceeds the cost. The benefit of taking any actionDis9 the dollar value
of everything you gain by taking it. Here, the0benefit of buying
apply economic concepts, the
Q9 Q downtown is exactly 0 Q Q9
$10, since that’s the amount you’ll save on the price of(millions
Quantity the game.ofThe cost of taking
bags/month)
ultimate goal is to see that
Quantity (millions of bags/month)
any action is the dollar value of everything you give up by taking (a) it. Here, the cost of (b) each human action is a result
buying downtown is the dollar value you assign to the time and trouble it takes to
make the trip. But how do we estimate that value?
of an implicit or explicit cost-
One way is to perform the following hypothetical auction. Imagine that a benefit calculation.
stranger has offered to pay you to do an errand The following concept
that involves thecheck
same askswalkyou
down-to consider a simple variation on the problem
town (perhaps to drop off a letter for her posed in the
at the postprevious
office). Ifexample.
she offered you a pay-
Concept Checks
ment of, say, $1,000, would you accept? If so, we know that your cost of walking
downtown and back must be less than $1,000. Now imagine her offer being re-
These self-test questions CONCEPT CHECK 2.6
duced in small increments untilin you finally refuse the last offer. For example, if you’d
the body
agree of the chapter
to walk and back for $9.00will
downtownenable What buthappen to the then
not for $8.99, equilibrium
your cost price
of and quantity in the corn tortilla chip
making the trip is $9.00. In this case, you market
should if buy
boththe
of game
the following
downtown events
becauseoccur: (1) researchers discover that a vita-
students to determine whether
the $10 you’ll save (your benefit) is greater min than
found in corn
your $9.00helpscost protect
of making against cancer and heart disease and (2) a swarm
the trip.
42 the preceding
CHAPTER
But2 suppose
SUPPLYmaterial
your cost has
AND DEMAND
of making of thelocusts
trip had destroys part of than
been greater the corn
$10. crop?
In that
beencase,
understood
your best and reinforce
bet would have been to buy the game from the nearby campus
store. Confronted with this choice, different people may choose differently, depend-
understanding before reading
Theit is
very idea ofthenottripbeing able toBut buyalthough
a pizza seems
there isabsurd,
no The yet precisely such
ing on how costly they think to make downtown. Economic Naturalist 2.3
further. Detailed
uniquely Answers
things
correct choice, most to routinely
happen
people who areinasked markets in which
what pricesdo
they would areinheld below the equilibrium lev-
this situ-
els. For example, prior to the collapse of communist governments, it was considered
Concept
ation sayChecks are buy
they would found at downtown.
the game
Why dofor
normal in those countries the prices
people of some
to stand in linegoods,
for hourslike airline
to buy breadtickets
and otherto Europe, go up
the end of each chapter. basic goods, while during the months
the politically connected of had
heaviest consumption,
first choice of those goodswhile others, like sweet
that were
available. corn, go down?
Seasonal price movements for airline tickets are primarily the result of seasonal varia-
tions in demand. Thus, ticket prices to Europe are highest
Recap
R E C Aduring
P the summer months
fra21820_ch01_001-028.indd 3
because the demand for tickets is highest during those months, as shown
MARKET EQUILIBRIUM Sprinkled
in Figure throughout each
11/26/15 9:16 AM
2.19(a), where the w and s subscripts denote winter and summer values,chapter
respectively.are Recap boxes that
Market equilibrium, the situation in which all buyers and sellers are satisfied
with their respective quantities at the market price, occurs at the intersection underscore and summarize the
of the supply and demand curves. The corresponding price and quantity are SW
called the equilibrium price and the equilibrium quantity.
importance of the preceding
Unless prevented by regulation, prices and quantities are driven toward material
S S and key concept
S P
Price ($/bushel)
Price ($/ticket)

their equilibrium values by the actions of buyers and sellers.W If the price is ­takeaways.
initially too high, so that there is excess supply, frustrated sellers will cut their
P PS
price in order to sellSmore. If the price is initially too low, so that there is
excess demand, competition among buyers drives the price upward. This
PW D
process continues until equilibrium is reached. S
DW D
xiv
PREDICTING AND
0 EXPLAININGQ W QS CHANGES
0 QW Q S
Quantity (1,000s of tickets) Quantity (millions of bushels)
IN PRICES AND QUANTITIES (a) (b)
If we know how the factors that govern supply and demand curves are changing, we can
SUP P LE M E N TS
The following ancillaries are available for quick download
and convenient access via the Instructor Resource material
available through McGraw-Hill Connect®.
Solutions Manual
Prepared by the authors with assistance from Per Norander,
University of North Carolina at Charlotte, this manual pro-
vides detailed answers to the end-of-chapter review ques-
tions and problems.
Test Bank
The test bank has been carefully revised and reviewed for
accuracy. Thousands of questions have been categorized by
chapter learning objectives, AACSB learning categories,
Bloom’s Taxonomy objectives, and level of difficulty.
Computerized Test Bank
McGraw-Hill’s EZ Test is a flexible and easy-to-use elec-
tronic testing program that allows you to create tests from
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ported for use with course management systems. EZ Test
Online gives you a place to administer your EZ Test–
­created exams and quizzes online. Additionally, you can
­access the test bank through McGraw-Hill Connect.
PowerPoints
Presentation slides contain a detailed, chapter-by-chapter
review of the important ideas presented in the textbook, ac-
companied by animated graphs and slide notes. You can
edit, print, or rearrange the slides to fit the needs of your
course.
Customizable Micro Lecture Notes and
PowerPoints
One of the biggest hurdles to an instructor considering
changing textbooks is the prospect of having to prepare new
lecture notes and slides. For the microeconomics chapters,
this hurdle no longer exists. A full set of lecture notes for
principles of microeconomics, prepared by Bob Frank for
his award-winning introductory microeconomics course at
Cornell University, is available as Microsoft Word files that
instructors are welcome to customize as they see fit. The
challenge for any instructor is to reinforce the lessons of the
text in lectures without generating student unrest by merely
repeating what’s in the book. These lecture notes address
that challenge by constructing examples that run parallel to
those presented in the book, yet are different from them in
interesting contextual ways. Also available is a complete set
of richly illustrated PowerPoint files to accompany these
lecture notes. Instructors are also welcome to customize
these files as they wish.
xv
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 BR I EF C ONTE N TS

PART 1 Introduction
1 Thinking Like an Economist 1
2 Supply and Demand 29
3 A Brief Look at Macroeconomics 61

PART 2 Competition and the Invisible Hand

4 Demand and Elasticity 75
5 Perfectly Competitive Supply 101
6 Efficiency, Exchange, and the Invisible Hand in Action 129

PART 3 Market Imperfections

7 Monopoly, Oligopoly, and Monopolistic Competition 153
8 Games and Strategic Behavior 181
9 Externalities and Property Rights 207

PART 4 Economics of Public Policy

10 Using Economics to Make Better Policy Choices 231

PART 5 International Trade

11 International Trade and Trade Policy 249

PART 6 Macroeconomics: Issues and Data

12 Macroeconomics: The Bird’s-Eye View of the Economy 267
13 Measuring Economic Activity: GDP, Unemployment, and Inflation 285

PART 7 The Economy in the Long Run

14 Economic Growth, Productivity, and Living Standards 323
15 The Labor Market: Workers, Wages, and Unemployment 355
16 Saving and Capital Formation 381
17 Money, the Federal Reserve, and Global Financial Markets 411

PART 8 The Economy in the Short Run

18 Short-Term Economic Fluctuations and Fiscal Policy 449
19 Stabilizing the Economy: The Role of the Fed 479
20 Inflation and Aggregate Supply 515

PART 9 The International Economy

21 Exchange Rates and the Open Economy 549
xviii
C ON T E N TS

PART 1 Introduction Summary 54 ∙ Key Terms 55 ∙ Review Questions 56 ∙

Problems 56 ∙ Answers to Concept Checks 57 ∙ Appendix:
Chapter 1 Thinking Like an Economist 1 The Algebra of Supply and Demand 59

Economics: Studying Choice in a World of

Scarcity 2
Applying the Cost-Benefit Principle 3
Economic Surplus 4
Opportunity Cost 4
The Role of Economic Models 4
Three Important Decision Pitfalls 5
Pitfall 1: Measuring Costs and Benefits as Proportions
Rather than Absolute Dollar Amounts 6
Pitfall 2: Ignoring Implicit Costs 6
Pitfall 3: Failure to Think at the Margin 8
Normative Economics versus Positive Economics 12
Economics: Micro and Macro 12
The Approach of This Text 13
Economic Naturalism 13
THE ECONOMIC NATURALIST 1.1 14
THE ECONOMIC NATURALIST 1.2 15
THE ECONOMIC NATURALIST 1.3 15
Summary 16 ∙ Key Terms 16 ∙ Review Questions 17 ∙
Problems 17 ∙ Answers to Concept Checks 18 ∙ Appendix:
Working with Equations, Graphs, and Tables 19
Chapter 2 Supply and Demand 29
What, How, and for Whom? Central Planning
versus the Market 31
Buyers and Sellers in Markets 32
The Demand Curve 33
The Supply Curve 34
Market Equilibrium 35
Rent Controls Reconsidered 39
Pizza Price Controls? 41
Predicting and Explaining Changes in
Prices and Quantities 42
Shifts in Demand 43
THE ECONOMIC NATURALIST 2.1 45
Shifts in the Supply Curve 46
THE ECONOMIC NATURALIST 2.2 48
Four Simple Rules 49
THE ECONOMIC NATURALIST 2.3 51
Efficiency and Equilibrium 52
Cash on the Table 52
Smart for One, Dumb for All 53
Chapter 3 A Brief Look at
Macroeconomics 61
The Financial Crisis of 2008 62
Classical Macroeconomic Theory 64
The Keynesian Revolution and the New Deal 65
The Lessons of Post-Crisis Experience 68
Why Does the Dispute Linger? 69
Avoiding Protracted Downturns in the Future 70
THE ECONOMIC NATURALIST 3.1 72
Concluding Remarks 72
Summary 73 ∙ Key Terms 73 ∙ Review Questions 74 ∙
Problems 74 ∙ Answers to Concept Checks 74
PART 2 Competition and the
Invisible Hand
Chapter 4 Demand and Elasticity 75
The Law of Demand 76
The Origins of Demand 76
Needs versus Wants 77
THE ECONOMIC NATURALIST 4.1 77
Applying the Law of Demand 78
Substitution at Work 78
THE ECONOMIC NATURALIST 4.2 78
THE ECONOMIC NATURALIST 4.3 79
THE ECONOMIC NATURALIST 4.4 80
The Importance of Income Differences 80
THE ECONOMIC NATURALIST 4.5 80
Individual and Market Demand Curves 81
Horizontal Addition 81
Elasticity 82
Price Elasticity of Demand 83
Price Elasticity Defined 83
Determinants of Price Elasticity of
Demand 84
Some Representative Elasticity Estimates 85
Using Price Elasticity of Demand 86
THE ECONOMIC NATURALIST 4.6 86
THE ECONOMIC NATURALIST 4.7 87

xix
xx CONTENTS
A Graphical Interpretation of Price Elasticity 88
Price Elasticity Changes along a Straight-Line
Demand Curve 90
Two Special Cases 91
Elasticity and Total Expenditure 92
Income Elasticity and Cross-Price Elasticity of
Demand 96
Summary 96 ∙ Key Terms 97 ∙ Review Questions 97 ∙
Problems 97 ∙ Answers to Concept Checks 99
Chapter 5 Perfectly Competitive Supply 101
Thinking about Supply: The Importance of
Opportunity Cost 102
Individual and Market Supply Curves 103
Profit-Maximizing Firms in Perfectly
Competitive Markets 105
Profit Maximization 105
The Demand Curve Facing a Perfectly
Competitive Firm 106
Production in the Short Run 106
Choosing Output to Maximize Profit 107
Price Equals Marginal Cost: The Seller’s Supply Rule 110
Graphing Marginal Cost 111
The “Law” of Supply 113
Applying the Theory of Supply 113
THE ECONOMIC NATURALIST 5.1 114
Determinants of Supply Revisited 116
Technology 117
Input Prices 117
The Number of Suppliers 117
Expectations 117
Changes in Prices of Other Products 117
The Price Elasticity of Supply 118
Determinants of Supply Elasticity 120
THE ECONOMIC NATURALIST 5.2 122
Unique and Essential Inputs: The Ultimate Supply
Bottleneck 124
Summary 125 ∙ Key Terms 125 ∙
Review Questions 125 ∙ Problems 126 ∙
Answers to Concept Checks 127
Chapter 6 Efficiency, Exchange, and the
Invisible Hand in Action 129
The Central Role of Economic Profit 130
Three Types of Profit 130
The Invisible Hand Theory 134
Two Functions of Price 134
Responses to Profits and Losses 134
The Effect of Market Forces on Economic Profit 136
The Importance of Free Entry and Exit 137
The Invisible Hand in Action 137
THE ECONOMIC NATURALIST 6.1 138
Economic Rent versus Economic Profit 139
The Distinction between an Equilibrium and a
Social Optimum 141
Smart for One, Dumb for All 142
THE ECONOMIC NATURALIST 6.2 142
Market Equilibrium and Efficiency 143
Efficiency Is Not the Only Goal 146
Why Efficiency Should Be the First Goal 146
The Cost of Preventing Price Adjustments 147
Summary 149 ∙ Key Terms 150 ∙
Review Questions 150 ∙ Problems 150 ∙
Answers to Concept Checks 151
PART 3 Market Imperfections
Chapter 7 Monopoly, Oligopoly, and
Monopolistic Competition 153
Perfect and Imperfect Competition 154
Different Forms of Imperfect Competition 154
The Essential Difference between Perfectly and
Imperfectly Competitive Firms 155
Five Sources of Market Power 157
Exclusive Control over Important Inputs 157
Patents and Copyrights 157
Government Licenses or Franchises 157
Economies of Scale and Natural Monopolies 157
Network Economies 158
Economies of Scale and the Importance of
Start-Up Costs 158
THE ECONOMIC NATURALIST 7.1 161
Profit Maximization for the Monopolist 162
Marginal Revenue for the Monopolist 162
The Monopolist’s Profit-Maximizing
Decision Rule 165
Being a Monopolist Doesn’t Guarantee an
Economic Profit 166
Why the Invisible Hand Breaks Down under
Monopoly 167
Using Discounts to Expand the Market 168
Price Discrimination Defined 169
THE ECONOMIC NATURALIST 7.2 169
How Price Discrimination Affects Output 170
The Hurdle Method of Price Discrimination 172
Is Price Discrimination a Bad Thing? 174
Examples of Price Discrimination 175
THE ECONOMIC NATURALIST 7.3 176
Summary 177 ∙ Key Terms 178 ∙
Review Questions 178 ∙ Problems 178 ∙
Answers to Concept Checks 179

Chapter 8 Games and Strategic Behavior 181
Using Game Theory to Analyze Strategic Decisions 182
The Three Elements of a Game 182
Nash Equilibrium 183
The Prisoner’s Dilemma 185
The Original Prisoner’s Dilemma 186
The Economics of Cartels 187
THE ECONOMIC NATURALIST 8.1 187
Tit-for-Tat and the Repeated Prisoner’s Dilemma 190
THE ECONOMIC NATURALIST 8.2 191
THE ECONOMIC NATURALIST 8.3 192
Games in Which Timing Matters 193
Credible Threats and Promises 195
Monopolistic Competition When Location Matters 196
THE ECONOMIC NATURALIST 8.4 197
Commitment Problems 198
Solving Commitment Problems with Psychological
Incentives 200
Summary 202 ∙ Key Terms 203 ∙ Review Questions 203 ∙
Problems 203 ∙ Answers to Concept Checks 206
Chapter 9 Externalities and Property
Rights 207
External Costs and Benefits 207
How Externalities Affect Resource Allocation 208
The Coase Theorem 209
Remedies for Externalities 213
THE ECONOMIC NATURALIST 9.1 214
THE ECONOMIC NATURALIST 9.2 215
Property Rights and the Tragedy of the Commons 216
The Problem of Unpriced Resources 216
The Effect of Private Ownership 219
When Private Ownership Is Impractical 220
THE ECONOMIC NATURALIST 9.3 220
THE ECONOMIC NATURALIST 9.4 221
Positional Externalities 222
Payoffs That Depend on Relative Performance 222
THE ECONOMIC NATURALIST 9.5 222
Positional Arms Races and Positional Arms
Control Agreements 223
Social Norms as Positional Arms Control Agreements 224
Summary 227 ∙ Key Terms 227 ∙ Review Questions 227 ∙
Problems 228 ∙ Answers to Concept Checks 229
PART 4 Economics of Public Policy
Chapter 10 Using Economics to Make Better
Policy Choices 231
The Economics of Health Care 232
The Case for Mandatory Immunization Laws 232
CONTENTS xxi
Explaining Rising Health Care Costs 232
Designing a Solution 234
The HMO Revolution 235
THE ECONOMIC NATURALIST 10.1 235
The Problem with Health Care Provision through
Private Insurance 236
The Affordable Care Act of 2010 237
Using Price Incentives in Environmental Regulation 238
Taxing Pollution 238
Auctioning Pollution Permits 240
Climate Change and Carbon Taxes 241
Methods of Income Redistribution 243
Welfare Payments and In-Kind Transfers 243
Means-Tested Benefit Programs 243
The Negative Income Tax 244
Minimum Wages 244
The Earned-Income Tax Credit 245
Public Employment for the Poor 245
A Combination of Methods 245
Summary 246 ∙ Key Terms 247 ∙ Review Questions 247 ∙
Problems 247 ∙ Answers to Concept Checks 248
PART 5 International Trade
Chapter 11 International Trade and Trade
Policy 249
Comparative Advantage as a Basis for Trade 250
A Supply and Demand Perspective on Trade 254
Winners and Losers from Trade 256
Protectionist Policies: Tariffs and Quotas 258
Tariffs 258
Quotas 260
THE ECONOMIC NATURALIST 11.1 262
The Inefficiency of Protectionism 263
THE ECONOMIC NATURALIST 11.2 263
Summary 264 ∙ Key Terms 265 ∙
Review Questions 265 ∙ Problems 265 ∙
Answers to Concept Checks 266
PART 6 Macroeconomics: Issues and
Data
Chapter 12 Macroeconomics: The Bird’s-Eye
View of the Economy 267
The Major Macroeconomic Issues 268
Economic Growth and Living Standards 269
Productivity 270
Recessions and Expansions 272
Unemployment 272
Inflation 274
Economic Interdependence among Nations 275
xxii CONTENTS
Macroeconomic Policy 276
Types of Macroeconomic Policy 276
Positive versus Normative Analyses of
Macroeconomic Policy 277
Aggregation 278
Studying Macroeconomics: A Preview 281
Summary 282 ∙ Key Terms 282 ∙ Review Questions 282 ∙
Problems 283 ∙ Answers to Concept Checks 283
Chapter 13 Measuring Economic Activity:
GDP, Unemployment, and Inflation 285
Gross Domestic Product: Measuring the Nation’s
Output 286
Market Value 286
Final Goods and Services 289
Produced within a Country during a Given Period 292
Different Methods for Measuring GDP 293
The Expenditure Method for Measuring GDP 293
GDP and the Incomes of Capital and Labor 297
Nominal GDP versus Real GDP 299
Real GDP, Economic Growth, and Economic
Well-Being 301
Unemployment and the Unemployment Rate 302
Measuring Unemployment 302
The Costs of Unemployment 304
The Unemployment Rate versus “True”
Unemployment 305
The Consumer Price Index: Measuring the Price
Level 305
Inflation 308
Adjusting for Inflation 309
Deflating a Nominal Quantity 309
Indexing to Maintain Buying Power 310
THE ECONOMIC NATURALIST 13.1 311
Inflation Measurement and Quality Change 312
THE ECONOMIC NATURALIST 13.2 313
The Costs of Inflation: Not What You Think 314
The True Costs of Inflation 315
Summary 318 ∙ Key Terms 318 ∙ Review Questions 319 ∙
Problems 319 ∙ Answers to Concept Checks 321
PART 7 The Economy in the Long Run
Chapter 14 Economic Growth, Productivity,
and Living Standards 323
The Remarkable Rise in Living Standards:
The Record 325
Why “Small” Differences in Growth Rates Matter 326
Why Nations Become Rich: The Crucial Role of Average
Labor Productivity 328
The Determinants of Average Labor Productivity 331
Human Capital 331
THE ECONOMIC NATURALIST 14.1 332
Physical Capital 333
Land and Other Natural Resources 335
Technology 336
THE ECONOMIC NATURALIST 14.2 336
Entrepreneurship and Management 337
THE ECONOMIC NATURALIST 14.3 338
The Political and Legal Environment 339
Real GDP and Economic Well-Being 340
Real GDP Isn’t the Same as Economic Well-Being 341
THE ECONOMIC NATURALIST 14.4 341
But GDP Is Related to Economic Well-Being 343
THE ECONOMIC NATURALIST 14.5 344
The Costs of Economic Growth 345
Promoting Economic Growth 346
Policies to Increase Human Capital 346
THE ECONOMIC NATURALIST 14.6 346
Policies That Promote Saving and Investment 347
Policies That Support Research and Development 347
The Legal and Political Framework 348
The Poorest Countries: A Special Case? 348
Are There Limits to Growth? 349
Summary 350 ∙ Key Terms 351 ∙ Review Questions 351 ∙
Problems 352 ∙ Answers to Concept Checks 353
Chapter 15 The Labor Market: Workers,
Wages, and Unemployment 355
Five Important Labor Market Trends 356
Trends in Real Wages 356
Trends in Employment and Unemployment 357
Supply and Demand in the Labor Market 357
Wages and the Demand for Labor 358
Shifts in the Demand for Labor 360
The Supply of Labor 363
Shifts in the Supply of Labor 364
Explaining the Trends in Real Wages and
Employment 365
Large Increases in Real Wages in Industrialized
Countries 365
Real Wage Growth in the United States Has Stagnated
since the Early 1970s, While Employment Growth Has
Been Rapid 366
Increasing Wage Inequality: The Effects of Globalization
and Technological Change 368
Unemployment 372
Types of Unemployment and Their Costs 373
Impediments to Full Employment 374
Summary 376 ∙ Key Terms 377 ∙ Review Questions 377 ∙
Problems 378 ∙ Answers to Concept Checks 379

Chapter 16 Saving and Capital Formation 381
Saving and Wealth 382
Stocks and Flows 383
Capital Gains and Losses 384
THE ECONOMIC NATURALIST 16.1 385
Why Do People Save? 386
THE ECONOMIC NATURALIST 16.2 387
Saving and the Real Interest Rate 388
Saving, Self-Control, and Demonstration Effects 391
THE ECONOMIC NATURALIST 16.3 392
National Saving and Its Components 393
The Measurement of National Saving 394
Private and Public Components of National Saving 395
Public Saving and the Government Budget 396
Is Low Household Saving a Problem? 398
Investment and Capital Formation 399
THE ECONOMIC NATURALIST 16.4 402
Saving, Investment, and Financial Markets 403
Summary 406 ∙ Key Terms 407 ∙ Review Questions 407 ∙
Problems 408 ∙ Answers to Concept Checks 409
Chapter 17 Money, the Federal Reserve, and
Global Financial Markets 411
Money and Its Uses 412
THE ECONOMIC NATURALIST 17.1 413
Measuring Money 414
Commercial Banks and the Creation of Money 415
The Money Supply with Both Currency and Deposits 418
The Federal Reserve System 420
The History and Structure of the Federal Reserve
System 420
Controlling the Money Supply: Open-Market
Operations 421
The Fed’s Role in Stabilizing Financial Markets:
Banking Panics 422
THE ECONOMIC NATURALIST 17.2 423
The Financial System and the Allocation of Saving to
Productive Uses 425
The Banking System 425
THE ECONOMIC NATURALIST 17.3 426
Bonds and Stocks 427
Bond Markets, Stock Markets, and the
Allocation of Savings 432
The Informational Role of Bond and
Stock Markets 432
Risk Sharing and Diversification 432
THE ECONOMIC NATURALIST 17.4 433
International Capital Flows 434
Capital Flows and the Balance of Trade 435
The Determinants of International Capital Flows 437
CONTENTS xxiii
Saving, Investment, and Capital Inflows 438
The Saving Rate and the Trade Deficit 440
THE ECONOMIC NATURALIST 17.5 441
Summary 443 ∙ Key Terms 444 ∙ Review Questions 444 ∙
Problems 445 ∙ Answers to Concept Checks 446
PART 8 The Economy in the Short Run
Chapter 18 Short-Term Economic Fluctuations
and Fiscal Policy 449
THE ECONOMIC NATURALIST 18.1 450
Recessions and Expansions 451
THE ECONOMIC NATURALIST 18.2 454
Some Facts about Short-Term Economic Fluctuations 455
Output Gaps and Cyclical Unemployment 457
Potential Output and the Output Gap 457
The Natural Rate of Unemployment and Cyclical
Unemployment 458
THE ECONOMIC NATURALIST 18.3 459
Why Do Short-Term Fluctuations Occur?
A Preview and a Tale 461
Al’s Ice Cream Store: A Tale about Short-Run
Fluctuations 461
Recessions and Proposed Solutions: Keynes’s Analysis 463
Keynes’s Crucial Assumption: Firms Meet Demand at
Preset Prices 464
THE ECONOMIC NATURALIST 18.4 464
Aggregate Output and Spending 465
Hey Big Spender! Consumer Spending and the
Economy 466
The Multiplier 467
Stabilizing Spending: The Role of Fiscal Policy 468
Government Purchases and Spending 469
THE ECONOMIC NATURALIST 18.5 470
Taxes, Transfers, and Aggregate Spending 471
THE ECONOMIC NATURALIST 18.6 472
Fiscal Policy as a Stabilization Tool:
Three Qualifications 473
Fiscal Policy and the Supply Side 473
The Problem of Deficits 474
The Relative Inflexibility of Fiscal Policy 474
Summary 475 ∙ Key Terms 476 ∙ Review Questions 476 ∙
Problems 477 ∙ Answers to Concept Checks 478
Chapter 19 Stabilizing the Economy: The Role
of the Fed 479
The Federal Reserve and Interest Rates: The Basic Model 480
The Demand for Money 480
Macroeconomic Factors That Affect the Demand for
Money 484
The Money Demand Curve 485
xxiv CONTENTS
THE ECONOMIC NATURALIST 19.1 486
The Supply of Money and Money Market Equilibrium 487
How the Fed Controls the Nominal Interest Rate 489
The Role of the Federal Funds Rate in Monetary
Policy 491
Can the Fed Control the Real Interest Rate? 491
The Federal Reserve and Interest Rates: A Closer
Look 493
Can the Fed Fully Control the Money Supply? 493
Do Interest Rates Always Move Together? 496
The Effects of Federal Reserve Actions on the
Economy 499
Aggregate Expenditure and the Real Interest Rate 500
The Fed Fights a Recession 502
THE ECONOMIC NATURALIST 19.2 503
The Fed Fights Inflation 504
THE ECONOMIC NATURALIST 19.3 505
THE ECONOMIC NATURALIST 19.4 506
THE ECONOMIC NATURALIST 19.5 506
The Fed’s Policy Reaction Function 508
THE ECONOMIC NATURALIST 19.6 508
Monetary Policymaking: Art or Science? 510
Summary 511 ∙ Key Terms 512 ∙ Review Questions 512 ∙
Problems 512 ∙ Answers to Concept Checks 514
Chapter 20 Inflation and Aggregate
Supply 515
Inflation, Spending, and Output: The Aggregate
Demand Curve 516
Inflation, the Fed, and Why the AD Curve Slopes
Downward 516
Other Reasons for the Downward Slope of the AD
Curve 517
Factors That Shift the Aggregate Demand Curve 518
Shifts of the AD Curve versus Movements
along the AD Curve 520
Inflation and Aggregate Supply 522
Inflation Inertia 522
The Output Gap and Inflation 524
The Aggregate Demand–Aggregate Supply Diagram 526
The Self-Correcting Economy 529
Sources of Inflation 530
Excessive Aggregate Spending 530
THE ECONOMIC NATURALIST 20.1 531
Inflation Shocks 533
THE ECONOMIC NATURALIST 20.2 533
Shocks to Potential Output 536
THE ECONOMIC NATURALIST 20.3 537
Controlling Inflation 538
THE ECONOMIC NATURALIST 20.4 541
THE ECONOMIC NATURALIST 20.5 542
Summary 544 ∙ Key Terms 545 ∙ Review Questions 545 ∙
Problems 545 ∙ Answers to Concept Checks 546
PART 9 The International Economy
Chapter 21 Exchange Rates and the Open
Economy 549
Exchange Rates 550
Nominal Exchange Rates 550
Flexible versus Fixed Exchange Rates 552
The Real Exchange Rate 553
THE ECONOMIC NATURALIST 21.1 555
The Determination of the Exchange Rate in the
Long Run 556
A Simple Theory of Exchange Rates: Purchasing Power
Parity (PPP) 556
Shortcomings of the PPP Theory 559
The Determination of the Exchange Rate in the
Short Run 560
The Foreign Exchange Market: A Supply and Demand
Analysis 560
Changes in the Supply of Dollars 562
Changes in the Demand for Dollars 563
Monetary Policy and the Exchange Rate 564
THE ECONOMIC NATURALIST 21.2 565
The Exchange Rate as a Tool of Monetary Policy 565
Fixed Exchange Rates 566
How to Fix an Exchange Rate 566
Speculative Attacks 570
Monetary Policy and the Fixed Exchange Rate 571
THE ECONOMIC NATURALIST 21.3 573
THE ECONOMIC NATURALIST 21.4 573
THE ECONOMIC NATURALIST 21.5 574
Should Exchange Rates Be Fixed or Flexible? 576
THE ECONOMIC NATURALIST 21.6 576
Summary 577 ∙ Key Terms 578 ∙ Review Questions 579 ∙
Problems 579 ∙ Answers to Concept Checks 581
Glossary G-1
Index I-1
ECON OM I C N ATUR A LI ST
EX A M P LE S
1.1 Why do many hardware manufacturers include more
than $1,000 of “free” software with a computer
­selling for only slightly more than that?
1.2 Why don’t auto manufacturers make cars without
heaters?
1.3 Why do the keypad buttons on drive-up automatic
teller machines have Braille dots?
2.1 When the federal government implements a large
pay increase for its employees, why do rents for
apartments located near Washington Metro stations
go up relative to rents for apartments located far
away from Metro stations?
2.2 Why do major term papers go through so many more
revisions today than in the 1970s?
2.3 Why do the prices of some goods, like airline tickets
to Europe, go up during the months of heaviest con-
sumption, while others, like sweet corn, go down?
3.1 Is the low unemployment rate in Germany, whose
government advocates austerity, evidence against
Keynes’s argument?
4.1 Why does California experience chronic water
­shortages?
4.2 Why do the wealthy in Manhattan live in smaller
houses than the wealthy in Seattle?
4.3 Why did people turn to four-cylinder cars in the
1970s, only to shift back to six- and eight-cylinder
cars in the 1990s?
4.4 Why are automobile engines smaller in England than
in the United States?
4.5 Why are waiting lines longer in poorer ­neighborhoods?
4.6 Will a higher tax on cigarettes curb teenage
­smoking?
4.7 Why was the luxury tax on yachts such a disaster?
5.1 When recycling is left to private market forces, why
are many more aluminum beverage containers
­recycled than glass ones?
5.2 Why are gasoline prices so much more volatile than
car prices?
6.1 Why do supermarket checkout lines all tend to be
roughly the same length?
6.2 Are there “too many” smart people working as
­corporate earnings forecasters?
7.1 Why does Intel sell the overwhelming majority of all
microprocessors used in personal computers?
7.2 Why do many movie theaters offer discount tickets
to students?
7.3 Why might an appliance retailer instruct its clerks
to hammer dents into the sides of its stoves and
­refrigerators?
8.1 Why are cartel agreements notoriously unstable?
8.2 How did Congress unwittingly solve the television
advertising dilemma confronting cigarette
­producers?
8.3 Why do people shout at parties?
8.4 Why do we often see convenience stores located on
adjacent street corners?
9.1 What is the purpose of free speech laws?
9.2 Why does the government subsidize private property
owners to plant trees on their hillsides?
9.3 Why do blackberries in public parks get picked too
soon?
9.4 Why are shared milkshakes consumed too quickly?
9.5 Why do football players take anabolic steroids?
10.1 Why is a patient with a sore knee more likely to
­receive an MRI exam if he has conventional health
insurance than if he belongs to a health maintenance
organization?
11.1 Who benefited from and who was hurt by voluntary
export restraints on Japanese automobiles in the
1980s?
11.2 What is fast track authority?
13.1 Every few years there is a well-publicized battle in
Congress over whether the minimum wage should be
raised. Why do these heated legislative debates recur
so regularly?
13.2 Why is inflation in the health care sector apparently
high?
14.1 Why did West Germany and Japan recover so suc-
cessfully from the devastation of World War II?
14.2 Why did U.S. labor productivity grow so rapidly in
the late 1990s?
14.3 Why did medieval China stagnate economically?
14.4 Why do people work fewer hours today than their
great-grandparents did?
14.5 Why do far fewer children complete high school in
poor countries than in rich countries?
14.6 Why do almost all countries provide free public
­education?
16.1 How did American households increase their wealth
in the 1990s and 2000s while saving very little?
16.2 Why do Chinese households save so much?
16.3 Why do U.S. households save so little?
16.4 Why has investment in computers increased so much
in recent decades?
17.1 Is there such a thing as private, or communally
­created, money?
17.2 Why did the banking panics of 1930–1933 reduce
the national money supply?
17.3 What happens to national economies during banking
crises?
xxv
xxvi ECONOMIC NATURALIST EXAMPLES
17.4 Why did the U.S. stock market rise sharply and fall
sharply in the 1990s and again in the 2000s?
17.5 Why is the U.S. Trade deficit so large?
18.1 Do economic fluctuations affect presidential elections?
18.2 How was the 2007 recession called?
18.3 Why has the natural rate of unemployment in the
United States declined?
18.4 Will new technologies eliminate menu costs?
18.5 Does military spending stimulate the economy?
18.6 Why did the federal government temporarily cut
taxes in 2001 and in 2009?
19.1 Why does the average Argentine hold more U.S.
­dollars than the average U.S. citizen?
19.2 How did the Fed respond to recession and the terror
attacks in 2001?
19.3 Why did the Fed raise interest rates 17 times in a row
between 2004 and 2006?
19.4 Why does news of inflation hurt the stock market?
19.5 Should the Federal Reserve respond to changes in
asset prices?
19.6 What is the Taylor rule?
20.1 How did inflation get started in the United States in
the 1960s?
20.2 Why did oil price increases cause U.S. inflation to
escalate in the 1970s but not in the 2000s?
20.3 Why was the United States able to experience rapid
growth and low inflation in the latter part of the
1990s?
20.4 How was inflation conquered in the 1980s?
20.5 Can inflation be too low?
21.1 Does a strong currency imply a strong economy?
21.2 Why did the dollar appreciate nearly 50 percent in
the first half of the 1980s and nearly 40 percent in
the second half of the 1990s?
21.3 What were the causes and consequences of the East
Asian crisis of 1997–1998?
21.4 What is the IMF and how has its mission evolved
over the years?
21.5 How did policy mistakes contribute to the Great
­Depression?
21.6 Why have 19 European countries adopted a common
currency?
 1
LEARNING OBJECTIVES

Thinking Like an
After reading this chapter, you
should be able to:

L O 1 Explain why having

Economist
more of any good thing
almost always requires
making do with less of
something else.

L O 2 Explain and apply the

How many students are in your introductory economics class? Some classes have just 20 Cost-Benefit Principle,
or so. Others average 35, 100, or 200 students. At some schools, introductory economics which says that an
classes may have as many as 2,000 students. What size is best? ­action should be taken
If cost were no object, the best size might be a single student. Think about it: the if, but only if, its benefit
whole course, all term long, with just you and your professor! Everything could be is at least as great as
custom-tailored to your own background and ability. You could cover the material at just its cost.
the right pace. The tutorial format also would promote close communication and personal L O 3 Discuss three important
trust between you and your professor. And your grade would depend more heavily on pitfalls that occur when
what you actually learned than on your luck when taking multiple-choice exams. Let’s applying the Cost-
suppose, for the sake of discussion, that students have been shown to learn best in the Benefit Principle incon-
tutorial format. sistently.
Why, then, do so many introductory classes still have hundreds of students? The
simple reason is that costs do matter. They matter not just to the university administrators L O 4 Explain why, if you want
who must build classrooms and pay faculty salaries, but also to you. The direct cost of to predict people’s
providing you with your own personal introductory economics course might easily top ­behavior, a good place
$50,000. Someone has to pay these costs. In private universities, a large share of the cost to start is by examining
would be recovered directly from higher tuition payments. In state universities, the bur- their ­incentives.
den would be split between higher tuition payments and higher tax payments. But, in
either case, the course would be unaffordable for most students.
With larger classes, of course, the cost per student goes down. For example, an intro-
ductory economics course with 300 students might cost as little as $200 per student. But
a class that large would surely compromise the quality of the learning environment. Com-
pared to the custom tutorial format, however, it would be dramatically more affordable.
In choosing what size introductory economics course to offer, then, university ad-
ministrators confront a classic economic trade-off. In making the class larger, they lower
the quality of instruction—a bad thing. At the same time, they reduce costs and hence the
tuition students must pay—a good thing.
In this chapter, we’ll introduce some simple ideas that will help you understand and
explain patterns of behavior you observe in the world around you. These principles also
will help you avoid three pitfalls that plague decision makers in everyday life.
1
2 CHAPTER 1 THINKING LIKE AN ECONOMIST

ECONOMICS: STUDYING CHOICE

IN A WORLD OF SCARCITY
Even in rich societies like the United States, scarcity is a fundamental fact of life. There
is never enough time, money, or energy to do everything we want to do or have every-
thing we’d like to have. Economics is the study of how people make choices under con-
ditions of scarcity and of the results of those choices for society.
In the class-size example just discussed, a motivated economics student might
definitely prefer to be in a class of 20 rather than a class of 100, everything else being
equal. But other things, of course, are not equal. Students can enjoy the benefits of
having smaller classes, but only at the price of having less money for other activities.
The student’s choice inevitably will come down to the relative importance of compet-
ing activities.
That such trade-offs are widespread and relevant is one of the most important ideas
of economics. Although we have boundless needs and wants, the resources available to us
are limited. So having more of one good thing usually means having less of another.
Inherent in the idea of a trade-off is the fact that choice involves compromise
­between competing interests. Economists resolve such trade-offs by using cost-benefit
analysis, which is based on the disarmingly simple principle that an action should be taken
if, and only if, its benefits exceed its costs. We call this statement the Cost-Benefit Principle.
With this principle in mind, let’s think about our class-size question again. Imagine
that classrooms come in only two sizes—100-seat lecture halls and 20-seat classrooms—
Are small classes “better” than and that your university currently offers introductory economics courses to classes of
large ones?
100 students. Question: Should administrators reduce the class size to 20 students? Answer:
Reduce if, and only if, the value of the improvement in instruction outweighs its addi-
economics the study of how tional cost.
people make choices under This rule sounds simple. But to apply it we need some way to measure the relevant
conditions of scarcity and of costs and benefits, a task that’s often difficult in practice. If we make a few simplifying
the results of those choices assumptions, however, we can see how the analysis might work. On the cost side, the
for society primary expense of reducing class size from 100 to 20 is that we’ll now need five profes-
sors instead of just one. We’ll also need five smaller classrooms rather than a single big
one, and this too may add slightly to the expense of the move. Let’s suppose that classes
with 20 cost $1,000 per student more than those with 100. Should administrators switch
to the smaller class size? If they apply the Cost-Benefit Principle, they will realize that
doing so makes sense only if the value of attending the smaller class is at least $1,000 per
student greater than the value of attending the larger class.
Would you (or your family) be willing to pay an extra $1,000 for a smaller class? If
not, and if other students feel the same way, then sticking with the larger class size makes
sense. But if you and others would be willing to pay the extra tuition, then reducing the
class size makes good economic sense.
Notice that the “best” class size, from an economic point of view, will generally not
be the same as the “best” size from the point of view of an educational psychologist.
That’s because the economic definition of “best” takes into account both the benefits and
the costs of different class sizes. The psychologist ignores costs and looks only at the
learning benefits of different class sizes.
In practice, of course, different people feel differently about the value of smaller
classes. People with high incomes, for example, tend to be willing to pay more for the
advantage. That helps to explain why average class size is smaller, and tuition higher, at
private schools whose students come predominantly from high-income families.
The cost-benefit framework for thinking about the class-size problem also suggests a
possible reason for the gradual increase in average class size that has been taking place in
American colleges and universities. During the last 30 years, professors’ salaries have
risen sharply, making smaller classes more costly. During the same period, median family
income—and hence the willingness to pay for smaller classes—has remained roughly
constant. When the cost of offering smaller classes goes up but willingness to pay for
smaller classes does not, universities shift to larger class sizes.
Another random document with
no related content on Scribd:
ezeknek ártson, ne lenne arra kötelezve, hogy ne tanusítson
ellenséges magatartást polgártársai többségének véleményével
szemben; sőt még jobban igyekszik kezében tartani őket azáltal,
hogy sokszorosítja azon alkalmakat és eszközöket, melyek által őket
államosíthatja és szocializálhatja.
Végül arra törekszik, hogy megszüntesse a nagy társulatokat és
azok munkásságának eredményét felszívja. Megvásárolja valamely
nagy társaság vasutait, mindenekelőtt azért, hogy kihasználja azokat
s abban a reményben, hogy az állam ebből nyereségre fog szert
tenni. Mindenekfelett pedig azért, hogy ezen társaság összes
alkalmazottainak és hivatalnokainak személyzetét eltávolítsa, akik
nem törekedtek az állam, a kormány, a polgárok többsége
tetszésének megnyerésére és akiknek nem volt egyéb gondjuk és
egyéb kötelességük, mint hogy jó alkalmazottak legyenek és végül
arra törekszik, hogy helyettesítse azokat, – bár az egyének
ugyanazok maradnak, – az állami alkalmazottak olyan személyzete
által, akiket mindenekelőtt alkalmazkodóknak és jóérzelműeknek
tart.
Ezen uralomnak legszélsőbb és tökéletes állapotában, vagyis a
szocialista kormányrendszerben, csak hivatalnokok lennének.
– Következésképen – mondják az eméleti szocialisták – a jelzett
összes állítólagos hátrányokat ki fogjuk kerülni. Az állam, a
demokrácia, az uralkodó-párt, bármiként nevezzük is azt, tényleg
nem fog abba a helyzetbe jutni, hogy hivatalnokait – mikén az előbb
mondottak feltüntetik – alkalmazkodásuk és hozzá nem értésük
alapján válassza meg, minthogy az összes polgárok hivatalnokok
lennének. Eltünnék tehát ilymódon azon társadalmi dualizmus,
amely abban áll, hogy a népesség egy része az államból él, egy
másik része pedig önmagát tartja fenn és azzal kérkedik, hogy
magasabbrendű amannál jellemben, értelmiségben és
hivatottságban az előadott indokoknál fogva. Ebben rejlik a
megoldás.
– Kételkedem, hogy az legyen a megoldás, minthogy a
szocialista uralomban fennmarad a választási rendszer,
következésképen fennmaradnak a pártok. A polgárok megválasztják
a törvényhozókat, a törvényhozók a kormányt, a kormány pedig
megválasztja a munkakörök főnökeit és a javak szétosztóit. A pártok,
vagyis az érdekcsoportok fennállanak, minden csoport magának
akarja megszerezni a törvényhozókat és a kormányt, hogy a maga
számára nyerje meg ezektől ezen uralom arisztokratáit, t. i. a
munkakörök főnökeit és a javak szétosztóit, hogy a nevezettek ezen
csoport tagjai részére a munkát sokkal enyhébbé s a jövedelmet
sokkal dúsabbá tegyék.
Kivéve azt, hogy a gazdagság és ami még a szabadságból
megmaradt eltöröltetett: semmi sem változott meg s mindazon
hátrányok, melyeket fenntebb felsoroltam továbbra is fennmaradnak.
A megoldás nem következett be.
Hogy meg legyen a megoldás, szükséges volna, hogy a
szocialista kormányzatnak ne választás legyen az alapja; szükséges
volna, hogy isteni jogon alapuljon, mint a jezsuiták uralma
Paraguayban;22 szükséges volna, hogy zsarnoki legyen nem csupán
cselekedeteiben, hanem eredetére nézve is; szükséges volna, hogy
királyság legyen. Az okos királynak nincs semmi érdeke abban, hogy
hivatalnokait a hivatás nélkül valók közül válassza, sőt inkább az az
érdeke, hogy határozottan éppen az ellenkezőt cselekedje. Erre azt
felelhetik nekem, hogy rendkívül ritka eset és rendellenes dolog az,
hogy a király intelligens legyen; nem óhajtom, hogy ezt elismerjék. A
királynak – kevés kivétel mellett és amit a történet csudálkozva
jegyez föl – határozottan ugyanazon indokokból vannak kegyencei,
miként a népnek, akik őt nem homályosítják el és nem szállnak
szembe vele, következésképen akik nem értékesebbek, mint a többi
polgár, sem értelmiség, sem jellem tekintetében. A választáson
alapuló szocialista uralom és a diktátori szocialista uralom tehát
ugyanazon hátrányokat tünteti föl, mint aminőket a demokráciánál
ismerünk.
Egyébiránt alapjában véve a demokráciának a szocializmus felé
való csúszás-mászása – ha szabad magunkat ekként kifejeznünk –
nem egyéb, mint visszatérés a zsarnoksághoz. Ha a szocialista
uralom megalakulna, elsősorban is választási uralom lenne;
minthogy pedig minden választáson alapuló uralom feltételezi,
megengedi és szükségeli a pártokat, az uralkodó párt lenne az,
amely megválasztaná a törvényhozókat s amely ennek
következtében megalakítaná a kormányt és amely ezen kormánytól
nyerné el az összes kegyeket, miután azokat a maga számára
kierőszakolná. Az elv tehát az volna, hogy az országot a többség
kizsákmányolja, amint az meg is van minden olyan országban, ahol
a kormányzat választáson nyugszik.
De a szocialista kormányzat mindenekfelett a munkakörök
főnökeinek és a javak kiosztóinak olygarchiája és még hozzá nagyon
merev olygarchiája lévén, uralma alatt csakis védelem nélkül való
lények állanak, akik egyenlők a szegénységben és egyenlőkké
téttettek a nyomorúságban; ezen olygarchia egyébaránt nagyon
nehezen pótolható, ameddig a rendkívüli módon bonyolult
közigazgatás – amelyet kezeiben tart – azt követeli, hogy minden
hirtelen változás nélkül, minden a maga helyén maradjon, mint
elmozdíthatatlan olygarchia tehát csakhamar egy vezér körül
összpontosulna és elnyomná, vagy a második helyre és a második
rangsorozatba szorítaná a nemzeti képviseletet választóival együtt.
Ez hasonló volna némileg ahhoz, ami Franciaországban az első
császárság alatt történt. Az első császárság alatt a harcosok
osztálya van túlsúlyban és az uralkodik, háttérbe szoríthat és
eltiporhat mindent, miután reá állandóan szükség van s amely ha
elenyészett: újra születik és amely egy vezér körül csoportosul, aki
neki egységet ad és biztosítja számára az egység erejét.
A szocialista uralom mellett – igaz, hogy sokkal lassabban egy
emberöltő után a munkavezetők és a javak kiosztói, ezen békés
janicsárok – egy nagyon zárt, összetartó s szűkkörű kasztot
alkotnának, amelyet nem lehetne nélkülözni, ellenben a
törvényhozók nélkülözhetők, minthogy helyettük elegendő az
államtanács;23 majd egy vezér körül csoportosulnának, aki nekik az
egységet s az egység erejét adná meg.
Midőn még a szocializmust nem ismerték, állandóan azt
mondták, hogy a demokrácia természeténél fogva a zsarnokság felé
hajlik. Ez mintha megváltozott volna és úgy tetszett, hogy a
demokrácia a szocializmus felé hajlik. Ámde semmi sem változott
meg, mert midőn a demokrácia a szocializmus felé hajlik, a
zsarnokság felé törekszik. Ezt azonban öntudatlanul cselekszi, mert
tudatosan az egyenlőség felé törekszik; az egyenlőség állapotából
pedig mindig zsarnokság fejlődik ki.
Ez a jövőt illetőleg egy kissé eltérő elmélkedés volt. Térjünk
vissza tárgyunkhoz.
 IV.

A HIVATÁSOS TÖRVÉNYHOZÓ.

A demokrácia – amint az mai napság fennáll, – megtámadja a

végrehajtó hatalmat, meghódítja és magába olvasztja azt; támadást
intéz a közigazgatási hatalom ellen, meghódítja és magába olvasztja
azt és mindezt a törvényhozóknak – az ő képviselőinek
közvetítésével teszi, akiket a maga képére választ meg, vagyis
akiket azért választ meg, mert hivatástalanok és szenvedélyesek,
minthogy «a nép sohasem cselekszik más indokból, mint
szenvedélyből» miként Montesquieu – magának kissé ellentmondva
állítja.
De hát milyenek legyenek a törvényhozók? Úgy tetszik nekem,
hogy éppen ellenkezőnek kellene lenniök, mint amilyenek a
demokrácia által választott törvényhozók. Az eszményi
törvényhozónak nagyon tájékozottnak és a szenvedélyektől minden
tekintetben mentesnek kell lennie.
Nagyon tájékozottnak kell lennie, nem annyira a könyvekben
foglalt dolgokban, – ámbár eléggé kiterjedt jogi ismeretekkel kell
bírnia, nehogy ami minden pillanatban megtörténik, határozottan az
ellenkezőjét tegye annak, amit tenni akarna – mint inkább tisztában
kell lennie azon népnek, melynek számára törvényeket hoz
vérmérsékletével és közszellemével is.
Mert nem szabad a népnek más rendeleteket és szabályokat
adni, mint amilyeneket elviselni képes; és csodálatosan beválik itt
Solon24 ezen mondása: «azon legjobb törvényeket adtam nekik,
melyeket képesek voltak elviselni». Nemkülönben tiszteletreméltó a
zsidók istenének ezen mondása: «olyan parancsolatokat adtam
nektek, amelyek nem jók», vagyis csak annyiban jók, amennyit a ti
gonoszságtok megengedhet; «ez törli el mindazon nehézségeket,
amelyeket a mózesi törvények ellen lehet emelni» – mondja
Montesquieu.
A törvényhozónak tehát ismernie kell azon népnek, melynek
számára törvényeket hoz, véralkatát és szellemét; járatosnak kell
lennie – miként a németek mondják – a népek psychológiájában és
jegyezzük meg, hogy ismernie kell népének véralkatát, jellemét és
közszellemét, anélkül, hogy maga is bírna ezen véralkattal,
jellemmel és szellemmel; mert a szenvedélyek, hajlamok és
törekvések körében az átérzés még nem megismerés, sőt
ellenkezőleg átérezni annyi, mint nem ismerni a dolog lényegét: a
megismerés feltétele éppen ezen érzelmek hiánya.
Az eszményi, vagy legalább is a megfelelő törvényhozónak
ismernie kell népének általános hajlamait és szükséges, hogy ezen
hajlamok fölé emelkedjék és uralkodjék azok felett, minthogy az a
hivatása: részben eleget tenni azoknak, részben pedig leküzdeni
azokat.
Részben tehát eleget kell tenni azoknak, vagy legalább is
kímélnie kell azokat, minthogy az olyan törvény, amely teljes
mértékben ellentétben állana a nép vérmérsékletével, olyan lenne
mint a Roland kancalova,25 amely a világon minden jó
tulajdonsággal bírna egyetlen hiba mellett, hogy halott, sőt halva
született. Adjatok a rómaiaknak a népek jogából eredő olyan
törvényt, amely kíméletet rendel el a legyőzött népekkel szemben,
ezt a törvényt sohasem fogják végrehajtani, sőt bizonyos mételyezés
folytán hozzá fognak szokni ahhoz, hogy más törvényeket se
hajtsanak végre. Adjatok a franciáknak olyan szabadelvű törvényt,
amely az ember és polgár egyéni jogainak tiszteletben tartását
rendeli el, minthogy a szabadság a franciáknál abban áll, – miként
Joannes báró mondja, – hogy: «joga legyen mindenkinek azt tenni,
amit akar s megakadályozni másokat abban, hogy azt tegyék, amit
akarnak», ily módon ez a törvény mindig csak közepesen és kínosan
lesz végrehajtva és szokássá teszi, hogy a többi törvények se
hajtassanak végre.
A törvényhozónak tehát ismernie kell népének hajlamait, hogy
megszabhassa magának azon határokat, amelyek között meg kell
állapodnia vele szemben.
Tehát részben legyőzni azokat; mert a törvénynek azon népnél,
mely azt csak rendészeti szabálynak tekinti, olyannak kell lennie,
amilyen az egyén erkölcsi törvénye, az üdvös eredmények
szempontjából bírjon az állandósított kényszer jellegével s kell, hogy
a romboló szenvedélyek, az ártalmas hangulatok s a veszedelmes
szeszélyek féke legyen; le kell küzdenie az ént, vagy jobban mondva
olyan észszerű énnek kell lennie, ami leküzdi a szenvedélyes ént. Ez
az, amit Montesquieu meg akar értetni akkor, midőn mondja, hogy
«a szokásoknak le kell küzdeniök a körülményeket, a törvényeknek
pedig a szokásokat».
A törvénynek tehát bizonyos mértékben le kell küzdenie a nép
általános hajlamait. Szükséges, hogy a törvény a nemzet
vezérfonala legyen, melyet egy kevéssé szeressenek, mivel jónak
találják, kissé féljenek attól, mivel szigorúnak találják, kissé gyűlöljék,
mivel viszonylag ellenségesnek találják, végül tiszteljék, mivel
szükségesnek tartják.
Ilyen törvényt kell hoznia a törvényhozónak; következésképen
rendkívüli finomsággal kell ismernie azon népnek, amelynek
számára törvényeket hoz, egész lelkületét, valamint ismernie kell a
népléleknek azon árnyalatait is, amelyek ellenszegülnének éppen
úgy, mint annak azon árnyalatait, amelyek azt elfogadni hajlandók,
nemkülönben ismernie kell azokat is, akikkel minden ellenállás
nélkül képes elfogadtatni a törvényt s azokat is, akikkel szemben
nem teheti ki magát azon veszélynek, hogy erőtlennek láttassék.
Ime ez a legjobb s leglényegesebb hivatottság, amivel a
törvényhozónak bírnia kell.
Másrészről szenvedély nélkül valónak kell lennie. «A mérséklet»
azon erénye, amelyet Cicero26 annyira dicsőít és amely tényleg
nagy ritkaság, ha ezt a szónak valódi értelmében vesszük s ha ez
alatt a léleknek és elmének egyensúlyát értjük – legyen azon alap,
amelyre a törvényhozónak helyezkednie kell. «Azt mondom és úgy
tetszik nekem, hogy ezen művet27 nem egyébért írtam, mint annak
bebizonyítására, hogy a törvényhozónak a mérséklet szellemével
kell bírnia s úgy a politikai értékek, valamint az erkölcsi értékek
mindig két határvonal között mozognak» – mondja Montesquieu.
Semmi sem nehezebb az embernek, mint magát a szenvedélyek
ellen megvédelmezni, következésképen a törvényhozónak is az a
legnehezebb azon nép szenvedélyei ellen védekezni, amelyből
maga is származik, nem számítva a saját magáéit: «Aristoteles ki
akarta elégíteni részint Platon28 elleni féltékenységét, részint Nagy
Sándor iránt való szenvedélyét; Platon az athéni nép zsarnoksága
miatt méltatlankodott; Machiavelli29 el volt telve bálványával,
Valentinois30 hercegével. Moore Tamás,31 ki inkább arról beszélt,
amit olvasott, mint ami felett gondolkozott, minden államot egy görög
város egyszerű mintája szerint akart kormányozni. Harrington32 nem
látott mást, mint az angol köztársaságot, míg az írók tömege
mindenütt rendetlenséget talált, ahol nem látott koronát. «A
törvények mindig összeütköznek a törvényhozó szenvedélyeivel és
előítéleteivel (részint saját szenvedélyeivel, részint azokkal, amelyek
vele és népével közösek). Néha görbe utakon haladnak és ettől
nyerik színezetüket, néha ott rekednek és beolvadnak» – mondja
Montesquieu.
Erre pedig egyáltalában nem volna szükség. A törvényhozónak
ugyanazt a helyet kell betöltenie a nép életében, mint az öntudatnak
az ember lelkében, t. i. ismernie kell a nép minden szenvedélyét,
azoknak egész terjedelmét, horderejét, nem hagyván magát
megcsalatni azok tekintélye, álszenteskedése és titkolódzása által;
majd szembeszállván azokkal, majd legyőzvén egyiket a másik által,
majd kedvezve némileg egyiknek, egy sokkal félelmesebb másik
szenvedély kárára, majd elhagyva a küzdteret, majd visszafoglalva
azt; legyen mindig ügyes, mindig alkalmas, mindig mérsékelt; de ne
hagyja magát sem megközelíteni, sem megfélemlíteni, sem
gyönyörködtetni, sem körülhálózni, sem vezetni természetes
ellenségei által.
Sőt sokkal öntudatosabb legyen – hogy így mondjuk – mint maga
az öntudat, mert nem szabad elfelejtenie, hogy az általa mások
számára hozott törvényt egyszersmind a maga számára is hozta és
amit ma elhatározott, annak holnap is tartozik engedelmeskedni –
semel jussit semper paruit – tehát határozottan és a szó betűszerinti
értelmében – érdek nélkül valónak kell lennie, ami neki sokkal
nehezebb, mint az öntudatnak, amelynek semmi fáradságába sem
kerül, hogy közömbös legyen.
Nemcsak szenvedélyek nélkül valónak kell lennie, hanem még
saját szenvedélyeitől is mentesítenie kell magát: ami sokkal
nehezebb. Olyan szenvedélyre van szükség – képzeljük el – (hogy
hypothezis által tegyük szemlélhetővé), ami öntudattá változhatik;
miként ezt Jean Jaques Rousseau következőleg mondja:
«Hogy feltárhassuk a társadalom lehető legjobb szabályait,
melyek a nemzetek szükségleteinek megfelelnek, magasabbrendű
intelligenciára volna szükségünk, amely látná ugyan az emberek
minden szenvedélyét, de azok közül egyet sem érezne; semmi
összeköttetése sem volna természetünkkel, de ismerné azt
alapjában, boldogulása független volna tőlünk s mégis törődnék
velünk s amely végül időjártával kiérdemelvén egy messzefekvő
dicsőséget, dolgozhatnék az egyik században és gyönyörködhetnék
egy másikban.»
Ez azért van így – miként a találékony Græcia feltételezte – hogy
némely törvényhozó miután elfogadtatta népével törvényeit s
megeskette polgártársait, hogy addig, míg vissza nem tér, meg
fogják tartani azokat: száműzte magát és elvonult messzire
ismeretlen tartózkodási helyre. Ezt talán azért tették, hogy lekössék
polgártársaikat az ilymódon kivett eskü által; de vajjon nem azért
tették-e, hogy ne kelljen engedelmeskedniök a maguk által hozott
törvényeknek s ezen törvények meghozatalánál vajjon nem jártak-e
el túlszigorúan abban bizakodva, hogy elmenekülésükkel szükség
esetén ki fogják alóla vonni magukat? Proudhon33 mondá: «Olyan
szabadelvű köztársaságról álmodom, amelyben engem mint
reakcionáriust kivégeztek volna.» Lycurgus34 talán úgy tett, mint
Proudhon, de aki oly szigorú törvényekkel bíró köztársaságot
alapított, aminőt csak tudott és aki azon erős elhatározásban élt,
hogy elhagyja a köztársaságot azon a napon, amelyen megalkotta.
Solon és Sulla35 bent maradtak azon államban, melynek törvényeket
adtak. Őket tehát Lycurgus fölébe kell helyeznünk, aki elhagyta
övéit. Lycurgusnak egyébiránt az a mentsége, hogy minden
valószínűség szerint nem is létezett.
A fennmaradt legenda bizonyítja, hogy a törvényhozónak épen
úgy kell uralkodnia saját, mint népének szenvedélyein, mint
törvényhozónak pedig olyan törvényeket kell hoznia, amelyek előtt
mint embernek egy vagy más módon magának is remegnie kell.
A szónak általunk adott értelmében vett mérséklet egyébiránt
némelykor azon gondolatot kelti fel a törvényhozóban – miként már
jeleztük – hogy inkább rábeszéléssel, mint erőszakkal fogadtassa el
a törvényt, ami ugyan nem mindig lehetséges, de gyakran
megtörténik. Szent Lajos36 királyról a következőket mondja el
Montesquieu: «Látván a király korának a jogtudománnyal való
visszaéléseit, arra törekedett, hogy a nép megundorodjék attól, ez
okból tehát több rendszabályt készített birodalma és hűbéresei
(bárói), törvényszékei számára és oly nagy eredményt ért el, hogy
kevéssel halála után az ő bíráskodási módszere szerint járt el a
hűbérúri udvarok legnagyobb része. Ekként oldotta meg ezen
fejedelem feladatát, habár rendszabályai nem azért készültek, hogy
a királyság általános érvényű törvényeivé legyenek, de azért, hogy
példaképül szolgáljanak s mindenki saját érdekében követhesse
azokat. Azzal távolította el a rosszat, hogy rámutatott a jobbra.
Midőn a király törvényszékeinél és némely hűbérúri bíróságnál az
illetékes körök látták a sokkal természetesebb, sokkal észszerűbb,
az erkölccsel, a vallással s közbékével, a személy és javak
biztonságával és a közbátorsággal sokkal inkább megegyező
törvénykezési módot, elfogadták ezt és elhagyták a régit, amely csak
árnyéka volt a helyes eljárásnak. A törvényhozó legnagyobb
ügyessége: a rábeszélés, midőn nem szabad ellenállnia és az
irányítás, midőn nem szabad parancsolnia.»
Ehhez Montesquieu bizonyára némi optimizmussal, de ez végre
is kecsegtető – a következőket fűzi: «az észnek megvan a
természetes hatásköre, az ember ellenáll neki, azonban ezen
ellenállás felett az ész mindig győzedelmeskedik, mivel kevés idő
multán kényszerítve leszünk hozzá újból visszatérni».
A példa igen messzefekvő és alig alkalmazható napjainkban
bármire is. Vegyük ezért elő a vasárnapi munkaszünetre vonatkozó
megújított egyházjogi törvényt; ennek a törvénykönyvbe való
felvétele hiba volt, mert ellenkezett a francia szokások igen nagy
részével, sőt bizonyos tekintetben magával a nemzet
komplexumával; a törvényhozók tehát annak tették ki magukat, ami
bekövetkezett, t. i. a törvény alig és csak végtelen nehézségek
mellett volt végrehajtható. El lehetett volna ezt érni a törvénykönyvbe
való beiktatás nélkül is; adja meg u. i. az állam a vasárnapi
munkaszünetet minden alkalmazottja, minden hivatalnoka, minden
munkása számára az igazságügyi miniszter egyszerű
körrendeletébe foglalt azon rendelkezés által, hogy a munkásoknak
a munkabérszerződés ellen elkövetett azon szerződésszegései,
miszerint vasárnap nem állanak munkába, büntetés alá nem esnek:
ilymódon a heti munkaszünet törvénye kihirdetés nélkül is fennáll,
létezik befolyásolás és meggyőzés folytán és hatályát veszti ott, ahol
a vasárnapi munka teljesítésének szüksége annyira nyilvánvaló úgy
a munkások, valamint a munkaadók előtt, hogy mindkét fél aláveti
magát a körülmények kényszerítő erejének, sőt ezenfelül elég ereje
lesz a nemzet évszázados szabályai módosítására, anélkül, hogy
lerontsa azokat.
Lássunk még egy olyan esetet is, midőn magára a
törvénykönyvbe beiktatott törvényre nézve a törvényhozó
befolyásolás vagy ajánlás által jár el. A XIX. század kezdetével a
törvényhozó úgy gondolkozott, hogy a tisztesség követeli a férjtől, ha
tettenéri feleségét a házasságtörésen, hogy megölje bűntársával
együtt. Ezen nézet felett lehet vitatkozni, de ez mégis csak a
törvényhozó nézete volt. Dehát tett-e erre vonatkozó törvényes
intézkedést? Nem tett. A törvényhozó ez irányban a befolyásolás,
bizalmas ajánlás és szenvelgő felbátorítás mellett járt el, ezen
szavakat foglalván törvénybe: «tettenérés esetén a gyilkos férj
felmentendő».37 Nem ezen szöveget helyeslem, hanem azon
eljárást tartom lehetségesnek, mely szerint rámutatunk a törvényre
anélkül, hogy azt kötelező erővel ruháznánk fel; azon módot, mely
szerint véleményt mondunk a helyes gyakorlatról, anélkül, hogy
rendelkeznénk, mert vannak ilyen esetek és viszont vannak más
ettől eltérő esetek, ahol ez fényesen beválnék.
Végül a törvényhozó legfontosabb képességeinek egyike a
fennálló törvények megváltoztatásának tudománya; ez azon nagy
bölcseség, amely legtöbbet követel tőle, azt t. i., hogy mentes legyen
a szenvedélyektől és uralkodjék saját szenvedélyei felett. A
törvénynek csak akkor van igazi tekintélye, midőn régóta fennáll;
vagyis inkább itt két eset lehetséges: vagy nem egyéb a törvény,
mint törvénybe foglalt szokás, tehát igen nagy tekintélye lesz már
keletkezésénél fogva, minthogy értékét emeli a szokásnak –
amelyből eredt – régisége; vagy pedig a törvény nem a törvénybe
átment szokás, sőt épen ellenkezőleg ellentétben áll azzal, ez
esetben tehát, hogy hatályt nyerjen, arra lesz szükség, hogy a
hosszantartó időmúlás folytán maga is szokássá váljék.
Miként mindkét esetben látjuk, valóban a törvény régisége
biztosítja az emberek felett tekintélyének erejét. Olyan a törvény,
mint a növény, kezdetben csak gyönge fácska, majd kifejlődik, kérge
megkeményedik és gyökerei mélyen behatolnak a földbe és
belekapaszkodnak a sziklákba.
Rendkívüli körültekintés szükséges tehát ahhoz, hogy a régi
fatörzs fiatal fácskával helyettesítessék. «A törvényhozók
legnagyobb része – mondja Usbek à Rhédi38 – korlátolt emberekből
állott, akiket a véletlen helyezett a többiek fölé, akik csakis saját
előítéleteiktől és képzeletöktől kértek tanácsot… Gyakran minden
szükség nélkül eltörölték a már megalkotott törvényeket, vagyis
beletaszították a népeket a változtatásoktól elválaszthatatlan
rendetlenségbe. Igaz ugyan, hogy néha meg kell változtatni
bizonyos törvényeket azon különös oknál fogva, amely inkább a
természetből, mint az ember lelkületéből ered; de ezen eset felette
ritka és ha előfordul, csak nagy óvatossággal szabad a törvényt
megbolygatni s annyi ünnepélyességet kell alkalmazni, hogy a nép
ebből természetszerűleg azt következtesse, miszerint a törvények
valóban szentek, mert azok megszüntetéséhez oly sok alakszerűség
szükséges.» – Montesquieu ebben az esetben – miként gyakran –
egészen Aristoteles felfogását követi. Aristoteles u. i. ezt írta:
«Nyilvánvaló, hogy némely törvényt, bizonyos időközökben, meg kell
változtatni, de ez sok körültekintést követel, mert ha a
megváltoztatás alig jár előnnyel – s mert veszedelmes a törvények
könnyű megváltoztatásához hozzá szoktatni a polgárokat – inkább el
kell türni a törvényhozás és a bíróságok egynémely tévedését.
Kevesebb előny származik a törvények megváltoztatásából, mint
amily nagy azon kár, amelyet azon szokás keletkezése okoz, hogy
nem kell engedelmeskedni a bíróságnak.» (Tekintettel kell lennünk
arra is, hogy a bíróságok által alkalmazott törvény gyorsan eltünő,
mulandó jellegű és mindig közel van a megváltoztatáshoz.)
A szerepvivő népek törvényeinek ismerete, mélyreható ismerete
azon nép vérmérsékletének, jellemének, érzelmeinek,
szenvedélyeinek, hajlamainak, nézeteinek, előítéleteinek és
szokásainak, amelyhez a törvényhozó tartozik, a lélek és szív
mérséklése, szenvedélymentesség, érdeknélküliség, hidegvér, sőt a
teljes önuralom: ezek az eszményi törvényhozó tulajdonságai, sőt –
hogy többet mondjunk – ezek azon minősítések, amelyek a jó
törvény hozatalához szükségesek; valóban körülbelül ezek a
törvényhozó elemi tulajdonságai.
Jól megfigyelhettük, hogy mindez majdnem éppen az ellenkezője
azon tulajdonságoknak, amilyeneket a demokrácia törvényhozóiban
kedvel, sőt – hogy így mondjuk, – követel tőlök. A demokrácia
majdnem mindig hivatásnélkül való és tudatlan embereket választ
meg, – kifejtettem, miért és kétszeresen hivatás nélkül valókat,
vagyis olyan embereket, akiknél a szenvedély ellensúlyozza a
hivatottságot, ha ugyan birnak hivatottsággal.
De még egy különös tényt kell itt megfigyelnünk. A demokrácia
annyira szenvedélyük okából és nem szenvedélyük dacára és
annyira szenvedélyességük okából és nem azért, mert bár
szenvedélyesek választja meg megbizottait s annyira azon okokból,
amelyek miatt mellőznie kellene azokat, hogy azon ember, aki
mérsékletre és józan gondolkozásra, a lehetséges és való dolgok
tiszta megfigyelésére képes, realitással és gyakorlati szellemmel bír,
hogy magát megválasztassa s elérje összes erényeinek
gyakorolhatását: kezdi gondosan eltitkolni erényeit s lármásan
hirdetni az erényeivel ellenkező összes hibákat. A polgári háború
jelszavait használja, hogy megválasztathassa magát azon állásra,
amelyen arra számít, hogy jól megvédelmezheti és biztosíthatja a
békét s hogy békeszerzővé válhassék, azzal kell kezdenie, hogy a
lázító alakját öltse magára.
A nép minden kedvence keresztülmegy e kettős folyamaton és
ezen két álláspontot tünteti fel; szükségképen el kell foglalnia az
elsőt, hogy belekezdhessen a másodikba. «Vajjon nem volna jobb
inkább a konzervativsággal kezdeni, mint azzal végezni?» –
Egyáltalában nem volna jobb, mert az ember csak akkor lehet
valóban erősen konzervativ és csak akkor gyakorolhatja a
konzervativ hatalmat, ha mint anarchista kezdte meg pályafutását.
A nép annyira hozzá van szokva ezen átalakulásokhoz, hogy
nem tehet egyebet, mint mosolyog azokon. Azon hátrány azonban
mindig fennforog, hogy azon konzervativ ember, akinek forradalmi
multja van, mindig csupán zavaros és kétségbevont tekintéllyel fog
bírni s életének egy részét azzal fogja eltölteni, hogy
megmagyarázza azon óriási kerülő utat, amelyet megfutott s amely
számára nyüg és akadály.
Mindig az történik, hogy a nép vagy igazán szenvedélyes – vagy
álszenvedélyes embereket választ meg, akik vagy mindig
megmaradnak szenvedélyeseknek – és ezek képezik a
törvényhozók legnagyobb részét – vagy pedig mérsékeltekké válnak,
helytelen irányba terelvén őket új szerepük. És ezek a
szenvedélyesek – hogy a nagy, a túlnagy többségről szóljunk, –
gyalázó szavakban törnek ki a törvényhozásban, ahelyett, hogy ott
tudománnyal, hidegvérrel és bölcseséggel dolgoznának. Az imént
megjelölt szabályok tehát nagyon határozottan megdőltek. A
törvények nem a nép szenvedélyeit nyomják el vagy fékezik meg,
hanem éppen a nép szenvedélyeinek tulajdonképeni kifejezői. A
törvények indítványozása a hadüzenetet – a megszavazott
törvények pedig a győzelmet jelentik; ime meg annyi definició a
törvényhozók elítélésére és a rendszer megvádolására.
 V.

TÖRVÉNYEK A DEMOKRÁCIÁBAN.

A demokráciában hozott összes törvények ismertető jele, hogy

azok alkalmi törvények, amilyeneknek soha sem szabad volna
lenniök. A demokrácia nagyon is távol áll attól, hogy – miként ezt
Montesquieu akarta – mindenesetben félne megbolygatni a régi
törvényeket, hogy megváltoztassa azokat; lebontja a házat, hogy
sátort üssön helyette, az új törvények napról-napra
megsokszorozódnak, amint a szél fú a politika mindennapi
eseményei szerint. Hasonló ez Demosthenes39 barbár harcosához,
aki ott védekezik, ahol épen kapta a csapást, vállon ütve – paizsát
vállára emeli, majdha lábaszárát éri az ütés, gyorsan odakapja azt
az uralkodó párt is csupán azért hozza a törvényeket, hogy
védekezzék valódi – vagy vélt ellensége ellen, vagy pedig nem hoz
rögtönzött, siettetett reformokat csupán valamely botrány vagy
valamely kitörni készülő állítólagos botrány hatása alatt.
Egy «zsarnokságra törekvő egyént» – miként Athénben mondták
– nagyon sok kerületben képviselőnek választottak; gyorsan törvényt
a többszörös jelöltség megtiltására. Ugyanazon okokból s
ugyanazon ember iránti félelemből gyorsan törvényt, mely a
lajstromos szavazást?40 az arrondissement szerint való szavazással
helyettesítse.
Egy vádlottnőt – mondjuk – nagyon meggyötörtek a büntető
vizsgálat alatt, túlgyorsan alávetették az elnöki kihallgatásnak a
törvényszéki tárgyaláson s ügyetlenül vádolta a közvádló is, gyorsan
elő az egész bünvádi peres eljárásra vonatkozó gyökeres reformmal.
 Így járnak el mindenben. A törvények kohója nem egyéb, mint
újdonságok raktára, vagy még inkább olyan, mint a hirlap, amelyben
naponkint egyszer «interpellálnak», ez a vezércikk, majd a
miniszterekhez napjában többször «kérdést» intéznek azon kis
események felől, melyeket imitt-amott jeleztek, ez a regénytárca
vagy az elbeszélés; majd törvényt szerkesztenek arra, ami egy
nappal előbb történt: ez a tudományos értekezés; végül
ökölcsapásokat osztogatnak egymásnak: ez a vegyes rovat.
Nincs az országnak ennél tökéletesebb képviselete, hűséges
képe ez annak; mindaz, amivel reggel foglalkozik, tárgyalás alá kerül
itt este, éppen úgy, mint a Castel-tartarin kereskedelmi kávéházban;
a fecsegő ország nagyító-tükre ez. Tehát a törvényhozókamara ne
legyen az ország képe, hanem legyen az ország lelke – az ország
agyveleje; úgyde tekintetbe véve mindazon indokokat, amelyeket
már elmondottunk, a nemzeti képviselet csupán az ország
szenvedélyeit képviselvén, nem lehet egyéb, mint az ami; vagyis
más szavakkal a modern demokráciát nem törvények, hanem
dekretumok által kormányozzák, minthogy az alkalmi törvények nem
igazi törvények, hanem csupán dekretumok. A törvény a hosszú időn
át tartó gyakorlat által szentesített régi szabály, amelynek a polgárok
engedelmeskednek anélkül, hogy tudnák, vajjon törvény vagy
szokás-e az s amely a mélyen átgondolt, összetartozó, logikus és
egymással összhangban levő szabályok egy része. – A körülmények
által sugalt törvény nem egyéb, mint dekretum. Ez egyike azon
dolgoknak, amelyet Aristoteles igen jól látott és százszorosan
világította meg ezen lényeges és alapvető különbséget, melyet ha
félreismerünk, vagy nem ismerünk fel jól, – igen hátrányos lehet.
Idézem azon tételét, amely e tekintetben a leghatározottabb és
legerőteljesebb: «Végül van a demokráciának egy ötödik fajtája, ahol
a souverainitás a törvényről a sokaságra van átruházva. Ez akkor
következik be, midőn a dekretumok csökkentik a törvény abszolut
tekintélyét. Ez a demagógokba vetett bizalom eredménye. Azon
demokratikus kormányzatban, ahol a törvény uralkodik, nincsenek
demagógok; a legérdemesebb polgárok bírnak elsőbbséggel; de
mihelyt a törvény elvesztette fenségét, felemelkedik a demagógok
tömege. Ettől fogva a nép olyan, mint a százfejű monarcha;
souverain nem egyénileg, hanem testületileg… Az ilyen nép igazi
monarcha, – úgy akar uralkodni, mint a monarcha; felmenti magát a
törvény járma alól és zsarnokká válik; ez okozza, hogy a hizelgők itt
becsületben állnak. Ezen demokrácia az a maga nemében, ami a
zsarnokság a monarchiában. Itt is, ott is elnyomják a vagyonos
embereket: a monarchiában az önkényes rendeletek, a
demokráciában pedig az önkényes dekretumok. A demagógok és
hizelgők egy úton haladnak, van köztük valami hasonlóság, ami őket
összezavarja s egyenlő befolyással bírnak a hizelgő a zsarnokokra,
a demagóg a népre, amely a zsarnokság állapotára sülyedt. A
demagógok okai annak, hogy a souverainitás tekintélye a
dekretumokban van és nem a törvényben, azáltal, hogy mindent a
népre vezetnek vissza; ebből következik, hogy hatalmasokká válnak,
minthogy a nép úr mindenekben, ők maguk pedig urai a népnek…
Tehát joggal mondhatjuk, hogy az ilyen uralom demokrácia és nem
köztársaság; mert ott, ahol a törvények nem uralkodnak, nincs
köztársaság. Valóban, a törvény tekintélyének minden dologra ki kell
terjednie… Következőleg, – ha a demokráciát a kormányformák
közzé lehet számítani – világos, hogy az olyan uralom, amelyben
minden dekretumok által szabályoztatik – még nem is demokrácia,
mert a dekretum sohasem birhat általános jelleggel, mint a törvény.»
A régi és modern szociológusok közti összes különbség –
helyesen felfogva – abban áll, ami az évszázados törvény, vagyis a
tulajdonképeni törvény és az alkalmi törvény, vagyis a dekretum közt
van; továbbá abban, ami egy coordinált törvényhozás részét képező
törvény, vagyis az igazi törvény és azon alkalmi törvény közt van,
amely nem egyéb, mint dekretum, végül abban, ami a mindenkorra
hozott – vagyis az igazi törvény és azon alkalmi törvény közt van,
amely analog a zsarnok velleitásaival és mindenben hasonlatos
ahhoz. Midőn a régi és modern szociológusok törvényről beszélnek,
nem beszélnek egy és ugyanazon dologról, s ez okoz annyi
ellenkező felfogást. Midőn a modern szociológus törvényről beszél
ez alatt a közakaratnak ilyen és ilyen kelet alatti, pl. 1910. évi
kifejezését érti. A régi szociológus előtt a közakaratnak ilyen kelettel
való kifejezése például: II. évi 73-ik Olympiád41 nem törvény, hanem
dekretum. A törvény náluk: Solon, Lycurgus vagy Charondas42
törvényének egyik szakasza. Valahányszor egy görög vagy római
politikus ezen szavakat mondja: törvények által kormányozott állam,
ne fordítsuk le ezt másképen, ne magyarázzuk másképen: ez alatt
egy nagyon régi törvényhozás által kormányozott államot akar érteni,
amely nem változtatja meg ezen törvényhozó hatalmat. Ez adja meg
valódi értelmét a törvények híres személyesítésének a
Phedonban,43 amely együgyűség volna, ha a görögök a
«törvények» alatt azt értették volna, amit mi értünk ezen szó alatt.
Kifejezése a törvény a nép közakaratának? Ha igen, miért tisztelné
azt Socrates, aki utálja a népet, ő aki egész életén át – még büntető
pörében is gúnyolja a népet. Ez képtelenség volna. Ámde a
törvények nem dekretumok, amelyeket a nép Socrates életében hoz,
hanem törvények, melyek az államot oltalmazzák mióta létezik,
olyan törvények ezek, amelyek ősrégi bálványai az államnak.
Ezen törvények tévedhetnek, bizonyság erre az, hogy ezek
alapján Socratest halálra ítélhették; de mégis tekintélyben állottak,
tiszteletben tartották és sérthetetlenek voltak, minthogy oltalmazói
voltak az államnak évszázadok óta és védelmezői voltak magának
Socratesnek is addig a pillanatig, amíg azokkal visszaélve, ellene
nem fordultak.
A köztársaság – tehát ha elfogadjuk Aristoteles kifejezését – az a
nép, amely engedelmeskedik a törvényeknek és midőn
engedelmeskedik azoknak, ez azt jelenti, hogy engedelmeskedik
ősei írott törvényeinek. Tehát ez nem egyéb, mint arisztokrácia; mert
az, hogy nem csupán azoknak engedelmeskedik, akik az ősök
hagyományait képviselik, t. i. a nemességnek, hanem maguknak az
ősöknek is, azok gondolatainak, amelyek egy öt évszázados
törvényhozásban vannak lefektetve, ez inkább arisztokratikusabb
magatartás, mint ha az arisztokratáknak engedelmeskednék. Az
arisztokraták mindig félig a hagyományokhoz, félig saját korukhoz
ragaszkodnak; a négyszáz esztendő óta fennálló törvény négyszáz
esztendős és ez semmi egyebet nem jelent. A törvénynek
engedelmeskedni úgy, amint azt a régi szociológusok is tették, nem
azt jelenti, hogy Scipiónak44 engedelmeskedem, akivel a via
sacran45 találkozom, hanem azt, hogy az ő nagyatyja ősének
engedelmeskedem. Ez ultraarisztokratikus! tökéletesen az! A
törvény arisztokratikus, demokratikus csupán a dekretum, az alkalmi
törvény. Ezért beszél Montesquieu mindig féken tartott, elnyomott s
végeredményben törvények által fenntartott monarchiáról. Vajjon mit
akar ez jelenteni az ő idejében, amidőn a «közakarat» nem nyer
«kifejezést», amidőn ennek következtében a monarchia sem lehet
korlátolva törvények, a közakarat megnyilvánulása által, – olyan
korban, amelyben a királyságot illeti a törvényhozó hatalom, mely
törvényeket hoz, következésképen azon törvényekkel, melyeket ő
maga hoz, leronthat s újraalkothat, – nem lehet őt korlátozni?! De
hát vajjon mit akar ez jelenteni? Ez azt jelenti, hogy «törvény» alatt
Montesquieu – épen úgy mint a régi szociológusok – akiket sikerrel
tanulmányozott – az ő idejében fennálló uralom előtti régi
törvényeket érti, az ősmonarchia régi törvényeit, – (melyeket
«alaptörvényeknek» nevez) s amelyek hozzá kapcsolják s kell is
hogy hozzá kapcsolják a jelenlegi monarchiát, amelyek nélkül
hasonlóvá lenne a zsarnoksághoz, vagy a demokráciához. A törvény
lényegében arisztokratikus. A kormányzottakat a kormányzók által
kormányoztatja, a kormányzókat pedig az elhúnytak által. Az
arisztokráciának épen az a kormányforma a lényege, amely az
élőkre származik át az elhúnytakról, akik már életükben tekintettel
voltak a jövő nemzedékre. Az arisztokrácia a szó helyes értelmében
a húsból való arisztokrácia, a törvény pedig szellem-arisztokrácia; a
szó tulajdonképeni értelmében vett arisztokrácia az elhúnytakat a
hagyomány, az örökösödés, a nyert tanítások, az átszármaztatott
nevelés, nemkülönben a véralkat és jellem fiziológiai átöröklése által
képviseli; a törvény nem képviseli az elhúnytakat, a törvény: maguk
az ősök; a törvény az ő gondolataiknak lefektetése a
törvényszövegbe, amely nem változik, vagy csak észrevétlenül
változik.
Az a nemzet, amely ősi arisztokratikus előkelőségeit megőrzi és
amely diszkrétül, kiméletesen és fokozatosan új embereknek óvatos
befogadása által újítja meg azokat, arisztokratikus rendszer szerint
és arisztokratikus szellemben jár el. Ugyanezen eljárás által
határozottan arisztokratikus, sőt arisztokratikusabb azon nemzet,
amely régi törvényhozását a legnagyobb kegyelettel őrzi meg s