Essential Readings in Economics

412 Pages·1995·43.776 MB·English

by  Saul Estrin, Alan Marin (eds.)

ESSENTIAL READINGS IN ECONOMICS
ESSENTIAL
READINGS IN
ECONOMICS
Edited by
Saul Estrin
London Business School
and
Alan Marin
London School of Economics
Selection, editorial matter and Introduction © Saul Estrin and Alan Marin 1995
Softcover reprint of the hardcover 1st edition 1995
For individual chapters, please see the Acknowledgements.
All rights reserved. No reproduction, copy or transmission of
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No paragraph of this publication may be reproduced, copied or
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Any person who does any unauthorised act in relation to this
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claims for damages.
First published 1995 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 2XS
and London
Companies and representatives
throughout the world
ISBN 978-0-333-59452-0 ISBN 978-1-349-24002-9 (eBook)
DOI 10.1007/978-1-349-24002-9
A catalogue record for this book is available
from the British Library.
10 9 8 7 6 5 4 3 2 1
04 03 02 01 00 99 98 97 96 95
Typeset in 10/12 pt by EXPO Holdings, Malaysia
Contents
Acknowledgements ix
Introduction 1
S. Estrin and A. Marin
PART I THEORY OF CONSUMER DEMAND
1 The Law of Consumer's Demand 19
J. R. Hicks
PART II THEORY OF THE FIRM AND SUPPLY
2 The Nature of the Firm 37
R.H. Coase
3 The Concept of Monopoly and the Measurement of
Monopoly Power 55
A. Lerner
4 Monopoly and Resource Allocation 77
A. C. Harberger
5 Strategic Competition among the Few - Some Recent
Developments in the Economics of Industry 91
J. Vickers
PART III GENERAL EQUILIBRIUM AND WELFARE
6 The Anatomy of Market Failure 129
F. Bator
v
vi Contents
7 Diagrammatic Exposition of a Theory of
Public Expenditure 159
P. A. Samuelson
PART IV ECONOMICS OF UNCERTAINTY AND INFORMATION
8 The Market for 'Lemons': Quality Uncertainty and
the Market Mechanism 175
G. Akerlof
PART V INFLATION AND UNEMPLOYMENT
9 How Important is it to Defeat Inflation? The Evidence 191
R. Bootie
10 The Role of Monetary Policy 215
M. Friedman
11 Inflation and Unemployment 232
J. Tobin
PART VI THE NATURE OF UNEMPLOYMENT
12 Unemployment Policy 257
R. E. Lucas, Jr.
13 On Theories of Unemployment 264
R.M. Solow
14 Efficiency Wage Models of Unemployment 280
J. Yellen
PART VII THE BUSINESS CYCLE
15 The State of Long-Term Expectation 293
J.M. Keynes
16 Understanding Business Cycles 306
R. E. Lucas, Jr.
17 Real Business Cycles: A New Keynesian Perspective 328
N. G.Mankiw
Contents vii
PART VIII CONTROL OF MACROECONOMIC
FLUCTUATIONS
18 A Monetary and Fiscal Framework for Economic Stability 345
M. Friedman
19 Rational Expectations and the Theory of Economic Policy 366
T. J. Sargent and N. Wallace
20 The Monetarist Controversy, or, Should we Forsake
Stabilization Policies? 383
F. Modigliani
Index 409
Acknowledgements
The editors and publishers wish to thank the following for permission to
use copyright material:
American Economic Association and the authors, for A. C. Harberger,
'Monopoly and Resource Allocation', American Economic Review (1954),
pp. 77-87; M. Friedman, The Role of Monetary Policy', American
Economic Review, 58 (1) (March 1968), pp. 1-17, and M. Friedman, 'A
Monetary and Fiscal Framework for Economic Stability', American
Economic Review, 38 (3) Oune 1948), pp. 245-64; J. Tobin, 'Inflation and
Unemployment', American Economic Review, 62 (March 1972), pp. 1-18;
R. E. Lucas, Jr., 'Unemployment Policy', American Economic Review, 68 (2)
(May 1978), pp. 353-7; R. M. Solow, 'On Theories of Unemployment',
American Economic Review, 70 (1) (March 1980), pp. 1-11; J. Yellen,
'Efficiency Wage Models of Unemployment', American Economic Review,
Papers and Proceedings, 74 (2) (May 1984), pp. 200-5; F. Modigliani, 'The
Monetarist Controversy ... ', American Economic Review, 67 (2) (March
1977), pp. 1-17; N. G. Mankiw, 'Real Business Cycles: A New Keynesian
Perspective', Journal of Economic Perspectives, 3 (3) (Summer 1989),
pp. 79-89.
Blackwell Publishers, for R. H. Coase, 'The Nature of the Firm',
Economica, 1937, pp. 386-405.
Elsevier Science B. V., for T. J. Sargent and N. Wallace, 'Rational
Expectations and the Theory of Economic Policy', Journal Of Monetary
Economics Ouly 1976), pp. 199-214; and R. E. Lucas, Jr., 'Understanding
Business Cycles' in K. Brunner and A. Meltzer (eds), Stabilization of the
Domestic International Economy, Vol. 5, Carnegie-Rochester Series on
Public Policy (1977), pp. 7-29.
ix
x Acknowledgements
Macmillan Ltd, Cambridge University Press and RES, for J. M. Keynes,
The General Theory of Employment, Interest and Money, Chap. 12 (1936),
pp.147-64.
The MIT Press, for F. Bator, 'The Anatomy of Market Failure', Quarterly
Journal of Economics (1958), pp. 351-79; and G. Akerlof, 'The Market for
"Lemons": Quality Uncertainty and the Market Mechanism', Quarterly
Journal of Economics (1970), pp. 488-500.
Oxford University Press, for J. R. Hicks, Value and Capital, Chap. 2, 2nd
edn (1946; 1st edn 1939), pp. 26-41; and John Vickers, 'Strategic
Competition Among the Few: Some Recent Developments in the
Economics of Industry', Oxford Review of Economic Policy, I, 3 (1985),
pp. 39-62.
Review of Economic Studies Ltd, for A. Lerner, 'The Concept of
Monopoly and the Measurement of Monopoly Power', Review of
Economic Studies (1934) 2, pp. 157-75.
The Royal Bank of Scotland pic, for R. Bootle, 'How Important is it to
Defeat Inflation? The Evidence', The Three Banks' Review (Dec. 1981),
pp.23-47.
Paul A. Samuelson, for 'Diagrammatic Exposition of a Theory of Public
Expenditure', Review of Economics and Statistics, 21 (May 1955), pp. 350-6.
Every effort has been made to trace all the copyright-holders, but if any
have been inadvertently overlooked the publishers will be pleased to
make the necessary arrangement at the first opportunity.
In trod uction
S. ESTRIN and A. MARIN
Introduction
The purpose of this book of readings is to make available in a single
volume some of the seminal papers in the areas of microeconomics and
macroeconomics which comprise the subject matter of intermediate
courses in economic principles. In cases when the original material has
been deemed too technically demanding, alternative papers by leading
economists have been chosen on the basis of clarity of exposition as
much as originality of contribution. A few minor changes of a purely
cosmetic nature have been made, such as standardization of diagram
numbering and correction of obvious misprints. These do not affect the
original tone of the articles. We also include a few important papers
which indicate how contemporary researchers have developed or
applied the principles outlined in the other readings, as an appetizer to
students who are thinking of pursuing their study of economics further
and as examples of the direction in which the subject is being extended
beyond areas covered in mainstream intermediate textbooks.
The book is not, however, intended as a substitute for textbooks in
microeconomics or macroeconomics. It has been written on the premise
that students' understanding of the subject will be enormously enhanced
if they are given access to some of the seminal papers which layout
problems or methods for the first time. Intellectual advances in econom
ics often come from debates that have been long forgotten, but which
offer context, depth and clarity to contemporary study. The vigour and
resonance of these arguments have been muffled in the homogenizing
dullness of many textbooks. Students may also be surprised to discover
that many of the best economists are also excellent writers, often better
able to express their arguments than those who later sought to purvey
their concepts to a wider audience.
We faced a number of constraints in attempting to develop this set of
essential readings. The most obvious was one of choice. Economists have
been publishing in scholarly journals and books for more than two
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