The Economics Book PDF
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LONDON, NEW YORK, MELBOURNE, MUNICH, AND DELHI DK LONDON DK DELHI First American Edition, 2012 Published in the United States by PROJECT ART EDITORS SENIOR ART EDITOR DK Publishing Anna Hall, Duncan Turner Ivy Roy 375 Hudson Street SENIOR EDITORS ART EDITOR New York, New York 10014 Janet Mohun, Rebecca Warren Arijit Ganguly 07 08 09 10 11 10 9 8 7 6 5 4 3 2 1 001 - 186345 - Sep/2012 EDITOR ASSISTANT ART EDITORS Lizzie Munsey Sanjay Chauhan, Kanika Mittal Copyright © 2012 Dorling Kindersley Limited US EDITOR CONSULTANT ART DIRECTOR Kate Johnsen Shefali Upadhyay All rights reserved. MANAGING ART EDITOR SENIOR EDITOR Without limiting the rights under Michelle Baxter Anita Kakar copyright reserved above, no part of this publication may be reproduced, MANAGING EDITOR EDITORS stored in or introduced into a retrieval Camilla Hallinan Rupa Rao, Priyaneet Singh system, or transmitted, in any form, or by any means (electronic, mechanical, PUBLISHER DEPUTY MANAGING EDITOR photocopying, recording, or otherwise), Sarah Larter Alka Thakur without the prior written permission ART DIRECTOR EDITORIAL MANAGER of both the copyright owner and the Philip Ormerod Rohan Sinha above publisher of this book. ASSOCIATE PUBLISHING DIRECTOR DTP MANAGER Published in Great Britain by Liz Wheeler Balwant Singh Dorling Kindersley Limited. PUBLISHING DIRECTOR DTP DESIGNERS A catalog record for this book is available Jonathan Metcalf Vishal Bhatia, Bimlesh Tiwary from the Library of Congress. ISBN: 978-0-7566-9827-0 ILLUSTRATIONS James Graham produced for DK by DK books are available at special discounts when purchased in bulk PICTURE RESEARCH TALLTREE LTD for sales promotions, premiums, Louise Thomas fund-raising, or educational use. PRODUCTION EDITOR MANAGING EDITOR For details, contact: DK Publishing Ben Marcus David John Special Markets, 375 Hudson Street, New York, New York 10014 or PRODUCTION CONTROLLER COMMISSIONING EDITOR [email protected]. Sophie Argyris Sarah Tomley Printed and bound in China SENIOR DESIGNER by Leo Paper Products Ltd Ben Ruocco original styling by STUDIO8 DESIGN SENIOR EDITORS Discover more at Rob Colson, Deirdre Headon www.dk.com CONTRIBUTORS NIALL KISHTAINY, CONSULTANT EDITOR JAMES MEADWAY Niall Kishtainy teaches at the London School of Economist James Meadway works at the New Economics and specializes in economic history and Economics Foundation, an independent British development. He has worked for the World Bank and think tank. He has also worked as a policy adviser the United Nations Economic Commission for Africa. for the UK Treasury. GEORGE ABBOT CHRISTOPHER WALLACE George Abbot is an economist who worked in 2012 on Christopher Wallace is Head of Economics Barack Obama’s presidential reelection campaign. He at the UK’s prestigious Colchester Royal Grammar previously worked with Compass, the influential UK School. He has been teaching economics for more think tank, on strategic documents such as Plan B: than 25 years. A New Economy for a New Society. JOHN FARNDON MARCUS WEEKS John Farndon is the author of many books on Marcus Weeks studied philosophy and worked as a contemporary issues and the history of ideas, teacher before embarking on a career as an author. including overviews of the booming economies He has contributed to many books on the arts and of China and India. popular sciences. FRANK KENNEDY Frank Kennedy worked for over 25 years in investment banking in the City of London as a top-ranked investment analyst and as a managing director in capital markets, where he led a European team advising financial institutions. He studied economic history at the London School of Economics. CONTENTS 10 INTRODUCTION THE AGE LET THE TRADING OF REASON BEGIN 1770–1820 400 –1770 BCE CE 52 Man is a cold, rational calculator 20 Property should be Economic man private Property rights 54 The invisible hand 22 What is a just price? of the market Markets and morality brings order Free market economics 24 You don’t need to barter when you have coins 62 The last worker adds The function of money less to output than the first 26 Make money from money Diminishing returns Financial services 66 Divide up pin 63 Why do diamonds cost production, and you 30 Money causes inflation more than water? get more pins The quantity theory of money The paradox of value The division of labor 34 Protect us from 64 Make taxes fair 68 Population growth foreign goods and efficient keeps us poor Protectionism and trade The tax burden Demographics and economics 36 The economy can be counted Measuring wealth 70 Meetings of merchants end in conspiracies to 38 Let firms be traded raise prices Public companies Cartels and collusion 39 Wealth comes from 74 Supply creates its the land own demand Agriculture in the economy Gluts in markets 40 Money and goods flow 76 Borrow now, tax later between producers and Borrowing and debt consumers The circular flow of the economy 78 The economy is a yo-yo Boom and bust 46 Private individuals never pay for street lights 80 Trade is beneficial Provision of public goods for all and services Comparative advantage INDUSTRIAL AND WAR AND ECONOMIC DEPRESSIONS REVOULTIONS 1929–1945 1820–1929 154 Unemployment is not a choice Depressions and 90 How much should I unemployment produce, given the competition? 126 Companies are price 162 Some people love risk, Effects of limited competition takers not price makers others avoid it The competitive market Risk and uncertainty 92 Phone calls cost more without 130 Make one person better off 164 Government spending competition without hurting the others boosts the economy by Monopolies Efficiency and fairness more than what is spent The Keynesian multiplier 98 Crowds breed collective 132 The bigger the factory, insanity the lower the cost 166 Economies are embedded Economic bubbles Economies of scale in culture Economics and tradition 100 Let the ruling classes 133 The cost of going to the tremble at a communist movies is the fun you’d 168 Managers go for perks, revolution have had at an ice rink not their company’s profits Marxist economics Opportunity cost Corporate governance 106 The value of a product 134 Workers must improve 170 The economy is a comes from the effort their lot together predictable machine needed to make it Collective bargaining Testing economic theories The labor theory of value 136 People consume to 171 Economics is the science 108 Prices come from supply be noticed of scarce resources and demand Conspicuous consumption Definitions of economics Supply and demand 137 Make the polluter pay 172 We wish to preserve 114 You enjoy the last External costs a free society chocolate less than Economic liberalism the first 138 Protestantism has made Utility and satisfaction us rich 178 Industrialization creates Religion and the economy sustained growth 116 When the price goes up, The emergence of modern some people buy more 140 The poor are unlucky, economies Spending paradoxes not bad The poverty problem 180 Different prices to different 118 A system of free markets 142 Socialism is the abolition people Price discrimination is stable of rational economy Economic equilibrium Central planning 124 If you get a pay raise, 148 Capitalism destroys the buy caviar not bread old and creates the new Elasticity of demand Creative destruction POST-WAR CONTEMPORARY ECONOMICS ECONOMICS 1945–1970 1970–PRESENT 186 In the wake of war 262 It is possible to invest and depression, nations without risk must cooperate Financial engineering International trade and Bretton Woods 266 People are not 220 Policies to correct markets 100 percent rational 188 All poor countries need can make things worse Behavioral economics is a big push The theory of the second best Development economics 270 Tax cuts can increase 222 Make markets fair the tax take 194 People are influenced by The social market economy Taxation and irrelevant alternatives economic incentives Irrational decision making 224 Over time, all countries will be rich 272 Prices tell you everything 196 Governments should do Economic growth theories Efficient markets nothing but control the money supply 226 Globalization is not 273 Over time, even the Monetarist policy inevitable Market integration selfish cooperate with others Competition 202 The more people at work, 232 Socialism leads to and cooperation the higher their bills empty shops Shortages in Inflation and unemployment planned economies 274 Most cars traded will be lemons 204 People smooth 234 What does the other man Market uncertainty consumption over their think I am going to do? life spans Saving to spend Game theory 276 The government’s promises are incredible 206 Institutions matter 242 Rich countries impoverish Independent central banks Institutions in economics the poor Dependency theory 208 People will avoid work if 244 You can’t fool the people they can Market information Rational expectations and incentives 248 People don’t care 210 Theories about market about probability efficiency require many when they choose assumptions Paradoxes in decision making Markets and social outcomes 250 Similar economies can 214 There is no perfect voting benefit from a single system Social choice theory currency Exchange rates and currencies 216 The aim is to maximize happiness, not income 256 Famine can happen The economics of in good harvests happiness Entitlement theory
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