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First American Edition, 2012
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NIALL KISHTAINY, CONSULTANT EDITOR
Niall Kishtainy teaches at the London School of
Economics and specializes in economic history and
development. He has worked for the World Bank and
the United Nations Economic Commission for Africa.
GEORGE ABBOT
George Abbot is an economist who worked in 2012 on
Barack Obama’s presidential reelection campaign. He
previously worked with Compass, the influential UK
think tank, on strategic documents such as Plan B:
A New Economy for a New Society.
JOHN FARNDON
John Farndon is the author of many books on
contemporary issues and the history of ideas,
including overviews of the booming economies
of China and India.
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.
JAMES MEADWAY
Economist James Meadway works at the New
Economics Foundation, an independent British
think tank. He has also worked as a policy adviser
for the UK Treasury.
CHRISTOPHER WALLACE
Christopher Wallace is Head of Economics
at the UK’s prestigious Colchester Royal Grammar
School. He has been teaching economics for more
than 25 years.
MARCUS WEEKS
Marcus Weeks studied philosophy and worked as a
teacher before embarking on a career as an author.
He has contributed to many books on the arts and
popular sciences.
CONTRIBUTORS
10 INTRODUCTION
LET THE TRADING
BEGIN
400 BCE–1770 CE
20 Property should be
private Property rights
22 What is a just price?
Markets and morality
24 You don’t need to barter
when you have coins
The function of money
26 Make money from money
Financial services
30 Money causes inflation
The quantity theory of money
34 Protect us from
foreign goods
Protectionism and trade
36 The economy can be
counted Measuring wealth
38 Let firms be traded
Public companies
39 Wealth comes from
the land
Agriculture in the economy
40 Money and goods flow
between producers and
consumers The circular
flow of the economy
46 Private individuals never
pay for street lights
Provision of public goods
and services
THE AGE
OF REASON
1770–1820
52 Man is a cold, rational
calculator
Economic man
54 The invisible hand
of the market
brings order
Free market economics
62 The last worker adds
less to output than
the first
Diminishing returns
63 Why do diamonds cost
more than water?
The paradox of value
64 Make taxes fair
and efficient
The tax burden
66 Divide up pin
production, and you
get more pins
The division of labor
68 Population growth
keeps us poor
Demographics
and economics
70 Meetings of merchants
end in conspiracies to
raise prices
Cartels and collusion
74 Supply creates its
own demand
Gluts in markets
76 Borrow now, tax later
Borrowing and debt
78 The economy is a yo-yo
Boom and bust
80 Trade is beneficial
for all
Comparative advantage
CONTENTS
INDUSTRIAL AND
ECONOMIC
REVOULTIONS
1820–1929
90 How much should I
produce, given the
competition?
Effects of limited competition
92 Phone calls cost
more without
competition
Monopolies
98 Crowds breed collective
insanity
Economic bubbles
100 Let the ruling classes
tremble at a communist
revolution
Marxist economics
106 The value of a product
comes from the effort
needed to make it
The labor theory of value
108 Prices come from supply
and demand
Supply and demand
114 You enjoy the last
chocolate less than
the first
Utility and satisfaction
116 When the price goes up,
some people buy more
Spending paradoxes
118 A system of free markets
is stable
Economic equilibrium
124 If you get a pay raise,
buy caviar not bread
Elasticity of demand
126 Companies are price
takers not price makers
The competitive market
130 Make one person better off
without hurting the others
Efficiency and fairness
132 The bigger the factory,
the lower the cost
Economies of scale
133 The cost of going to the
movies is the fun you’d
have had at an ice rink
Opportunity cost
134 Workers must improve
their lot together
Collective bargaining
136 People consume to
be noticed
Conspicuous consumption
137 Make the polluter pay
External costs
138 Protestantism has made
us rich
Religion and the economy
140 The poor are unlucky,
not bad The poverty problem
142 Socialism is the abolition
of rational economy
Central planning
148 Capitalism destroys the
old and creates the new
Creative destruction
WAR AND
DEPRESSIONS
1929–1945
154 Unemployment is not
a choice Depressions and
unemployment
162 Some people love risk,
others avoid it
Risk and uncertainty
164 Government spending
boosts the economy by
more than what is spent
The Keynesian multiplier
166 Economies are embedded
in culture
Economics and tradition
168 Managers go for perks,
not their company’s profits
Corporate governance
170 The economy is a
predictable machine
Testing economic theories
171 Economics is the science
of scarce resources
Definitions of economics
172 We wish to preserve
a free society
Economic liberalism
178 Industrialization creates
sustained growth
The emergence of modern
economies
180 Different prices to different
people Price discrimination