Lessons for the Young Economist

Book Description:

We are beyond mere excitement about Lessons for the Young Economist. It is easily the best introduction to economics for the young reader because it covers both pure economic theory and also how markets work (the domain of most introductory books).

Robert Murphy has the right frame of mind and mastery of the subject matter to provide the best possible pedagogy. The logic is super clear. The organization is impeccable. It achieves a great balance between plain old economics and that aspect of economic thought that is considered particularly Austrian. Therefore, it prepares the student for both conventional economic studies in the future and provides the logical rigor and policy clarity that only the Austrian School perspective can offer.

Most of the attempts at such texts falter because they are either too dry and technical for the young reader or they are littered with attempts to keep the student entertained with references to pop culture or cheesy passages that attempt to speak the child s language but only end up sounding patronizing.

Dr. Murphy s text has none of this. The prose has relentless fire without needless fireworks. What drives it forward is intellectual passion born of his love of the topic. What s also nice is that he is nowhere self-consciously trying to sound like someone he is not. It is his real voice, explaining everything point by point. For this reason, the text is warm and engaging.

Here is the product of vast experience and daily writing. This permits the voicing of the book to achieve a remarkable integration page to page, chapter to chapter. Though he is drawing from the whole history of the development of economics, the text ends up being strikingly original. His approach is not based on anything but his own sense of how to teach this subject.

This book will not be boring or useless even for people who think they already know the subject. Every page or two, there are fresh insights. For example, on the problems with barter, he shows that in the real world, most goods and services would not have come into existence at all (so that there would be no trading of tractors for cobbler services because there would be no tractors or repairable shoes). In another place, he points out that one of the advantages of the division of labor is that it makes the advantages of automation more readily apparent.

Maybe these points appear in other introductory texts but the way he works them into a logical and seamless system is very impressive. It has a much larger market than just high-school students. Anyone can enjoy this book and learn from it. The appropriate age here is probably 13 and up but any adult will love this book.

Murphy wrote the first study guides to Human Action and Man, Economy, and State. He can now add another medal to his chest. It is a big one. There is every reason to believe that this book will still have powerful legs decades from now.

As for the price, it is close to being a miracle for a textbook of this size and expanse. The conventional publishers of bad books at high prices don’t stand a chance against this landmark.

 

Contents

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix

PART I: FOUNDATIONS

1. Thinking Like an Economist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

thinking Like an economist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Is economics a science? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

the scope and Boundaries of economic science . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Why study economics? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2. How We Develop Economic Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Purposeful Action versus Mindless Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

the social versus the natural sciences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

the success of the natural sciences versus the social sciences . . . . . . . . . . . . 17

How We Develop Basic economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

3. Economic Concepts Implied By Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Only Individuals Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Individuals Have Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Preferences Are subjective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Preferences Are a Ranking, not a Measurement using numbers . . . . . . . . . . 39

Different Individuals’ Preferences Can’t Be Combined . . . . . . . . . . . . . . . . . . . 42

4. “Robinson Crusoe” Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Crusoe Creates Goods With His Mind Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Consumer Goods versus Producer Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Land, Labor, and Capital Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Income, saving, and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Goods Are Valued unit by unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Pulling It All together: What should Crusoe Do With Himself? . . . . . . . . . . . 61vi | Lessons for the Young Economist

PART II: CAPITALISM: THE MARKET ECONOMY

5. The Institution of Private Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

society Requires Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Capitalism: this Is Private Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

the Market economy and Free enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

6. Direct Exchange and Barter Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Why Do People trade With each Other? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Direct exchange / Barter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

How Prices Are Formed in Barter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

7. Indirect Exchange and the Appearance of Money . . . . . . . . . . . . . . . . . . . . 99

the Limitations of Direct exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

the Advantages of Indirect exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

the Advantages of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Who Invented Money? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

8. The Division of Labor and Specialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

the Division of Labor and specialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Why specialization Makes Labor More Productive . . . . . . . . . . . . . . . . . . . . . 115

enriching everyone By Focusing on Comparative Advantage . . . . . . . . . . . 117

9. Entrepreneurship and Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Competition Protects Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Competition Protects Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

10. Income, Saving, and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Income, saving, and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Investment Increases Future Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

How saving and Investment Increase An economy’s Future Output . . . . . 141

11. Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

supply and Demand: the Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

Demand: Its Definition and Its Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

supply: Its Definition and Its Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

using supply and Demand to explain the Market Price . . . . . . . . . . . . . . . . . 155

using supply and Demand to understand Price Changes . . . . . . . . . . . . . . . 159Contents | vii

12. Interest, Credit, and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Interest: It’s About time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

savings, Investment, and economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

Common Credit transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

the Pros and Cons of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

13. Profit and Loss Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Profit and Loss Guide entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Interest Versus Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

the social Function of Profit and Loss Accounting . . . . . . . . . . . . . . . . . . . . . . 195

the Limits of Profit and Loss Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

14. The Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

the stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

Why Issue stock? (Debt versus equity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

the social Function of stock speculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

PART III: SOCIALISM: THE COMMAND ECONOMY

15. The Failures of Socialism—Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

the Vision of Pure socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

socialism’s Incentive Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

socialism’s Calculation Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

16. The Failures of Socialism—History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

economic theory and History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Communism vs . Fascism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

socialism’s Body Count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

PART IV: INTERVENTIONISM: THE MIXED ECONOMY

17. Price Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

the Vision of Interventionism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Price Ceilings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256

Price Floors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261viii | Lessons for the Young Economist

18. Sales and Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

Government spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

How Government Finances Its spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275

sales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279

19. Tariffs and Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

Mercantilism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

the General Case for Free trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

Import Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299

20. The Economics of Drug Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

Drug Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

Drug Prohibition Corrupts Government Officials . . . . . . . . . . . . . . . . . . . . . . . 307

Drug Prohibition Fosters Violence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

Drug Prohibition Reduces Product safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320

Money Inflation vs . Price Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

21. Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

How Governments Make Prices Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

the Danger of Government Price Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336

22. Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

Government Deficits and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

Government Debt and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350

Government Debt and Future Generations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353

23. The Business Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361

the Business Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361

How Governments Cause the Business Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . 363

the Inevitable Bust Following an Artificial Boom . . . . . . . . . . . . . . . . . . . . . . . 368

the Causes of Mass unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377