The Econoruic
Wo/ olrTlrinkinj
Pauu} &Xeyree
University of Washington
Peter S. &oettke
George Mason University
&awid X,, Pryeh&tko
Northern Michigan University
Thirteenth Edition
PEARSON
Boston Columbus Indianapolis New York San Francisco Upper Saddle River
Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montr6al Toronto
Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Editor in Chief: Donna Battista
Serrior Acquisitions Editor: Noel Seibert
Acquisitions Editor: Christina Masturzo
Senior Editorial Project Manager: Caroiyn Terbush
Editorial Assistant Emily Brodeur
Director of Marketing: Maggie Moylan
Marketing Manager: Lori DeShazo
Marketing Assistant Kim Lovato
Managing Editor: Jeff Holcomb
Production Project Manager: Alison Eusden
Senior Manufacturing Buyer: Carol Me1ville
Creative Director: Jayne Conte
Cover Designer: Suzanne Behnke
Cover Art: Owenani/Fotolia
Full-Service Project Management and Composition:
54Carlisle Publish i ng SeMces
Printer/Binder: Edwards Brothers Mallov State
Cover Printer: Lehigh-Phoenix/Hagerstoirn
Text Font: New Aster LT Std Regular,
1
0/1 2
Credits and acknou'ledgments borrorved Irom other sources and reproduced, r.r,ith permission, in rhis textbo6k appear
on the appropriate page u,ithin tert.
Copr'right A 2014, 2010, 2006 by Peai:son Education, Inc. All rights l'esen cd. Manufactured in rhe Unitecl States of
America This publication is protected by Cop-vright, and permission should be obtainecl fron'r the publisher prior to
any pi:ohibited reproduction, storage in a retrieval svstem, or transmission in anv form or br, anv means, eleitrrnic,
mechanical, photocopying, recording, or liker.tise. To obtain permission(s) to use material ft-om'this u,oik, please submit
a written reqllest to Pearson Education, Inc., Permissicins Departmenl, One Lake Strcet, Upper Saddle River, Nelv Jersey
07458, or 1.otr mav far your request to 201-236-3290.
M:rn1' of the designations by manufacturers ancl sc]lers to distinguish their products are claimed as tr:rdemarks. Wherc
those designations appear in this book, and the publisher \vas a\\rare oi a triclemark claim, the designations haye been
printed in initial caps or all caps.
Library of Congress Cataloging-in-Publication Data
He1ne, Paul T.
The economic u,ay of thinking / Paul He-v--ne, Universitv of Washington, Peter J. Boettke, George Mason University,
David L. Prvchitko, Northern Michigan Universit]..
Thirteenth edition.
pages cm
Includes index.
ISBNISBN-
13
: 97 8-O- I
3
-299 129 -2
0: 0-13-299 129 -2
1. Economics. I. Boettke,
HB171.5.H46 2014
1
PeterJ. II. Prychitko, David L. III.
Tit1e.
330-dc23
20t3006767
10987651321
PEARSON
ISBN 10: 0-13-299129-2
ISBN 13: 97 8-0-13-299129-2
ln memor/
oft
Parl ueyre,
ard orr proftessors Hans Senn/rolz,
Howard Swaine, Don Laroie,
Kenneth Bould;r!,
and/arues Buchanan
On a lar.
'.,
dividual
forlunai.
r:.
he sent
I'rtt
-
acacler r::
at
,
-
wltit',
.'
decisicti ..
inutec
.
lecLcltiti -
tt,ell att,i
,
Iha;,
economi;.
to make
--
cluded n',,
of achier -::
undergr-;.;.-
sity plar.';
geared ti,;
accordin,.,-,
should g' , ;
we did. I',...
my under-.:
gon of ec, ..
imperfec,:
monopol.,
:
graphs. F" -
ture on
p-:
agricultli:-=
took erce:.
a lesson :--:,.
He did, c-.
marketin. :
culture a::i
my office -.:
I ltas som.
back asH:=
Pau/ HVnt
/?31-2000
I
tt t::,"-.
cot:: ''.
I woultl ;:-..
ing abot,.
cally-
.
ing
ct
criti..
facttlt,,
..
.
riilill
A Tribute
On a rare occasion, if you are fortunate, you will run across an individual who Iives and acts upon the ideals that we profess. I was
fortunate. Paul Heyne came into my life in 1975. Out of the blue,
he sent me a letter that began as follows:
I'm going to be moving to Seattle at the end of the current
academic year, and I'd tike to find a college or university in the city
at which I could be an economics teacher. Those are two separqte
decisions. I'll be moving to Seattle whether or not I find a position
in an economics department there. But teaching and especially the
teaching of introductory economics is one of the things I think I do
well and something I would continue doing.
I had assumed the chairmanship of the department of
economics at the University of Washington in 1967 and set out
to make it one of the best in the country. My definition of best included not only scholarly eminence, which we were in the process
of achieving, but the effective, caring teaching of the multitude of
undergraduates that populated a large state university. The University played lip service to good teaching but the reward system was
geared to publication and most, but not all, of my colleagues acted
accordingly. Shortly after assuming the chairmanship, I decided I
shor:Id go back to teaching the introductory course to see just what
we did. I was dismayed to find that it had not changed an iota from
my undergraduate days. The textbooks were firll of the formal jargon of economic theory elucidating the perfectly competitive model,
imperfect competition a la Chamberlin and Joan Robinson, and
monopoly replete with aI the marginal analysis and appropriate
graphs. Following the tradition, I was in the midst of my fourth lecture on perfect competition, illustrating it with the case of American
agriculture, when a student in the back of the auditorium noisily
took exception to what I was saying. I thought I would teach him
a lesson and invited him to address the class, explaining himself.
He did, describing effectively the myriad of price supports, milk
marketing acts, sugar production subsidies, etc. that pervaded agriculture and made it far from the competitive model. I slunk back to
my office and began a search for a more effective teaching program.
I was some years into an attempt when Paul's letter arrived. I wrote
back asking what he would like to do as a teacher. His reply, in part:
I would like to teach at a college whose faculty was enthusiastically committed to providing a liberal education for undergraduates.
I would like to be a member of a faculty that was continuously asking about the nature and significance of liberal education and looking critically at its own efforts to provide one. The members of such
a
faculty would use their own disciplines as bases for venturing
into ather tlisciplines and ytot as castl* *itltin trltich.
tO enit:,v
tttt'
trr,tubled Lit,es. In thrt college ts{'tttt' Jtuttttsies, there'"vould be sonte
core requiretngnls fin'dl t.o scLiisfi:; fiot s{} tltttclt l}ecotts{. {ttt\'1{}trc c{tu
speat{1, y:a.rticttlar knrtu,r.'ler}ile fhut a libe rrt!|1' cdutttLter! peysail n'ilrsl
l,toye as betat.tse {L liberal rtrts toLle ge retltLires so'firc cotllytton care. il'
il rvamts lo he a livelt inteltet:tua! c:ornntunitt', ,t4aslet)' of the ct;re
tt,oulrl be expec:tetl f"irst o{ al{. o!'lacrlty tuentbers. {{'r,e rtf'lt:tr tlxtttglzt
fuctw,rnuch utare Ttrofi/abfe {at:ul/.t crryfic{iu*t rlisclt-s.sirxt.r- st,ttLtld
lte if'eyett, fot:ttkr lwentber krtetr thlt he v,otLld lst- taking, ttll cottrse.s
Con
Prt
\t)
inrytosetl ofi tutderErilc{rtotes ut.ztl tlufi li:; colleag,Ll€s tvo{rkS be eval:*
atifig at1 c{}Ltr.\e he hirn5el{r\,{}ttled tct oflbr itt llrc cort'Lrttttrt core..,)
Th,
Paul left a tenured professorship at Southern Methodist
University to come to Washington as a non-tenured lecturer
and he retained that untenured rank until he died in March
2000. I am not sure we lived up to Paul's fantasies of the ideal
facult-v-; I knorv we didn't but he did change the r'r'aY economics $,as taught at the University'; revamping the undergraduate
program, over-hauling the introductory course, and meeting
regularly rnith the graduate teaching assistants to improve the
quality of their teaching. But much more than that, Paul u'as
a continuing inspiration for those o[ us u'ho took seriouslY a
quality liberal education for undergraduates.
The Economic Wu- of Thinking embodies Paul's approach
to economics and to a liberal educatior-r. It u'as a radical change
foom the textbooks of the time. Its focus on the problems of a
society and the \vay in rvhich economic reasoning could shed light
on those problems made economics interesting to the students.
More than that, the book recognized that the strength of economics 'uvas precisell, described in the title of the book-a5 3 1v4v of
thinking. Comprehending that u'ay of thinking \\ras, and continues
to be, the rerrolutionary contribution of economics Lo the social
sciences and to a better r,rnderstanding of the rvorld around us.
I open the seminar for freshrnen that I teach every fall u'ith
a lecture on Paul, the human being-his Seminar-v education,
ordination, the rvay he got drau,'n into economics, and the wav
he combined a rigorous economics (and make no mistake about
it, Paul's economics is rigoror-rs) rvith a broad and actirre concern
for community and social rr,'elfare. He believed in indirridual
freedom and the demands that that freedom imposed on responsible human beings. And he and his u'ife, Julie, lived their lives
Eii
Sul
Co:
Sul
L'n
ofl
Prc
Pri
accordingly.
Cor
"
', //
,'\
/rt
/ /;) i//
ffi, h"
//
I /r4'l-
Dougl:rss C. Norlh
Ilra sl ingtot t U nivers i L\', St. Ltt uis
Nobel Prizc in Econon'ric Sciences 1993
10
Ext
Contents
[ll,
Preface
About the Authors
I
xll
xvll
The Economic Way of Thinking
Questions for Discussion
2
I
16
Efficiency, Exchange, and Comparative
Questions for Discussion
Advantage tg
3
Substitutes Everyrvhere: The Concept of
Questions for Discussion
Demand
4
Cost and Choice: The Concept of Supply
Questions for Discussion
73
Supply and Demand: A process of Coordination
An Appendix: The Coordinating Roles
96
5
.3B
of Money and Interest
Questions for Discussion
6
Unintended Consequences: More Applications
of Supply and Demand
An Appendix: Framing Economic
Questions Correctly
Questions for Discussion
7
Profit and Loss
An Appendix: profiteering in Futures Markets
Questions for Discussion
8
Price Searching
Quesl ions for Discussion
9
Competition and Government policy
Questions for Dis cus sion
10 Externalities and Conflicting Rights
Questions for Discussion
43
66
91
109
115
120
141
146
153
157
174
181
196
204
223
227
244
Xt
Markets and Government
Quesl ion s for Disc ussion
xii
11
Contents
l2 The Distribution of Income
Quest ions
13
for Discussion
Measuring the Overall Performance
of Economic Systems
An Appendix: Limitations of National
Income Accounting
Question s
for
Di sc u ss ion
14 Money
15
te s
ti on s
274
280
for
Di sc ussion
Economic Performance and Real-World Politics
Que s t i on s [ot' Disc u ssion
m
298
304
325
330
33s
An Appendix: What About Gold?
Qt
253
352
3s4
358
388
Japar
looks
the m
teache.
br
CITOTS
The
Qe
Ile f i.-
Some.
t6 The Wealth of Nations: Globalization
Ul tt,
and Economic Growth
Q uest ion s for Disct Lss ion
393
Postscript: What Economists Know
420
Glossary
423
over1,,,-.
429
builcl::
npica
Index
417
nomi:
ends
..
dispi;.'
the n:,-
why
why
an ir
takers,
both tt
plan ct
the lec'
that m
du]
shop
of
and
editior
.
The Economic way of Thinkingcontinues
to enjoy a dedicated and
growing fo'owing and has beln
recentry tra.rsi#JmJ^6lirr"r",
Japanese, Russian, and-Hunga.irrr.
nrr.r, in English, this book
looks different, feels ditr ."ni, u"J.Jua,
aim"."?i*-o"."a *r,r,
the mainstream fare.
Indeed, this book zs different.
This text introduces students to the
sk,rs of the economist. It
teaches students through exampre
and apprication. It even teaches
by showing students
exposing them to the
\"*popular
"u tiihi"k;;y
errors implicit in much
reasoning about economic events.
The text is designedprimarily f.;;-;;;_r"mesrer
survey course in
general economics. It has also
b."., ,.r"""rsfully used in M.B.A.
economics courses and in Master's
courses in economic education.
Some have used it as a micro principles
text. The A"ono*i" lUoy
of Th.inking develops the basic
of micro- and macroeconomic analysis and rigorously fri;;i;i;
emplo'ys it
u,
ends unto themselves.
"^ iir;il;;i."
Authors of oth,er introdrrctory texts,
understandably eaAer to
display the formal beauty of economic
analysis, unwittingly-tend to
overload students with atstract te.hniJ#,"i.
build modets (and we also
ura rhetoric). But the
typical college freshman probably
":"
*lrr;irrr*"
our excitement over
the models. Most sit through o;1.o;;;,
merely hoping to get a
prerequisite out of the way. We
economists ought to show them
why they're in the seats and *",r"
;;il;podium. Let,s show them
why others who have designed the
curriJulum believe economics is
an important area of study. In the
*J,
ics is notabout
production functions, periectly
""o""*
.;;,iri*
equilibrium, price
takers, or Phillips curves. Instead,
explores the logic of
both the
process and ".orro_i.,
the exchange process_it,Jabour
".oro*irirg
plan coordination aTrong buyers;;.;ii;r.
in the world outside
the lecture ha,. Studentr
tiri.-u."r. *iil not have to wait for
that message at the end of".r"g
the"s".*"... ifreyll
get ii riiir.
^
beginning too.
""*.
;6;Ii,
G'""i1lilo,,
Paul never shied away from making
his strategy explicit. In
previous editions he insisted, "w"
*rrt-rhow them from the first
principles of economt*;;;.; sense
out of buzzinE
PI:ysion;thehow
confu
they clarify, systematize, ;;;;;;;;
;"";il;'"
asserLions of newsoapers, politicat
figr..s, ax grinders, and coffee
shop pontifical0rsi' For more tnu"
tf;i.tyl ears, The Economic way
of Thinking has raushr.t"a""rc r,o*;;
# through rhe nonsense
and begin to unders-rand the comfr"r*"ria
around them. The r3th
edition continues that tradition.
xut
xir
Preface
Accompftsh;rg More with Less
This text accomplishes more-more thinking' more application'
*o."irright-rvlth less emphasis on formal modeling' But don't
and watered-down explora;;, ;t *rJrg. This is not an easy
offers a solid discussion and
ediiion
iion of econlmics. The 13th
and a wealth of probing'
principles,
J"r"top*"nt of economic
world around us' Even
everyday
the
illuminating applications to
co-authors that they
the
informed
economists have
frof"rrlo.ru'i
'have
this book' And
reading
by
leurrr"d more about economics
Ph'D's'
thatt after they've acquired their
This book is designed to develop our students' skills inthinkample
inglikean economistlff they become hooked' they will have
other
to
advance
they
as
skills
op'port rity to hone their modeling
.ourse offerings. May we hope that the students conretain
"io.o*i.t
tinue their pursuit of this wonderful discipline-or at least
its basic lessons.
Chanjes ts the Thirteenth Edition
TheEconomicWayofThinkingisPaulHeyne'sbaby'hispedagogi;il"gr.y It is ricily steeped in the property-rights and coordinawhich
tionii tradition of etct iu,, & Allen's Llniversity Economics'flair,
eml, to,'g out of print. our text also has an Austrian-School
propfrutiTmg theiynamic, entrepreneurial natlrre of the market
developed by fudwig von Mises' F A' Hayek' Israel
i"rr, tt
"ir"s
Kirzner, and Murray RotLbard' These and other insights-such
professors James
as the Public Choice approach of our former
into what some
merged
Tullock-have
Buchanan and Gordon
Economy'
Political
Virginia
are beginning to call
This edition has several new features:
. We discuss time preference and the role of interest rates in
coordinating economic activity in Chapter 5'
. We have reintroduced an entire chapter on income distribution (ChaPter 12)'
. We have added a discussion of discouraged workers in
ChaPter 13.
o Our discussion of monetary equilibrium has been merged
into ChaPter l'4 on money'
. We discuss the Austrian theory of the unsustainable boom in
Chapterl5,connectthattotheinterestratepresentationin
recent
Chapter 5, and apply it to the Great Recession of our
of
enough
have
didnt
we
past. (One.",ri"*"t t"-arked that
business cycle
a presentation of the Austrian theory of the
.
be
in previous editions' He asked us to just spell it out and
l5')
Chapter
just
in
that
done with it. We have accomplished
objectives
learning
We've updated the data and have added
at the beginning of each chaPter'
Acknon
We shai- .
ful
t}-rar --.',
tunih't,
,=.
i-.'.
the pasr :::'
Sc,
knorvleC;=
colltrTle ir -:
are:
Terrr'.{r-;-:
Yoram B.:-.
Roberr B-Roberr B:.:
Walter
B-
-
B
,
Samuel
Barrr B,-',:
Ronald B:'.
Paul Br-r--.
Rober-t B:'
Henn
B:---.
Gene C4.."
Art Cari;:Tonl'Ci.r--Shari'n C.: Judith B C
Paul Crr .
Brent D:.', -.
Arthur D.Q.
John B.
E;;
Theo Ei;:--=:
Man'E., s.-Mattl-ie,.,"
F:
In a ma:'.,::
into mc,: - ;:
centive . - tion, ne',;: .:comiret--,> Boettke ::'
COITIII EI] . :
Re-t
detailecl
-...,
: -'
Acknow/edyments
we shall always be indebted to the rate paul Heyne. we are thankful that new generations of students continue to hur" tt . oppo._
tunity to learn from paul's text.
, So many people have helped shape and improve this text over
the past three decades. In appreciation, we wish to continue
to acknowledge those who have reviewed or offered helpful unsolicited
comments on earlier editions, as paul Heyne did without fail. They
are:
Terry Anderson
Yoram Barzel
Samuel Bostaph
Horst Feldmann
Robb Freeman
Joseph Furhig
Warren C. Gibson
Andrew Hanssen
Robert Higgs
Barry Boyer
P.J.
Robert Beck
Robert Bish
Walter Block
Hi[
Ronald Brandolini David Henderson
Paui Briggs
Ted Holmstrom
Brown
Henry Bruton
Gene Callahan
Art Carden
Tony Carilli
Shawn Carter
Judith B. Cox
Paul Cwik
Brent Davis
Arthur DiQuattro
John B. Egger
Theo Eicher
Mary Eysenbach
Matthew Facas
Robert
Steve
Horwitz
David Johnson
Laurie Johnson
Thomas Johnson
Edward A. Kaschins
Ronald Krieger
Charles Lave
Ian Laxer
Frank Machovec
John McArthur
Mark McNeil
Tom Means
Howard Miller
Glenn Moots
Charles Nelson
Marilyn Orozco
E.C. (Zeke) Pasour
Benjamin Powell
Potfuri Rao
Reed Reynolds
Andrew Rutten
Haideh
Salehi-Esfahani
Mark Skousen
Howard Swaine
James Swofford
Peter Toumanoff
Stephen J.
Tirrnovsky
T. Norman Van Cott
Wendy Warcholik
Donald Wells
Sidney Wilson
Michelle Wyrick
Harvey Zabinsky
M.Y. (Zak) Zaki
In a market economy, mismanaged property rights tend. to move
into more productive hands, ro yoriuuiho., hi.r" quite the in_
centive to minimize errors and add value to the project. Information, nevertheless, remains a scarce good, so *" *"i"om. vo,r.
comments, criticisms, and suggestions. Allyays feel free to email
Boettke (pboettke@gmu.edu) or prychitko (dprychitOnmu.
for
comments on this new edition and its supplements.
"duj
Reviewers solicited for the 13th edition provided clear and
detailed comments, and challenged us to reconsider
""u-pt".,
Preface
xvt
sections, and even whole chapters from the previous edition.]Me
greatly appreciate their comments, and they deserve a special word
of thanks:
Prcface
Gloria Komef Stark State University
John Marcis, Coastal Carolina University
John McArlhu4 Wofford College
Lawrence Overlan, Wentwofih Institute
Michael Carter, Jacksonville State University
Ning Wang, Arizona State University
Paul Cwik, Mount Olive College
You might have noticed that several of our reviewers have been
involved with this textbook for quite some time. In our blind review,
we have carefi-rlly considered all.the comments and, when reviewer
suggestions offered two (or three) alternative forks in the road, we
ch6!e the one we thought would be most interesting and productive.
That means we faced opporlunity costs and probably wont satisfy
all of our reviewers aI1 of the time, but weie tried to do our best.
We don't want to forget GMU grads Scott Beaulier, Chris
Co;me, Isaac Dilanni, Jeremy Horpedahl, Peter Leeson, Nick
Schandler, Solomon Stein, and John Robert Subrick who had,
at one time or another, a hand in tracking down and updating
data since we came on board with the 10th edition. Peter Lipsey,
Boettke's personal assistant, did a fine job running in this direction,
helping ui update the data, proof the copyedits, and meet our deadlines. Emily Prychitko kindly assisted with the copyedits as well.
Turning to the editorial and production staff, we thank Noel
Seibert, Acquisitions Editor at Pearson, for continuing to appreciate
this text's rniqr"r"t. and for encouraging us to flrther adapt the
new edition to our economic challenging times. we thank caro$rr
Terbush, Senior Editorial Project Manager, and Emily Brodeur, Efitorial Assistant, for their patience and keeping us on task. Last but
not least, Alison Eusden, Associate Production Project Manager at
Pearson, and Arun Pragash Albert at S4Carlisle, made sure that our
and proofreading efforts were productive and fmely'
copyediting
^We are grateful to the good people at the At1as Foundation,
Earhart Foundation, J.M.Kaplan Fund, and the Mercatus center
for providing us quite generous financial suppoft for our research
and teaching activities over the years, activities that continue to
support this new edition as well.
And our most important acknowledgment of all: This project
would simply not be possible if it weren't for the unending love,
support, and understanding from our wives Rosemary Boettke
und Jrli" Prychitko and our families' Indeed, none of what we do
would have meaning without them.
Pete Boettke & Dave Prychitko
Abot
p. ---