PRIVATAEN D PUBLICCH OICE SeconEdd ition JAMES D. GWARTNEY FlorSitdaUatn ei svietry RICHARD STROUP MontaStnaaUt nveie rsity witht hea ssistance A. H. Studenmund of OccidCeonltlaelg e ACADEMIC PRESS NewY orkS aFnr ancLiosncdoo n AS ubsiodfHi aarrcyoB urraJtco ev anPouvlbiicshh,e rs Thibso owkas se t inb yTE ylpeoctthrIewatta pasre ti.en cl anbdo ubnydW . KAr.u eTgheperu .b litsehaimn g inclSuudseJadA.n n derascoqnu,i esdiitStiuoozrna;sGn .n e Bennaertdtti ,r eSchteorri;d and iHrueogcfht eosr, produJcatniIionsng; Strasuuspsve,ir saponrrJd;ou jdeictth Rodgperrosje,ed citMt aorrNy.e vaddietdrh c eo peyd iting anBde rnSacrhdo mennd bitadh ce ovaerrItl .l ustrations werper epbayrA endeo ofB oston. Covaer©rtB ernSaerhdo en1b9a79u.m Copytr©i1g9 8hb0y, AcaPdreemIsinscc, . Alrli grhetsse rved. Nop aorftt h piusb limcaabyte ri eopnr oodru ced transimnai ntfyto erodmrb ya ny meelaencst,r onic orm echainniccallup,dh oitnogc opy,o rar neyc ording, informsattoiraoanrngde e t rsiyesvtwaeilmt ,h out permiiswns riiotfnir notgmhp eu blisher. ACADEMPIRCE SISN,C . 11F1i fAtvhe nNueewY, o rNke,wY or1k00 03 UnitKeidn gEddoim tpiuobnl ibsyh ed ACAEDMIPCR ESS, (LIONNCD.O LNT)D . 24/O28v aRlo aLdo,n dNoWn!7 DX ISB0N-:1 2-311040-8 LibroafCr oynr geCsast aClaorNgelu mb7e8r-:6 8925 PRINTIEND TUHNET IEDS TATEOSFA MERICA MYTHS OF ECONOMICS 1 1 "Eocnomainlcay assissu pmeeosap cloten olyuo tfs elmfiosthi Ivrtee sj.e cts thheu mnaitasriiodafhen u amnkind." 2 2 "Ienx chaisnfog me,e ones ogmaeieonlnmsseue,s l to sTrea.d iiaszn egr o-sum gaem." 3 3 "Recnotn tarraoenle sff ecmteitvheoo fed n suardienqghu oautseai atn g pritchpeeo ocraa nff o.r"d 4 "Thger owotfth hf ee dgeorvanelmpr eth abse etnhm ea jsooru orfc e 5 govmeernnetx pansion." 7 "Unemlpoyreeds owuorucnleodset x iitsfht ee c onwoemroyep erating 5 efficiently." 14 6 Twop opumlyatrohf is n flaMtyitolhn": :C onsrucsma euisnefli aobtnyf ailing to sbeulye lcytM.iy"vt 2eh": I antfliiocsna ubsyea db noarllmlayrp grei ce incriensa osmesese ctors." 17 7 "Ag oobdu sidneecsiss iownin-lemlva sekearelp rlr odfuolcrett s hsai nt s produccot.sit"os n 21 8 "Thper iocfme ossg to oadrsue nn ecesisnaafltrbeiydla ylt e a2s5pt e rcaeasn t resouftl hte hiogfph r oorfifapt tr eo dsu.c"e r 24 9 "Automiast mitaohrjnce o a uosfue n emploIywfme ke eneatpl. l owing machtionr eesp lpaecoepw leae rg,eo itnorg u onu otfj obs." 26 10 "Uniohnasvi en crtehasee osdfih nacroegm oeit nolg a bor." 33 11 "Freew ittlrohaw d-ecw oaugne traisIe nsd siuaCc hhaiaw nn odu cladu tshee wages woofr ktUeof.r aSsl. l ." OUTSTANDING ECONOMISTS KennAertrho w 31 GarBye ecrk 23 4 JmaeBsuc hanan MartFienl dstein 15 MiltForni edman 13 JohKne nneth Galbraith 16 JohMna yanrKde ynes 8 AllKenne ese 30 JuanKirteap s 28 Simon Kuznets 6 AlfMraerds hall 3 KaMralr x 36 DavRiidc ardo 2 JoaRno binson 19 Paulu eSlasmon 12 ChlaerLs.S chultze 10 JosSecphhu mpeter 25 AdaSmm ith 1 GeorSgtei gler 21 PERSPECTIEVS INE CONOMICS BeyotnhGdeN P-PioneReersienoagnrt chMhee asuroefEmc eonnto mic 6 1 Welfare FacatnF di ction NaabtoiuDoten battlh e 10 2 WilTlh eErveeB reA notGhreerDa etp resYseaisno Ndno ? 12 3 4 ThEec onoomfCi ocnss titAumteinodnmLaeilnm tisSt pienngd ing and 15 5 MandaatB ianlga Bnucdegde t IMso nopoCloimspteitcIie ntffiicoinYe enastn ?Nd o 19 6 7 ThEec onoomfGi ocvsem rennRte gulAacttoirvyi ties 20 8 ProdOubcsto leMsoconepnocPleoy,w aenrt,dh Dey nasmo ifPc roduct 21 9 Development AP rogtroPa rmo mCootmep etMiatrikveet s 22 10 AG albraViiteohwfai M aond neI rnudstErcioanlo my 22 11 ThMei nimWuamg- eAnE conoAmpipcr aisal 24 12 PubElmipcl oUyneie-o nAGs rowPionwge r 26 13 SocSieaclu arnitdth Iyetn ergeneRreadtiisotnroaifIlb n uctoimoen 27 14 ThMee roifAt nst ipoEvceorntoPymo il-ciA cD yebate 27 15 BureauCcormapceyt,ai ntIdimp orno,vt ihEneffig c ieonfGc oyv nemrent 32 16 DealwiintSghp e cIitnaelr ests 32 17 RicahnP do oNra tnisoA-rTeh eTyw oW orlDdrsi fAtpianrgt ? 35 18 SUGGESTED OUTLINES FORO NE-SEMESTER COURSES Balcaend Cousre- MacroeconMomcioirecoc nocm iPoclyi ChaptNeurm baenrdT o pic Emphasis Emphasis Emphasis 1 TheE conoAmpipcr oach D D D 2 SomTeo oolfts h Eec onomist D D D 3 SuppDleym,a nadnd, MtahrekP erto cess D D D 4 AB ird'Vsi-eoEwfty hePe u bSleicct or D D D 5 TaxesG oavnemdre nnStp ending D 6 TakinNga ttihEoecn o'nso Pmuilcs e D D 7 UnemploIynmfleianoattnn,,Bd u isneCsysc les D D 8 AggreEgquaitlei barnaidS u imm pKleeyn esian Model D D 9 ThMeu ltitphlAeic ecre,l earnadKt eoayr n,e sian Vieowft hBeu siCnyecslse D D 10 FisPcoalli cy D D 11 Moneaynt dh Bea niknSgy stem D D 12 MoneEym,p loyImneflinaotatn,n adM ore ComplKeetyen eMsoidaenl D D 13 ThMe onetCaharlilsettn otg heKe e yneVsiieawn D D 14 UnemploIynmtfleianoatnn,t,d h Lei moift s Macropolicy D D 15 InstaSbtialgifltaaynt,tdi h oDeni ,r ecotfi on Macroeconomics D 16 DemaanndCd o nsuCmheori ce D D Theosuelt inaermsee rreelcyo mmentdhaet iiboflsone osxk;i bleo.t hcSeoermv baeirtnaielon nasb le instsrt uooc bttotarhidene siermepdh aIsnai dsd.i Pteirosnp,e ccatbnie uv seeisdn dependently oft hceh taepirnws h itchheo yc cSuorm.ie n strmuacwyti ostrhoas s ssipgencP iefircs peacst ives supplemreenatdairnyg s. SUGGESTOEUDTI LNSE FORO NE-SEMESTCEORU RSES XVIII Balcaend Course- MacorecnoomiMci croneocmoicPo licy ChaptNeumrbe ra ndT opic Emphasis Emphsais Emphasis 17 Cosatnsd Stuhpepo lfGy o ods D D 18 ThFei rumn dPeurrC eo mpetition D 19 MonopoCloimspteitcPi rtoidoDuincff,te t rieantainodn , LowB arrtioEe nrtsr y D 20 MonopaonlHdyi gBha rrtioEe ntrrsy D 21 Oligoapnodl Wyto hrelo df BBuisgi ness D 22 BusinessC oSmtpreutcaitntuPdiru oebn,l ,i c Policy D D 23 ThSeu poplfay nD de mafnodPr r oductive Resources D D 24 EarnSiknAigclslq, u isainttdhi Jeoo Mnba, r ket D D 25 CapiIttnaelr,ae nsPdtr ,o fit D 26 UniPoonw -eArS hioeralT dh reat? D D 27 IenquaIlnictoMymo,eb ilaindt yB,ta hteat glaei nst Poverty D D 28 EmployDmiersnictm inaanttdih Eoean r noifn gs BlaacnkWdso men D 29 TheE nerMgya rket D 30 ProbAlreemfa otsr h Mea rket D D 31 Public anCGdhao iincfiern oGgmo vnemrnet D D 32 ThEec onoomfGi ocvsne mreFnati lure D D 33 GainfirnoIgmne trnatTiroandael D 34 ItnernaFtiinoanananctldeh F eo reEixgcnh ange Market D 35 EconoDmeivlceo pmaenntdth Ger owotfIh n ceo m D 36 ComptairEvaceo noSmyisct ems D PREFACE Econoamr ieclsay,to iuvnega smtoetnrhgse c ieinescn etsea,rn ei xncgi pthiansge ofg rowatnmhda turWaittithoh nde.e veloopftm heceno tm pudtuerrti hneg pa3s0t ysecairessn,tt uihdfiarycse waursdw eidtv has stto orfne eskw n owledge ofh oewc onoompiecrsSa otmee.t ithmgiersso ,wo tfoh u r undehrasst anding forucset doa bantdhoceno mfoofpr rte vihoeul"sdtl ryu Ytehttso .d"ta hye stuodefyc onomiperso moaiffnssee ervb see rf ore. The16 90msa bye t houogfah stt h geo ldaegonefe conopmoilci cy-making. Duritnhtgii sm peo,l icy-direcatcihnigme evaeescduo rsnauobcmlciaeesn stdss develgorpeceaodtn fidientn hceaeib rit losi otlyev ceo nomic problems, particu­ larilnty hm ea croecsopnhoeTmrhieegc. o ldaegwnea ssh olritvh eodw,e ver. Theb itetxepre roifet nhc1e7e9 0 isl lusdtrraaimtcaeatdtl hlaeytc onomic probsloelmvi ifsn amgro rceo mpalneddxe manadt iantsghk a tnhp eo licy­ maekrosft h1e69 0esv eirm agiInneflidao.utn n,e mploaynmsdet natg,n ation havper oviendt rarcettsaaibtnslotte h,re e metdhiwaeetsr teh ouegffhetc tive ten eyaeralTrishe eersv.ee -nantdst hger owotfoh u krn owl-emdangdeate an eawp prtooea ccohn opmriocb ilnte hm1es89 0s. Receandtv anicnse esv earraela sc urarreein nutflelnyc tihndegri ectoifo n econotmhiocuc ghhitie,nflm ya croecoRneoasmreicochnts h.ee c onoomfi cs propreirgthhyat bssr oadenuendd eorusrto afn dcionmgp arative systems, environemceonntoaamnlimd ca sr,kf eati lSuirmei.lp aurblclyhi,oc ti hceeo ry -anlayosgfir so bueph a-vhaiso rexpoauknrnd oewdl oecfdo glel edcetciivsei on­ maiknbgu,r eauocpreartaaitncitd oh enecs o,n oomfri ecgsu lation. Althomuagnohyf t heev eonftt shl ea dsetc awdeeru en atnicipwaet ed, belimeovdee rn eacnloayntsooibm seic ca paobfbl oete hx platihnteiu nrgb u­ lenocfteh 1 e79 0s saungdg epsotlfiiondcrgey a leiffnegc twiivttehhpl ery o blems ofu nemploiynmfleanattni,do ns,lg urgogwHitoshwh.e vteour n,d ertshteasned issouuesrst ,u dentse qmuuispwtpi etcbdhue r rkennotw liend gseau rceha s as i(naf)o rmatioann-dg jatosthbehe ae prrrciohnc g(e bts)hsd e,e vemleonoptf adtaipevxep ect(act)i ocnihsnta, hnm egi ecsr osttrahutacl tttuehirrene c entive ofi ndivtiodp uraoldsiu ncvees,sa tva,en ,rd e olnyd ebfitn anc(ictnlgh),e sequoefen vceein ntt hsme a kreatd jusptrmoecnaetns( dse ,) n tatuhorefet he incentive structudreec ifsaaiekcorwinshn- ogim mptlheeem cepono­tl itical nomic policy. Thetsoep oifgc rse at ccounrccreaernnn tnb oegt i vceonm plceovteeir na ge a sisnegcltoeir o anina n p peonnd ixc onrtaeermcypo onotmhiicn Akdien­g. quaitnes trruecqtutiiahorttneh sec soen cbeeipt ntesg rfautlielndoyt u oar n aly­ siosfm acrooencomWiech sa.vi en corproercaaetdnevtda ncoeusr ipnrteos enta­ tioonfm odeKreny neasnimdao nn ettahreioPsrotyl -.im caykiisan nga lyzed withtihfner ameowfao drvka inncc eosl ledcetciivsei onS-umplapyk-isnigd.e factaorgrers a ntesda mteh ec onsaistd heterr aatdiiodtnei moannadl- side emphoafms aicsr oeconomics. Althosuigmihint l harrtu oos utor r igainnaaltlyh speir set,sa etnoifeo cno nomic princiintp hlseee sc oenddi tiisbo ontb hr oaadnemdro rceo mprehensive. Discuhsabssei esonnu ppleimsnee nvtaeerrdeao alfms a croecoTnaoxmaitciso.n angdo vnemreenxtp end(iCthuar5pea)tsr ea erna lyiznge rde adteepartn had r e integmroraeft ueldl y pwuibtclhh ioctti hhceee i onrtyr oidnCu hcaepd4t .e r Chap7tc eorn taan ienswse ctointo hnre a otfee m ployams ettnaitsw,th iicc h maneyc onoumsiiesnc t osn juwnicttthihr oean ot fue n emplotyomm eesaunrte thtei ghotfnl easbmsoar rk eAtnsa .d denodnua gmg regate fissucpapll y and polhiacbsye eand dteodC hap1t2eD.ri scuisnts hetidis m efleya taurree contempthoeroarreeyxt pilcaanlaa ntsdiu ogngse fsottrir oenastt hiceno gm ­ bined porflo obpwlr eomd ucatnirdva ipitinydfl aatnia onna,lw yhsiiscsuh p ­ plemetnhttesr adiKteiyonneaeslmi pahnao snai gsg ree dgeamtaTnhde. comprehdeinssciuovsfes aiitoninaflo nnud n emploiynCm heatnpet1r 4sa nd 1,5b olsbtyea dr eesdc roifp tbirooetanhl -awnodr ltdh edoerveetliocpamle nts (suactshh a ed taipevxep ecthaytpiootnihasse l smicosos)mt,p lneetwre;el cyo m­ menaditofnospr o lidceya lt oe ffweicttthhi epvsreeol byal reaeml sps roe sented. Thmei croecsoencotmiiocnb ehesanis g nailfiscoa ntTlwyoc heaxpp­anded. teirnts h siesc -tihtoonsoenc apiittnearlae,ns pdtr ,o (fiCthsa 2p5ta)en rd the engeymr ark(eCth a2p9t-)earre en tireIlcnyl undieenowd u.d r i scuosfs ion dematnhde ionrC yh aptieasr n a 1d6d enodniu nmid fferceunrcavene a lysis thwaitpl rlo hveel ptfoiu nls trwuicsthtoiofrn asgm iltihaesritiruz dewe intths thtioso l. An ecwh apotnee cro nodmeivocep lmeannttdh ger owotfih n co(mCeh apter 35 )h abse eand dteodt hsee ctoinio nnt ernationAaswl e ltelhc,eo nomics. chapotnei trnesr nafitniaonancanecld o mparsaytsit(veCemh sa p3t2ae nrds 36r,e spechtaivbveee elenyn )l acrognesdi dbeeryaotbnhldeyfi i rres dti tion counteTrhpraorutgtshh.ofii unstas lec ttihJoepan a neesceon owmhyih,ca hs grosworn a psiidlnWyco er lWda rI I, htarse abotenaee p dna r twhieetc ho n­ omioefWs e stEeurnr opnetaaino ns. Ouorb jeicnt irtvehevi ishs aiso ntb ose terne nagntedhx epnat nhaden alysis sefto ritnth h e efidristWtie oh na.va ei mteomd a xziemt ihpee dagougsiec­al fulnoefEs cso mnicosP:r itveaa nPdu blic bCyeh louicciecd oantcienpgt s ing readteepwrti ht hsocaurti fitchibenr ge aadntcdhl atrhitdat iys tinguished thfier esdti tion. In seteoik lilnugts htpero awtreeer l,ne cvaean,ad c cessoifeb ciolniowtmeyi cs, havdee visaltiegfdhr totlmhyt e r adiatpipornoTaahlcef ho .l lopwoiinngt s are ofs peciinfitcei rnte hsits regard. I. EconoPmriicn cAirPperl eesse innaHt iegdhR leya deaF balshDiioffinc.u lt langaunatdge er omlioncgayon f theinn sduecrc elsesafrupnlai rntgi,oc fu larly econocmoinccF eepetdsb.fa rcobkmo tsht udaennidtsn st ruhcatison rdsi cated thraeta dawbaiosln oieftt hyse t reonfgt htfiehr ses dtoi ntI.inw rittihneg second editwieho anvb,eu iulptot nhs itsr esnog ttaohms ,ii nmitzhoeeb stacles faced byb eginsntiundogefe n ctosn omics. Withsoauctr iaficcciunwregah cayvs,eo utgohe tm plsoiym lpalneg uage. Simplhiocwiethvyaen,sro ,bt e en subfsodtrei ptRtuahtt.eh odeu rr, i atsio m hightlhipego hwtae nrad c cessoifeb ciolnioctmoyin cc eWphtersce.o mpildeexa s arees setnoot uiaranl lay stihse,yd eavreelf ouplWeledyb .e litehvtaehte e c o­ noimcrse qufiortreh de 19b8ec0 hsa lclaaennn adgp ipnlgit coa btlhweeo rrleda,l ancdo mprehteotn hsseit buldaeews ne tl l. 2.E conoRmesiaocn ainnidgtA sp plicAartEeim pohnass iAzletdh.om uogdhe ls, theoarniedex se,r acriiesmp eosr ttahneatyro, en tloyo wlistw hh itcodh e velop theec onowmaoiyftc h inAkbisntgr.a acntmdie ocnhsaa nrnieoc stst ressoas se d too bscmuarjceoo rn cWeepct osn.s ilyes mtepnhtatshbieaz seai nctdsh eriera l­ woralpdp lication. 3.M icroecRoenaoismnoiIgncas F unadmenCtoamlp onoefMn atc roeconomic AnalyTshies .c epnritnrocafeil cp olneso i mtsih ciantc enmtaitvtYeeesert c. o nomic modeplasr,t iicnmua lcarroleyc oanrooefm tiecns ,u nbsyuc popnocberaptsteisdc toe conormeiasc-o nofiren xgammpilcer,o cosnuccaehosp ptpso rtunity cost, infor­ mat-igoanthaenrjdio snbeg ca htr heoarnyd, t aidevaxepp ectTahtmeici ornos­. struocft uearcneo ndoomehysa vmear coecornaommiificc Maitciroonisn.c entives iflnuenscuecm har cofaacstth orera sot fue n emplotyhmleee nvotefs,l a vainndg invesatnmadeg ngtr,e gatPeo loituchtieapentusc t o.u (raia)mg mee diate consumrpattithohenair nn vestmtehfneut t u(frboe)r, the ocfth iamanenn de ling effoirnttt aoax v oidraanttchheeap rnr o duaccttiivvoeir( t cti)hea esc ,c umulation of dreabttthh ea"rnp a-yy-oausfi-ngaon"wc iihlnalgvc eo nseqIunetn htcieesxs t., thiem porotfta hnmeci ec roinscternuttcihtivautsetrh efe o undoafot uimroa nc ro­ econommarikce thsi gihsl ighted. 4.E conoTmoisoAc lr Aep pltioBe odtt hhM ea rkaenttdh Peo liPtriocsca.el s Mostte xtbtoesoltklus d heonawtn is d emaalr keecto nwoomuyol pde rhaotwe , rael-wmoarerltkddsi ffferrot mhh ey pothiedteiacla,l i adnepdau lbh plooiwlc i cy cacno rrtehsceh to rtcooftm himenar gkseI tna. d dittodi iosnc utshsetishnerg e e basicw eia snsaulweyhszar,ete al-pwuobrplloidlci i lsci yk teodl oyT. h icse 11tral