Economics (textbook)

The competitive price system adapted from Samuelson, 1961

Economics is an influential introductory textbook by American economists Paul Samuelson and William Nordhaus first published in 1948.

8nd ed. (1970)

• The competitive price system uses supply-demand markets to solve the trio of economic problems — What How, and For Whom All demand relations are shown in blue. all the supply relations, in black.
  • p. 41

• How do we measure the net national product, NNP? The general idea is simple. Figure 10-1 shows the circular flow of dollar spending in an economy with no government and no accumulation of capital or net saving going on.
  • p. 170

• Unless proper macroeconomic policies are pursued, a laissez faire economy cannot guarantee that there will be exactly the required amount of investment to ensure full employment: not too little so as to cause unemployment, nor too much so as to cause inflation. As far as total investment. ..is concemed, the laissez faire system is without a good thermostat.
  • p. 195

• Where the stimulus to investment is concerned, the system is somewhat in the lap of the Gods. We may be lucky or unlucky; and one of the few things you can say about luck is, "It's going to change." Fortunately, things need not be left to luck. We shall see that perfectly sensible public and private policies can be followed that have greatly enhanced the stability and productive growth of the mixed economy.
  • p. 196

• Figure 12-6 pulls together in a simplified way the main elements of income determination. Without saving and investment, there would be a circular flow of income between business and the public: above, business pays out wages, interest, rents, and profits to the public in return for the services of labor and property; and below, the public pays consumption dollars to business in return for goods and services.
  Realistically, we must recognize that the public will wish to save some of its income, as shown at the spigot Z. Hence, businesses cannot expect their consumption sales to be as large as the total of wages, interest, rents, and profits.
  • p. 218

• An increased desire to consume — which is another way of looking at a decreased desire to save — is likely to boost business sales and increase investment. On the other hand, a decreased desire to consume — i.e., an increase thriftness — is likely to reduce inflationary pressure in times of booming incomes; but in time of depression, it could make the depression worse and reduce the amount of actual net capital formation in the community. High consumption and high investment are then hand in hand rather than opposed to each other.
  • p. 224

• What good does it do a black youth to know that an employer must pay him $2 an hour if the fact that he must be paid that amount is what keeps him from getting a job?
  • p. 372

15th ed. (1995)

Thoughts on the Forty-sixth Birthday of a classic Economics Textbook

• Linus Pauling, so great a scholar and humanist that he was to win two Nobel Prizes, had already written a leading chemistry text—just as the great Richard Feynman was later to publish classic physics lectures. William James had long since published his great Principles of Psychology. Richard Courant, top dog at Gottingen in Germany, had not been to proud to author an accurate textbook on calculus. Who was Paul Samuelson to throw stones at scholars like these? And, working the other side of the street, I thought it was high time that we got the leaders in economics back in the trenches of general education.
  • p. xxvi

• Starting a baby is easy. Bringing it to full term involves labor and travail.
  • p. xxvi

• Economics is not merely a game, not merely a neat puzzle to test your powers of logic, arithmetic, and mathematical virtuosity.
  • p. xxix

• In the long run the facts win out. The fanatical simplicities perish in the Darwinian struggle for survival of useful principle. To illustrate this, listen to what I used to say to one of my generation's leading economists (a warm friend with a strong ideology that differed considerably from my own eclectic value judgments and methodology):
  You are a brilliant scholar, dazzlingly creative, with clear-cut economic convictions. But for you, things are either simply absurd or absurdly simple. Indeed the good fairies gave you every gift save one—the invaluable gift of "maybe."
  • p. xxix-xxx

16th ed. (1998)

A Golden Birthday

• History — at least economic history — has taught the world certain basic economic principles that have been learned and tested the hard way.
  • p. xxiv

• A historian of mainstream-economic doctrines, like a paleontologist who studies the bones and fossils in different layers of earth, could date the ebb and flow of ideas by analyzing how Edition 1 was revised to Edition 2 and, eventually, to Edition 16.
  • p. xxvi

• If it doesn’t make good sense, it isn't good economics.
  • p. xxvii

Ch. 8 : The Behavior of Perfectly Competitive Markets

• We have seen that markets have remarkable efficiency properties. But we cannot say that laissez-faire capitalism produces the greatest happiness of the greatest numbers. Nor does it necessarily result in the fairest possible use of resources. Why not? Because people are not equally endowed with purchasing power. Some are very poor through no fault of their own, while others are very rich through no virtue of their own. So the weighting of dollar votes, which lie behind the individual demand curves, may look unfair. [...] A society does not live on efficiency alone. Philosophers and the populace ask, Efficiency for what? And for whom? A society may choose to change a laissez-faire equilibrium to improve the equity or fairness of the distribution of income and wealth. The society may decide to sacrifice efficiency to improve equity. [...] There are no correct answers here. These are normative questions that are answered in the political arena by democratic voters or autocratic planners. Positive economics cannot say what steps governments should take to improve equity. But economics can offer some insights into the efficiency of different government policies that affect the distribution of income and consumption.
  • "Two Cheers for the Market, but Not Three", p. 151

Ch. 30 : Ensuring Price Stability

• Until the 1970s, high inflation usually went hand in hand with high employment and output.In the United States, inflation tended to increase when investment was brisk and jobs were plentiful. Periods of deflation or declining inflation [...] were times of high unemployment of labor and capital.
  But a more careful examination of the historical record has revealed an interesting fact: The positive association between output and inflation appears to be only a temporary relationship. Over the longer run, there seems to be an inverse-U-shaped relationship between inflation and output growth.
  • p. 585

19th ed. (2010)

Chap. 1 : The Central Concepts of Economics

• Let us begin with a definition of economics. Over the last half-century, the study of economics has expanded to include a vast range of topics. Here are some of the major subjects that are covered in this book:

  ● Economics explores the behavior of the financial markets, including interest rates, exchange rates, and stock prices.
  ● The subject examines the reasons why some people or countries have high incomes while others are poor; it goes on to analyze ways that poverty can be reduced without harming the economy.
  ● It studies business cycles — the fluctuations in credit, unemployment, and inflation — along with policies to moderate them.
  ● Economics studies international trade and finance and the impacts of globalization, and it particularly examines the thorny issues involved in opening up borders to free trade.
  ● It asks how government policies can be used to pursue important such as rapid economic growth, efficient use of resources, full employment, price stability, and a fair distribution of income.

  This is a long list, but we could extend it many times. However, if we boil down all these definitions, we find one common theme:

  Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals

• If we think about the definitions, we find two key ideas that run through all of economics: that goods are scarce and that society must use its resources efficiently. Indeed, the concerns of economics will not go away because of the fact of scarcity and the desire for efficiency.

Chap. 2 : The Modern Mixed Economy

• It was Adam Smith who first recognized how a market economy organizes the complicated forces of supply and demand. In one of the most famous passages of all economics, quoted from The Wealth of Nations at the opening of this chapter, Smith saw the harmony between private profit and public interest. Go back and reread these paradoxical words. Particularly note the subtle point about the invisible hand—that private interest can lead to public gain when it takes place in a well-functioning market mechanism.

• Adam Smith discovered a remarkable property of a competitive market economy. Under perfect competition and with no market failures, markets will squeeze as many useful goods and services out of the available resources as is possible. But where monopolies or pollution or similar market failures become pervasive, the remarkable efficiency properties of the invisible hand may be destroyed.

• Specialization and trade are the key to high living standards. By specializing, people can become highly productive in a very narrow field of expertise. People can then trade their specialized goods for others’ products, vastly increasing the range and quality of consumption and having the potential to raise everyone’s living standards.

• Governments control the money supply through their central banks. But like other lubricants, money can get overheated and damage the economic engine. It can grow out of control and cause a hyperinflation, in which prices increase very rapidly. When that happens, people concentrate on spending their money quickly, before it loses its value, rather than investing it for the future. That’s what happened to several Latin American countries in the 1980s, and many former socialist economies in the 1990s, when they had inflation rates exceeding 1000 percent or even 10,000 percent per year. Imagine getting your paycheck and having it lose 20 percent of its value by the end of the week!

• Economic activity involves forgoing current consumption to increase our capital. Every time we invest—building a new factory or road, increasing the years or quality of education, or increasing the stock of useful technical knowledge—we are enhancing the future productivity of our economy and increasing future consumption.

• In a market economy, capital typically is privately owned, and the income from capital goes to individuals. Every patch of land has a deed, or title of ownership; almost every machine and building belongs to an individual or corporation. Property rights bestow on their owners the ability to use, exchange, paint, dig, drill, or exploit their capital goods. These capital goods also have market values, and people can buy and sell the capital goods for whatever price the goods will fetch. The ability of individuals to own and profit from capital is what gives capitalism its name.

• Governments have three main economic functions in a market economy:

  1. Governments increase efficiency by promoting competition, curbing externalities like pollution, and providing public goods.
  2. Governments promote equity by using tax and expenditure programs to redistribute income toward particular groups.
  3. Governments foster macroeconomic stability and growth—reducing unemployment and inflation while encouraging economic growth—through fiscal and monetary policy.

• In many ways, governments are like parents, always saying no: Thou shalt not expose thy workers to dangerous conditions. Thou shalt not pour out poisonous smoke from thy factory chimney. Thou shalt not sell mind-altering drugs. Thou shalt not drive without wearing thy seat belt. And so forth. Finding the correct balance between free markets and government regulation is a difficult task that requires careful analysis of the costs and benefits of each approach. But few people today would argue for returning to the unregulated economic jungle where firms would be allowed to dump pollutants like plutonium wherever they wanted.

• Markets do not necessarily produce a fair distribution of income. A market economy may produce inequalities in income and consumption that are not acceptable to the electorate.

• Macroeconomic policies for stabilization and economic growth include fiscal policies (of taxing and spending) along with monetary policies (which affect interest rates and credit conditions). Since the development of macroeconomics in the 1930s, governments have succeeded in curbing the worst excesses of inflation and unemployment.

• In economic affairs, success has many parents, while failure is an orphan. The success of market economies may lead people to overlook the important contribution of collective actions. Government programs have helped reduce poverty and malnutrition and have reduced the scourge of terrible diseases like tuberculosis and polio.

• The debate about government’s successes and failures demonstrates that drawing the boundary between market and government is an enduring problem. The tools of economics are indispensable to help societies find the golden mean between an efficient market mechanism and publicly decided regulation and redistribution. The good mixed economy is, perforce, the limited mixed economy. But those who would reduce government to the constable plus a few lighthouses are living in a dream world. An efficient and humane society requires both halves of the mixed system—market and government. Operating a modern economy without both is like trying to clap with one hand.

Chap. 3 : Basic Elements of Supply and Demand

• When the price of a commodity is raised (and other things are held constant), buyers tend to buy less of the commodity. Similarly, when the price is lowered,other things being constant, quantity demanded increases.

• When changes in factors other than a good’s own price affect the quantity supplied, we call these changes shifts in supply. Supply increases (or decreases) when the amount supplied increases (or decreases) at each market price.

• A market equilibrium comes at the price at which quantity demanded equals quantity supplied. At that equilibrium, there is no tendency for the price to rise or fall. The equilibrium price is also called the market-clearing price. This denotes that all supply and demand orders are filled, the books are “cleared” of orders, and demanders and suppliers are satisfied.

• The equilibrium price and quantity come where the amount willingly supplied equals the amount willingly demanded. In a competitive market, this equilibrium is found at the intersection of the supply and demand curves. There are no shortages or surpluses at the equilibrium price.

• Many influences lie behind the demand schedule for the market as a whole: average family incomes, population, the prices of related goods, tastes, and special influences. When these influences change, the demand curve will shift.

• Elements other than the good’s price affect its supply. The most important influence is the commodity’s production cost, determined by the state of technology and by input prices. Other elements in supply include the prices of related goods, government policies, and special influences.

Chap. 5 : Demand and Consumer Behavior

• Utility is a scientific construct that economists use to understand how rational consumers make decisions.

Chap. 30 : Inflation

• Until the 1970s, high inflation in the United States usually went hand in hand with economic expansions; inflation tended to increase when investment was brisk and jobs were plentiful. Periods of deflation or declining inflation [...] were times of high unemployment of labour and capital.

Quotes about Economics

• The translation was terrible. It employed convoluted Hebrew terms for simple economic concepts. Nevertheless, I fell in love with the book’s content. What struck me most was the realization that one can in fact think systematically about complex social phenomena and describe them in precise language. All this was new to me, and my fascination grew with every page.
  • Elhanan Helpman, “Doing Research.” (1998) In Passion and Craft. edited by Michael Szenberg

• One of the things Robin Wells and I did when writing our principles of economics textbook was to acquire and study a copy of the original, 1948 edition of Samuelson’s textbook. It’s an extraordinary work: lucid, accessible without being condescending, and deeply insightful. His discussions of speculation and monetary policy are particularly striking: they run quite contrary to much of what was being taught just a few years ago, but they ring completely true in the current crisis. And he was, of course, the man who truly brought Keynesian economics to America — a contribution that now seems more relevant than ever.
  • Paul Krugman, "Paul Samuelson, R.I.P." (December 13, 2009)

• What sex is to the biology classroom, stocks and investment riskiness is to the sophomore economics lecture hall. That chapter on personal finance, put there to keep hard-boiled MIT electrical engineers awake, helped make introductory economics the largest elective course at hundreds of colleges. My great predecessors—John Stuart Mill, Alfred Marshall, Frank Taussig and Irving Fisher—were writing for their times. I was writing for the last half of the 20th century-an epoch that surpassed even my youthful optimism. Those classic authors had dealt with essentially pure capitalism. I had to grapple with the tradeoffs and opportunities inherent in the mixed economy, a social pattern that by now spreads across the continents of the Americas, Europe, Asia, and Africa.
  • Paul Samuelson, "Samuelson's Economics at Fifty: Remarks on the Occasion of the Anniversary of Publication", The Journal of Economic Education, Vol. 30, No. 4 (Autumn, 1999)

• Samuelson's textbook has delivered a great deal of economic wisdom. For many economists, the positive side of the balance sheet has outweighed the negative. Indeed, his defenders might ask: Might the United States and the West have suffered another Great Depression if Samuelson had not emphasized the need for "automatic stabilizers"? Did not Samuelson's heralding of the "mixed" economy curb the appetite of third world countries for national socialism?
  We will never know, of course, but it is humbling to speculate on whether alterations in principles textbooks might have led to a different U.S. economy.
  • Mark Skousen, "The Perseverance of Paul Samuelson's Economics", The Journal of Economic Perspectives, Vol. 11, No. 2 (Spring, 1997)