Introduction, Acknowledgements and Copyrights

Edited by David R. Henderson
To Rena and Karen


With all thy getting, get understanding.

—Proverbs, chapter 4, verse 7

An old joke says that if you laid all the economists in the world end to end, they would not reach a conclusion. What makes the joke work are the popular perceptions that economists never agree and that economists (unlike biologists or the practitioners of any other science) do not share a common set of beliefs. Given all the conflicting pronouncements by economists that appear almost daily in the press, these perceptions are understandable. They are also dead wrong. While economists disagree on many matters, they have reached virtually unanimous agreement on a multitude of others. One purpose of this book is to illuminate the many, many areas where economists agree (while also describing where and why they disagree). The main purpose, however, is to show how economic analysis can illuminate large parts of our daily world that are otherwise a mystery.

Most of the disagreement among economists concerns “macroeconomics,” which deals with nationwide or worldwide phenomena such as inflation, unemployment, and economic growth. Adherents of the various “schools” (Keynesians, monetarists, supply siders, rational expectationists, new classicals, new Keynesians, and Austrians) disagree a fair bit. Some of their disagreements reflect different judgments about the relative importance of, say, inflation versus unemployment. Others stem from basic disagreement on the ability of government policy to affect the total economy in predictable ways. Even here, though, viewpoints have converged: on macroeconomic policy, one of the big differences concerns whether the central bank should target the price level loosely or strictly—certainly not a major disparity. This encyclopedia reflects the disagreements and the points of convergence, with authors chosen from each school to explain and justify their views of how the “macro” world works. One of the most important issues in macroeconomics, incidentally, is what caused the Great Depression and what made it last so long. The article great depression lays out the author’s view of the causes as well as the issues on which there is an emerging consensus.

Macroeconomics, however, is only a small part of the total science of economics. The vast majority of economic questions and public-policy issues fall in the realm of microeconomics. And the vast majority of economists agree on the underlying economics of most micro issues, including rent controls, minimum wages, and the need to reduce pollution. Some may disagree on the policy implications of the analysis, but remarkably few disagree on the analysis itself.

The early evidence that economists agree on many micro issues first became clear in the late 1970s, when the American Economic Review, the world’s largest-circulation economics journal, published an opinion poll of 211 economists.1 The poll found that 98 percent agreed with the statement, “A ceiling on rents reduces the quantity and quality of housing available.” Similarly, 90 percent of economists agreed that “a minimum wage increases unemployment among young and unskilled workers.” And 97 percent agreed with the statement, “Tariffs and import quotas reduce general economic welfare.” Another poll, reported in 1992, found somewhat less, but still fairly widespread, agreement, with 93 percent agreeing on rent ceilings, 79 percent agreeing on the minimum wage, and 92 percent agreeing on tariffs and import quotas.2 A survey in 2000 found similar agreement. Seventy-four percent agreed about the minimum wage, and 93 percent agreed about tariffs and import quotas.3 (The survey did not ask about rent ceilings.) The entries on those topics in this encyclopedia explain why economists are in such startling agreement on these and many other issues. See, for example, the articles on minimum wages, price controls, and rent controls.

And this just scratches the surface of the agreement. Take one example among many: government-mandated benefits for employees. Many people believe that if the government requires employers to provide benefits that employees value at, say, two thousand dollars a year, then the employees are better off by two thousand dollars a year. Economists know better. They understand, based both on simple economic reasoning and on growing evidence, that the employees pay most of the cost of such mandates in the form of lower wages. Even more important than the fact that economists agree on this conclusion is the reasoning that gets them there. The article that lays out this issue quite clearly was written by Lawrence Summers while he was a Harvard professor. He later served as a member of the Clinton administration, which tried to mandate that employers provide health insurance for employees. Summers does an especially good job of laying out the economic reasoning, but many other economists could have reached the same conclusions by applying basic Econ 101 analytics, shifting demand and supply curves.4

In fact, the story of how I first had the idea for an encyclopedia of economics involves Larry Summers. It was the fall of 1982, when he was a domestic policy economist and I was a senior staff economist under Martin Feldstein, the new chairman of President Ronald Reagan’s Council of Economic Advisers. Several of us would sometimes lunch together and, of course, would mix it up on various issues. Macro-economics brought out a wide range of opinions. For instance, Larry and our colleague Paul Krugman, now a regular economics columnist with the New York Times, worried that the high deficits of the time would cause high inflation. Ben Zycher and Lincoln Anderson, fellow senior economists, and I were fairly confident that the policies would not cause high inflation because the Federal Reserve Board under Paul Volcker seemed to be keeping the growth of the money supply low. But on various microeconomic issues and on free trade we were almost completely unanimous. We all thought price controls are generally a bad idea. We all favored free trade and were critical of Reagan for his restrictions on Japanese auto exports to the United States. We often agreed that this or that government policy was counterproductive and that free people, left to their own devices, would work things out better than governments would. It was after one of those conversations that I started thinking that the world could use an encyclopedia. And an encyclopedia makes much more sense if there is agreement among the experts.

Interestingly, the difference between the liberals and the libertarians was less on the economic analysis and even the bottom-line policy conclusions than it was on our feelings about the bottom line. The libertarians—Anderson, Zycher, and I—loved it when the answer was that free markets work; and that was usually the answer. The liberals, Krugman more than Summers, seemed often upset when that was the answer; they seemed to want a big role for government.

This fact about economics has led many noneconomists who want government to restrict economic freedom to express disappointment with economists. Steven Kelman, a budget official in the Carter and Clinton administrations, wrote:

At the government agency where I have worked and where agency lawyers and agency microeconomists interact with each other . . . the lawyers are often exasperated, not only by the frequency with which agency economists attack their proposals but also by the unanimity among the agency economists in their opposition. The lawyers tend to (incorrectly) attribute this opposition to failure to hire “a broad enough spectrum” of economists, and to beg the economists, if they can’t support the lawyers’ proposals, at least to give them “the best economic arguments” in favor of them.. . . The economists’ answer is typically something like, “There are no good economic arguments for your proposal.”5

So, why do people think economists disagree about everything? One reason is that the media present all economic issues as if they are inherently controversial. The issues themselves are controversial, but the economics of the issues more often are not. A journalist writing a piece on free trade versus trade barriers, for example, would be hard put to find an economist who will defend trade barriers (economists know that free trade virtually always improves a nation’s economic well-being). But many journalists feel compelled to present a “balanced view.” So they go to economists who work for interest groups that favor trade barriers—groups such as the National Association of Manufacturers or the AFL-CIO—to get an opinion against free trade. Or they turn to a business person or labor leader whose industry faces tough competition from imports. The result is that readers and viewers get the false impression that economists are divided on free trade. The articles in this encyclopedia, though, reflect the consensus. See, for example, free trade by Princeton economist Alan Blinder, a former Clinton administration economist, and protectionism by noted Columbia economist Jagdish Bhagwati.

Another important source of the misimpression about economics comes from the often overlooked distinction that economists make between “positive” and “normative” analysis. Positive analysis is the application of economic postulates and principles to a question—in other words, finding out the way things are and why the world behaves as it does. Normative analysis, in contrast, deals with the way things ought to be and unavoidably involves the noneconomic value judgments of the analyst. For example, positive analysis says that licensing physicians will result in fewer doctors and higher prices for medical care. Whether states should license doctors to protect patients from quacks is a normative matter. In other words, there are no “shoulds” in purely positive economic analysis, but every economist has views on how things should be done.

In preparing this encyclopedia, the members of the Board of Editors and I tried to separate positive and normative positions, to emphasize the areas where economists agree while also specifying where and why they disagree. The goal is to communicate just how much economic analysis can teach us about the important issues we face as voters, as consumers, as employees, and as people who care about the world. As such, the encyclopedia gives a comprehensive yet readable and engaging survey of mainstream economic thought. Topics that will interest noneconomists are covered by economists who can make their ideas accessible to the general reader. The entries on conscription, discrimination, health insurance, insider trading, job safety, liability, and pharmaceuticals: economics and regulation, for example, cover issues whose important economic aspects are often overlooked. Also not to be missed are savings and loan crisis, which shows what caused, and what did not cause, that crisis; inflation, which gives one of the clearest expositions ever of the causes and effects of inflation; opec, which points out, among other things, that OPEC was an unintended consequence of President Dwight D. Eisenhower’s quotas on oil imports; and risk and safety, which gives startling statistics on the risks of various activities.

One last note. Various people who read and loved the first edition of the encyclopedia told me that they did not try to read it cover to cover, but instead hopped from interesting issue to interesting issue. I recommend that strategy.

David R. Henderson
Monterey, California
October 2005


I want to thank six people who were all a pleasure to work with and who were each important in getting this book done. First are the four members of the Board of Editors: Tyler Cowen, Bob Crandall, Kevin Hoover, and Russell Roberts. They gave me good comments and criticisms on all the articles, and their responses improved the articles immensely. I particularly want to single out Kevin Hoover, for his detailed comments and suggestions that were easy to follow and implement; and Tyler Cowen, for his incredibly quick turnaround and, well, encyclopedic knowledge. Also, Rena Henderson used her prodigious editing skills to make the articles more understandable to someone like herself, an intelligent reader with no background in economics. The sixth person is Laura Goetz of Liberty Fund, whom I have never met but who was always responsive to my questions, supportive of the project, friendly, and professional.

Alan Russell, chairman of Liberty Fund, deserves credit for thinking of putting the first edition of the encyclopedia on the Web. Andy Rutten, then an economist with Liberty Fund, and my agent, Henning Gutmann, did much of the tough work of bringing Liberty Fund and me to an agreement. I particularly appreciate Henning’s persistence.

My friends gave me moral support, especially Charley Hooper, Arunas Kuciauskas, Tom Lee, François Melese, and Greg De Young. Alan Reynolds was particularly helpful, giving me quick feedback on an article on an issue I knew little about.

Doug Brook, the dean of the Graduate School of Business and Public Policy for the whole time I worked on this book, gave me more than a year of unpaid leave, allowing me to finish it.

Harry E. Teasley Jr. gave a generous gift to the Hoover Institution that allowed me to take time to complete this massive project.

Finally, I thank the authors of these excellent articles. They were willing to share their knowledge with a wider audience and to do so for a modest fee. I enjoyed working with them, getting to know them, and learning from them, particularly Paul Bergin, Bryan Caplan, Jeffrey Frankel, John Goodman, Kevin Hassett, Jonathan Macey, Bennett McCallum, Paul Rubin, Kenneth Small, John Seater, Richard Thaler, and Adam Wildavsky.

David R. Henderson
Monterey, California
December 2005


Tyler Cowen, Professor of Economics at George Mason University and Director of the James Buchanan Center and the Mercatus Center

Robert W. Crandall, Senior Fellow at the Brookings Institution

Kevin D. Hoover, Professor of Economics and Philosophy at Duke University

Russell Roberts, Professor of Economics and the J. Fish and Lillian F. Smith Distinguished Scholar at the Mercatus Center at George Mason University


This book is published by Liberty Fund, Inc., a foundation established to encourage study of the ideal of a society of free and responsible individuals.

The cuneiform inscription that serves as our logo and as the design motif for our endpapers is the earliest-known written appearance of the word “freedom” (amagi), or “liberty.” It is taken from a clay document written about 2300 b.c. in the Sumerian city-state of Lagash.

© 1993, 2002, 2008 by David R. Henderson

All rights reserved

“Free Trade” is adapted from Alan S. Blinder, Hard Heads, Soft Hearts: Tough-Minded Economics for a Just Society, © 1988 by Alan S. Blinder. Originally published in 1988 by Addison-Wesley, and reprinted with the permission of Perseus Books Group.

“Keynesian Economics” is adapted from Alan S. Blinder, “The Rise and Fall of Keynesian Economics,” Economic Record, December 1988. Reprinted with the permission of Blackwell.

“Marginalism” is adapted from Steven E. Rhoads, The Economist’s View of the World, © 1985 by Cambridge University Press. Reprinted with the permission of Cambridge University Press.

Printed in the United States of America

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Library of Congress Cataloging-in-Publication Data

The concise encyclopedia of economics / edited by David R. Henderson.

p. cm.

Includes bibliographical references and index.

isbn-13: 978-0-86597-665-8 (hardcover: alk. paper)

isbn-13: 978-0-86597-666-5 (pbk.: alk. paper)

1. Economics—Encyclopedias. I. Henderson, David R. hb61.c66 2007

330.03—dc22 2007015993

Liberty Fund, Inc.

8335 Allison Pointe Trail, Suite 300

Indianapolis, Indiana 46250-1684


J. R. Kearl, Clayne L. Pope, Gordon C. Whiting, and Larry T. Wimmer, “A Confusion of Economists?” American Economic Review 69 (May 1979): 28–37.

Richard M. Alston, J. R. Kearl, and Michael B. Vaughan, “Is There a Consensus Among Economists in the 1990s?” American Economic Review 82 (May 1992): 203–209.

Dan Fuller and Doris Geide-Stevenson, “Consensus Among Economists: Revisited,” Journal of Economic Education (Fall 2003): 369–387.

Lawrence H. Summers, “Some Simple Economics of Mandated Benefits,” American Economic Review (May 1979): 177–183.

Steven Kelman, What Price Incentives? (Boston: Auburn House, 1981), p. 7.

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