When I was getting the Encyclopedia in shape for the web, I read through each of the 157 essays originally published in 1993 to see how many of them were out of date and to what extent. After all, things change. What struck me was how few needed updating, except for changes in the data. The reasoning and analysis that made sense in 1993 makes sense today. This shouldn't be surprising: after all, economics has existed as a science for at least the two and a quarter centuries since Adam Smith's Wealth of Nations appeared, and probably longer. It took a major leap in the late nineteenth century with the "marginal revolution." From then on, economists began to "think on the margin" on the various economic issues, and marginal thinking is still one of the most powerful and important parts of economic reasoning. Although many new economic ideas were developed in the twentieth century, especially in macroeconomics, arguably much less was added to understanding than in the nineteenth. Indeed, the late George Stigler, a superb humorist and one of the late-twentieth-century economists who was best informed about the development of economics as a science, once said of his friend, colleague, and fellow Nobel laureate Milton Friedman, "Milton is the greatest economist of the twentieth century—which was a lousy century for economics." Whatever one's view on the relative additions to knowledge of the two centuries, it would be very surprising if economics had changed a lot in less than a decade after the Encyclopedia first appeared.
One major development in the last half of the twentieth century that is probably the biggest improvement in economic science in that time is that economists have increasingly gathered and studied data in a rigorous way. Interestingly, Stigler, despite his views of twentieth-century progress in economics, was a major contributor to the use of data in economic analysis. The Encyclopedia reflects that development: many of the articles herein are rich in data. To the extent the Encyclopedia is out of date, it is in the data presented in some of these articles. I went through each article and assessed how much the data in each had changed. Most of the changes are too small to affect the conclusions of the articles. In the seventeen cases where I believed that the data had changed substantially, I wrote an editor's note reminding the reader when the article was written. Interestingly, Paul Romer's "Economic Growth" correctly predicted that Japan's economic growth would slow in the 1990s. Another article, Carolyn Weaver's "Social Security," anticipated developments for the years up to 2000 with considerable accuracy.
When I put the Encyclopedia together, I wanted to create not another dry, taxonomic dictionary but rather a broad collection of easy-to-read, punchy essays that give the reader an understanding of what economists actually think on a wide range of issues—and why. No other book since the original Palgrave Dictionary, published in the late nineteenth century, had done that. According to many economics professors, journalists, and students who have given me feedback over the years, I succeeded. A number of journalists have told me that it is their most-read reference book, and I often get reprint requests from professors who wish to hand out various articles to their classes. Now, with the Web edition, the book's contents will be much more available to people around the world. So click your way to economic understanding.
David R. Henderson
December 15, 2001
Preface to the 1993 EditionAn old joke says that if you laid all the economists in the world end to end, they would not reach a conclusion. The popular perception behind the joke is that economists never agree. Implicit in that perception is the belief that economics is largely a matter of opinion 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, that perception is very understandable. It also is 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). Another is to show how economic analysis can enhance our understanding of the world.
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, etc.) disagree a lot. 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. This encyclopedia reflects those disagreements, with authors chosen from each school to explain and attempt to justify their views of how the "macro" world works.
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 what is called 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.
That economists agree on most micro issues became clear in the late seventies when the American Economic Review, the world's largest-circulation economics journal, published an opinion poll of 211 economists. 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." The entries on those topics in this encyclopedia explain why economists are in such startling agreement on these and many other issues.
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 protectionism, for example, would be hard put to find an economist who will defend protectionism (economists know that free trade virtually always improves a nation's economic well-being). But many journalists feel compelled to get "the other side" and present a "balanced view." So they go to economists who work for protectionist interest groups like 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.
Another equally 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 there being fewer doctors in society 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, we strived 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, consumers, 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. I have chosen topics that will interest noneconomists, written by economists who can make their ideas accessible to the general reader. The entries on Apartheid, Discrimination, and Insider Trading, for example, cover issues whose important economic aspects often are overlooked.
As this book goes to press, economic issues dominate the news more than at any time since Ronald Reagan became president in 1981. This is due both to objective circumstances (the high federal budget deficit and rising costs of medical care) and to President Bill Clinton's attempt to shift economic policy in major ways. Although no one can know the actual policies that will emerge from Congress, the broad outlines of "Clintonomics" have become clear. In brief, Clinton would have the government take a larger role in the economy, both as taxer and as regulator.
To reduce deficits, Clinton wants to increase taxes, especially on high-income earners, on some of the elderly, and on corporations. Clinton wishes to cut government spending somewhat as a share of gross domestic product, but his proposals appear to shift the composition of spending more than they actually decrease it. He would cut defense spending further, along with spending in other domestic programs. At the same time, Clinton would increase domestic spending in many areas, especially on infrastructure and education. He also wants the government to spend money or require employers to spend money to make medical care available at low prices to all who want it.
Clinton wishes a larger role for government in the labor market, having appointed the most activist secretary of labor since the thirties, Robert Reich. He would increase the minimum wage and give unions more power in the workplace.
On environmental policy, Vice President Al Gore would increase regulations on polluters, while stemming some of the movement to incentive-based pollution control that began with President Jimmy Carter and continued through the Reagan and Bush administrations.
On trade policy, Clinton appears at this writing to be less in favor of free trade than was his immediate predecessor. He has raised doubts about whether he will sign the North American Free Trade Agreement. The position of chairman of the Council of Economic Advisers, in Republican and Democratic administrations, has traditionally gone to an economist who avidly favors free trade. Clinton, however, has appointed Laura Tyson, who has expressed strong reservations about it. On the other hand, Clinton has named Alan S. Blinder, an outspoken free trader, as one of the members of the Council of Economic Advisers.
This encyclopedia contains articles on all the above issues. Here you will find facts and economic analysis that are vital to understanding current economic controversies. All of the articles on taxes in chapter 5 are relevant to today's discussions, especially "Taxation, A Preface," "Corporate Taxation," "Marginal Tax Rates," and "Progressive Taxes." Indeed, that chapter's lead article, "Taxation, A Preface," is written by the chief economist of the Office of Management and Budget, Joseph J. Minarik. On budgets, deficits, and debts, the chapter 4 articles "Federal Budget," "Federal Debt," "Federal Deficit," and "Government Spending" are especially relevant.
On health care, two articles in chapter 13, "Health Care Industry" and "Health Insurance," give important context and analysis that are often missing from, or at least unstated in, current discussions. On education, the article "Public Schools," in chapter 13, addresses many of the same concerns that Clinton dealt with while governor of Arkansas.
On labor policy, all of the articles in chapter 9 are highly relevant, especially "Minimum Wages," "Labor Unions," and "Job Safety." All of chapter 8 helps clarify the ongoing debate about the environment. On trade policy, the articles in chapter 10 apply to current discussion, especially "Free Trade," "Free Trade Agreements and Customs Unions," and "Protectionism." "Free Trade" is written by Alan S. Blinder. The chapter 4 article "Industrial Policy" tells how the industrial policy debate developed in the eighties and of Robert Reich's role in that debate.
Not to be missed either are other articles by economists who are members of or advisers to the Clinton administration. Most notable are "Keynesian Economics" (in chapter 2) by Blinder, and "Unemployment" (in chapter 3) by Lawrence H. Summers, who is the undersecretary of the treasury for international affairs. Also in this encyclopedia are articles by economists who are critical of the Clinton administration. Most notable here are "Monetarism" (in chapter 2) by Allan H. Meltzer, "Trucking Deregulation" (in chapter 7) by Thomas Gale Moore, and "Defense" (in chapter 13) by Benjamin Zycher.
Finally, some of the world's leading economic journalists, whose job has always been to follow economic discussion closely and to make it understandable to a wide audience, have important articles in this encyclopedia. These journalists include Sylvia Nasar of The New York Times, Robert J. Samuelson of Newsweek, Al Ehrbar of the Wall Street Journal, Clive Crook of The Economist, Jodie T. Allen of the Washington Post, Rob Norton of Fortune, and David R. Francis of the Christian Science Monitor.
So whatever happens with the economy or with economic policy this year, or even this century, The Fortune Encyclopedia of Economics is an indispensable guide to help you follow and understand the continuing debates.
Producing this book was a labor of love for nearly three years. I hope you enjoy reading these articles as much as I have.
David R. Henderson
The main person I want to thank is my wonderful wife, Rena, who regularly reassured me that I could pull this off. Moreover, Rena was involved in the details: after I had edited each article, she used her prodigious editing skills to make the articles more understandable to someone like herself, an intelligent reader with no background in economics. I also thank my daughter Karen who was always proud and excited that "Dad's book will be in the bookstore."
Next, I thank my other friends who encouraged me and believed in me throughout this whole massive project. So many friends gave me so much support, especially Tom Nagle, the late Roy Childs, Frank Barrett, Doug Adams, Bill Haga, Paul Gerner, Jimmy Koo, Janet Beales, Mark Weston, Allen Tegtmeier, Greg De Young, Matt Johns, Barbara Glover, Bob Hessen, Marty Anderson, Lee Mairs, and Sylvia Nasar. I apologize to those friends whose names I may have overlooked.
Warner editors Al Ehrbar and Mel Minter also contributed to this book. I especially thank Al, not only for making deft edits that cut words and clarified issues further, but also for recommending about ten to fifteen important topics.
Thanks also to Bob Samuelson of Newsweek, Sylvia Nasar of the New York Times, Dan Seligman of Fortune, and Steve Cylke, who all made good suggestions for further topics or for authors. Tyler Cowen of George Mason University let me pick his brain for two hours and helped me think of about twenty authors whom I might not have thought of.
I thank Marshall Loeb and Ann Morrison of Fortune and Maureen Mahon Egen, Anne Hamilton, Harvey-Jane Kowal, Dennis Dalrymple, and Larry Kirshbaum of Warner Books. Larry deserves credit for having the idea of a readable encyclopedia of economics. I appreciate Anne Hamilton's ability to handle complicated details professionally.
I thank Jimmy Koo, my research assistant at the beginning, and again at the end, of the project. I also thank Janet Beales, my assistant editor during the summer of 1991 on an internship generously paid for by the Institute for Humane Studies. Marty Zupan of IHS suggested Janet and persuaded the institute to make her my intern. Dianne Kelsey and Barbara Glover not only provided secretarial services, but also believed in the project. Guy Cunningham, one of my students, found an important numerical error in one of the articles.
Thanks also to the Hoover Institution for lending financial support to this 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 not a very large fee. I enjoyed working with them, getting to know them, and learning from them, particularly Garrett Hardin, Bob Hessen, Jack Hirshleifer, Saul Hymans, Larry Kotlikoff, Stan Lebergott, Fred McChesney, Bob Michaels, Joe Minarik, Barry Nalebuff, June O'Neill, the late George Stigler, Jim Tobin, Kip Viscusi, and Aaron Wildavsky.
David R. Henderson
Grateful acknowledgment is made to the following for permission to reprint previously published material:
Economic Record: "Keynesian Economics" is adapted from Alan S. Blinder, "The Rise and Fall of Keynesian Economics," Economic Record, December 1988. Used with permission.
Regulation: "Airline Deregulation" is adapted from Alfred E. Kahn, "I Would Do It Again," Regulation, 1988. Number 2. Used with permission.
National Review: "Monetarism" is adapted from Allan H. Meltzer, "Is Monetarism Dead?" National Review, November 4, 1991. Used with permission.
Addison-Wesley Publishing Company, Inc.: "Free Trade" is adapted from Alan S. Blinder, Hard Heads, Soft Hearts, copyright © 1988 by Alan S. Blinder. Reprinted by permission of Addison-Wesley Publishing Company, Inc. Used with permission.
American Economic Review: "Greenhouse Effect" is adapted from Thomas C. Schelling, "Some Economics of Global Warming," American Economic Review, March 1992. Used with permission.
The Economist Newspaper Group, Inc.: "Third World Economic Development" is adapted from Clive Crook, "A Survey of the Third World," The Economist, September 23, 1989. Used with permission.
Cambridge University Press: "Marginalism" is adapted from Steven E. Rhoads, The Economist's View of the World, copyright © 1985 by Cambridge University Press. Reprinted with the permission of Cambridge University Press.
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