All of us are affected by government economic policies and by private economic decisions. No one can be an informed voter or even an understanding reader of the daily newspaper without a knowledge of economics. And who can plan for the future in which we and our children will live and work without a sense of the forces that shape our economic life?
The economic policy issues that we debate today—trade policy, inflation, the proper role of government, the eradication of poverty, and the means of raising the rate of economic growth—have been discussed by economists for more than two centuries. Many of today’s economic policies—both the good ones and the bad—are the result of the ideas of those past economists. And many of today’s debates about economic policy can be understood only by those who have at least some familiarity with the ideas of earlier economists.
The giants of economic science during the past two hundred years have been men concerned with the critical policy issues of their time. They studied the working of the economy in order to advocate better economic policies. But despite their concern with policy, they were not polemicists or politicians but men who sought to persuade their contemporaries in government and in the broader public by analysis and evidence that would meet the standards of professional debate.
Like any scientific discipline, economics advances by discovering the limitations of earlier ideas. Although economics does not have the opportunities for experimentation that characterize the natural sciences, economists can use systematic observation and the analysis of experience to reject old theories and develop new ones.
The changes in technology and in the political and institutional environment impede the process of drawing firm conclusions about the likely effects of alternative economic policies. It can take decades before issues are settled, and new generations of economists and policy officials may have to learn that the conclusions of the past continue to be valid in the changing environment of today.
Adam Smith, the eighteenth-century founder of modern economics, rejected the conventional wisdom of his day by arguing that government interference in the economy is generally harmful and that the public’s interest is best served by competition among private buyers and sellers. In recent years, governments around the world have recognized the virtues of a market economy based on private enterprise rather than on government planning and public ownership. The reduction of tax rates in the United States, the privatization of nationalized industries in England and France, the resurrection of family farms in China, and the Soviet economic restructuring that has been labeled “perestroika” are the direct descendants of the early ideas of Adam Smith.
The theories of John Maynard Keynes, developed in England during the Depression of the 1930s, have helped governments avoid a return to mass unemployment. But the Keynesian arguments against saving and in favor of increased consumer spending are being gradually abandoned as inappropriate for the very different conditions of today’s economy. Now we understand that increased saving can in general be the basis for increased investment in new plants and equipment and therefore for faster economic growth and a higher standard of living.
When Federal Reserve officials make decisions about monetary policy and interest rates, they are relying on ideas and evidence that can be traced back to nineteenth-century economists like John Stuart Mill as well as on the latest data being developed in Washington. When Treasury officials debate appropriate tax rules for businesses and individuals, they may make use of analytic arguments that date back more than a century to David Ricardo and Alfred Marshall. Similarly, the analysis of trade policy, energy and environmental regulation, and antitrust legislation are based on ideas that have developed through the centuries. A familiarity with these economic ideas is important for anyone who wants to understand how new policies are likely to affect the economy and why certain policies are chosen.
In this book, Todd Buchholz provides a lively and intelligible introduction to the key ideas of economics through the study of the great economists who have shaped the discipline. Instead of the formal models and complex diagrams that are the focus of standard economics textbooks, Buchholz provides clear, nontechnical explanations and timely examples.
I first met Todd Buchholz when he was teaching a section of the introductory economics course at Harvard. Buchholz was an excellent teacher who was selected from among the thirty other teachers in the course to receive the annual prize for outstanding teaching of introductory economics. His skills in the classroom are well displayed in this very readable book.
—Martin Feldstein
Cambridge, Massachusetts
June 1989