The 24/7 Economy

24/7. That's the way the economy works. While you're sleeping, workers at the Texas Instrument plant in Kuala Lumpur are assembling the electronic circuits that will instruct your alarm clock to go off, relay the news via satellite TV or radio, enable video presentations in class or at remote locations, and help retrieve music files on the iPod you carry around. Venezuelan oil workers are pumping oil that will fuel your drive to class. Ethiopian farmers are harvesting the coffee beans that will help keep you alert. Traders in London, Hong Kong, and Tokyo are pushing the value of the dollar up or down, changing the cost of travel and trade. In an increasingly globalized economy, the economy truly never sleeps. It's in motion 24 hours a day, 7 days a week.

All of this perpetual motion makes teaching economics increasingly difficult. The parameters of the economy are constantly changing. Interest rates are up one day, down the next, the same with oil prices. Inflation looks worrisome one month and benign the next. Job growth looks great one month, then dismal the next. Even such famous prognosticators as Alan Greenspan have trouble keeping track of all these (changing) data, much less divining the implied direction of the economy.

At the micro level, incessant changes in the economy create similar problems. Market structures are continuously evolving. Products are always changing. With those changes, even market boundaries are on the move. Is your local cable franchise really a monopoly when satellite and Internet companies offer virtually identical products? Will Apple Computer, Inc., with a 70 percent market share in the portable MP3-player market, behave more like a monopolist or like a perfect competitor? With the Internet creating global shopping malls, how should industry concentration ratios be calculated? The Federal Trade Commission and the Antitrust Division of the U.S. Justice Department are vexed by ever-changing market boundaries and structures.

Coping with Change

So how do we cope with all this flux in the classroom? Or, for that matter, in a textbook that will be in print for three years? We could ignore the complexities of the real world and focus exclusively on abstract principles, perhaps “enlivening” the presentation with fables about the Acme Widget Company or the Jack and Jill Water Company. That approach not only bores students, it solidifies the misperception that economics is irrelevant to their daily life. Alternatively, we could spend countless hours reporting and discussing the economic news of the day. But that approach transforms the principles course into a current-events symposium.

The Economy Today pursues a different strategy. I am convinced that economics is an exciting and very relevant field of study. I have felt this way since I attended my first undergraduate principles course. Despite an overbearing and boring textbook and a super-sized class (over 1,000 students!), I somehow discerned that economics could be an interesting topic. All it needed was a commitment to merging theoretical insights with the daily realities of shopping malls, stock markets, global integration, and policy development. Whew!

What Makes Economies Tick

How does this lofty ambition translate into the nuts and bolts of teaching? It starts by infusing the textbook and the course with a purposeful theme. Spotlighting scarcity and the necessity for choice is not enough; there's a much bigger picture. It's really about why some nations prosper while others languish. As we look around the world, how can we explain why millionaires abound in the United States, Hong Kong, the United Kingdom, and Australia, while 2.8 billion earthlings live on less than $2 a day? How is it that affluent consumers in developed nations carry around videophones while one-fourth of the world's population has never made a phone call? Surely, the way an economy is structured has something to do with this. At the micro level, Adam Smith taught us long ago that the degree of competition in product markets affects the quantity, quality, and price of consumer products.

Markets vs. Government

At the aggregate level, we've also seen that macro structure matters. Specifically, we recognize that the degree of government intervention in an economy is a critical determinant of its performance. The Chinese Communist Party once thought that central control of an economy would not only reduce inequalities, but accelerate growth. Since decentralizing parts of its economy, freeing up some markets, and even legalizing private property (see World View, p. 17), China has become the world's fastest growing economy. India has heeded China's experience and is also pursuing a massive privatization and deregulation strategy (World View, p. 11).

This doesn't imply that laissez faire is the answer to all of our economic problems. What it does emphasize, however, is how important the choice between market reliance and government dependence can be.

We know that the three core questions in economics are What, How, and For Whom to produce. Instead of discussing them in a political and institutional void, we should energize these issues with more real-world context. We should also ask who should resolve these core questions, the governments or the market place. Where, when, and why do we expect market failure - suboptimal answers to the what, how, and for whom questions. Where, when, and why can we expect government intervention to give us better answers - or to fail? This theme of market reliance vs. government dependence runs through every chapter of The Economy Today.

Real World Concerns

Within the two-dimensional framework of 3 core questions and markets-vs.-governments decision making, The Economy Today pursues basic principles in an unwavering real-world context. The commitment to relevance is evident from the get-go. At the outset, very serious trade-offs between arms spending and food production in North Korea (p. 8-9) put the concept of opportunity costs into a meaningful context. Chapter 1 pursues the nature of opportunity cost into the future by examining the earthbound sacrifices we'll have to make for the proposed Lunar and Martian settlements (Chapter 1's “Economy Tomorrow” section, p. 19-20). These kinds of concrete, page-one examples motivate students to learn and retain core economic principles.

Chapter 2 gives students a quick economic tour of the world. It shows how different nations have resolved the What, How, and For Whom questions. Students see how rich the USA is—and how poor other nations are (see World Views, p. 28 and 29). They also see that inequality is not an ailment unique to “rich” nations, (e.g. World View, p. 41). This chapter gives students an empirically-based global perspective on economic outcomes that can spark a motivated search for explanation, i.e. economic theory.

Macro Realities

In Macro, we emphasize the cyclical problems of unemployment and inflation. But students don't get motivated to learn the origins or solutions for these problems just by citing the latest economics statistics (yawn). Most students don't have enough personal experience to know why 6 percent unemployment or 3.7 percent inflation are serious concerns. To fill that void, The Economy Today takes students on a tour of unemployment and inflation. In Chapter 6, they see unemployment statistics translate into personal tragedies and social tensions. They see who loses their job when the unemployment rate rises (p. 118) and how devastating the experience can be (p. 121-122). In Chapter 7, the devastation wrought by hyperinflation drives home the realization that price-level changes matter. These two chapters lay a global, historical, and personal foundation that gives purpose to the study of macro theory. Few other texts lay this foundation.

In the core macro chapters (8-18), The Economy Today constantly reminds students of the real-world relevancy of core concepts. The potential instability of aggregate demand, for example, is illustrated with data on quarterly variance in consumption and investment (p. 192) as well as News accounts on investment decisions (p. 191) and consumer confidence (p. 187, 219). The impacts of terrorism (News, p. 191) and “oil shocks” (News, p. 337) on both AD and AS, get timely recognition. By tying core AS/AD concepts to real-world events, the textbook highlights the importance and relevance of macro theory.

When we peer into the long run, it's important to ask what makes economies grow and what institutions or policies can accelerate that growth. But students won't pay much attention until you demonstrate that economic growth is both important and desirable. Chapter 17 attempts this by reviewing the pay-offs to growth and by directly confronting concerns about the limits to growth.

Nowhere is the commitment to a real-world context more evident than in Chapter 19. The very title of the chapter (“Theory vs. Reality”) reveals its purpose. The chapter not only confronts, but also explains the gap between the promise of macro theory and the reality of economic outcomes. The section entitled “Why Things Don't Always Work” (p. 397-408) is a nice bridge between the blackboard and the boardroom for your students. Every Macro course should include this chapter.

Micro Realities

The emphasis on real-world applications continues in the micro section. Nowhere is this more evident than in the discussion of market structure. Chapter 22 offers the typical depiction of the perfectly competitive firm in static equilibrium (albeit illustrated with real-world catfish farmers). There is a second chapter on perfect competition which turns the spotlight on the competitive dynamics that power market-based economies. The reality of market structures is that they typically evolve—sometimes at lightening speed. In 1977, Apple Computer, Inc. had a virtual monopoly on personal computers; in 2001 it had a lock on portable, digital music players (iPods). In both cases, a swarm of wannabes transformed the market into more competitive structures. In the process, the products improved, sales volumes increased, and prices fell at extraordinary rates of speed. By emphasizing the behavior of a competitive market rather than just the structure of static equilibrium, Chapter 23 injects excitement into the discussion of market structures. The “Economy Tomorrow” section at the end of Chapter 23 explains why iPods are likely to cost only $49 within a few years. Understanding how competitive markets make this happen is probably the most important insight in microeconomics. By building on student experience with music downloads and MP3 players, The Economy Today helps students acquire that insight.

The central theme of government dependence vs. market reliance is particularly evident in Chapter 27, “(De) Regulation”. When the lights went out in California and later in the mid-West, a lot of people blamed “power pirates.” They wanted the government to more closely regulate electricity markets. Others protested that government regulation (e.g. price controls, environmental standards) had caused the brownouts and blackouts. They advocated less government intervention and more reliance on the market mechanism. Chapter 27 uses the experience of (de) regulation in the rail, air, electricity, and telecommunications industries to highlight unique features of natural monopoly and the possibilities of both market and government failure.

The For Whom question is one of the three core issues in economics, but it typically gets scant treatment in a principles course. The Economy Today tries to remedy this shortfall with companion chapters on taxes (Chapter 33) and income transfers (34). The chapters emphasize the key economic concepts (e.g. marginal tax rates, tax elasticity of labor supply, moral hazard) that are common to both sides of the tax-transfer redistribution system. By examining President George W. Bush's 2003 tax return (p. 700) students see the distinction between nominal and effective tax rates. By reviewing trends in aging and labor-force participation (p. 716-721), they may realize how Social Security alters work incentives and behavior.

International Realities

International chapters (35 and 36) not only explain the core concepts of comparative advantage and exchange-rate determination, but also assess the resistance to free trade and flexible exchange rates. By identifying the vested interests that resist trade, The Economy Today bridges the gap between free-trade models and real-world trade disputes. Students see not only why trade is desirable, but also how and why we pay for trade barriers. This is a lot more interesting than simply reciting the mathematics of comparative advantage in cloth and wine.

The bottom line here is simple and straight forward: by infusing the presentation of core concepts with a unifying theme and pervasive real-world application, The Economy Today offers an exciting and motivated introduction to economics.

DISTINCTIVE MACRO

The macro section of The Economy Today is well-known for its balanced presentation of different theoretical perspectives, its consistent use of the AS/AD framework, its global perspective, and its explicit juxtaposition of theory and reality.

Balanced Macro Theory

This isn't a highly opinionated text. It doesn't assert that only long-run issues matter or that monetary policy is the only effective lever of short-run stabilization. Rather, The Economy Today strives to offer students a balanced introduction to both short- and long-run macro concerns as well as an array of competing viewpoints. Keynes isn't dead, nor are supply-side policy options ignored. Instead, competing theories are presented in their best possible light, and then subjected to comparative scrutiny. This approach reflects my belief that students need to be exposed to a variety of perspectives if they're to understand the range and intensity of ongoing debates. Maybe we can't always answer the question posed in the accompanying cartoon with certainty. But our students should at least know the question is legitimate. That means we have to present alternative theories and opinions and help students sort them out. The benefits of such an eclectic and balanced approach were strikingly evident in the aftermath of the September 11, 2001 terrorist attacks. Not only did policy discussion shift abruptly from long-run issues (e.g. productivity growth and “saving Social Security”) to short-run issues (stabilizing the economy), but even Milton Friedman and Alan Greenspan endorsed counter-cyclical fiscal policy! Shouldn't students have a broad foundation of principles that enables them to follow these developments? The Economy Today offers such breadth of coverage.

Consistent AS/AD Framework

Too many textbooks still treat the aggregate supply/aggregate demand (AS/AD) framework as a separate theory. The AS/AD model is not a separate theory; it is just a convenient framework for illustrating macro theories in a world of changing prices. Keynes never said prices could not rise. So he would be surprised to see his macro theory of market instability confined to the “Keynesian Cross” framework. The full measure of Keynesian theory can be better illustrated in the AS/AD framework, without any loss of content. Notice in Figures 10.6 (p. 215) and Figure 10.9 (p. 218) how the multiplier is illustrated by sequential AD shifts and measured along a horizontal plane (the prevailing price level, not and AS curve).

These AD multiplier effects are summarized again in Figure 11.4 (p. 229). This depiction of multiplier effects in the AS/AD framework spotlights the fact that AD shifts have both price and output effects (e.g. Figure 11.3, p. 227). Shouldn't students start their macro tour with this real-world perspective?

In view of this upfront AS/AD depiction of the multiplier, the core macro presentation is now exclusively rendered in the context of the AS/AD model. This greatly simplifies the presentation for students, who often got lost shuttling between the two models, sometimes in the same chapter. Since students have never encountered the Keynesian Cross model, they won't miss it in The Economy Today. For instructors who still want to use it, the Keynesian Cross is now contained in the appendix to Chapter 9. As that appendix explains, the two models are simply different paths for reaching the same conclusions. The advantage of the AS/AD framework is that it generates more useful policy guidelines in a world of changing price levels. The single framework also facilitates controls of competing macro theories and time perspective (long-run vs. short-run).

Global Macro Constraints

The Economy Today incorporates not only the reality of changing price levels, but also the constraints of global linkages. The Fed's Board of Governors always looks over its collective shoulder at global markets when making decisions on domestic monetary policy. The impact of changing interest rates on the value of the dollar and global money flows is always discussed. Likewise, the effectiveness of fiscal-policy initiatives is always sensitive to potential export “leakage” and other trade effects. I have tried to convey a sense of how these global links constrain policy decisions and impacts in the “Global Macro” chapter. This unique chapter (18), is intended to introduce a dose of global reality into the macro course without delving into theories of trade or finance (Chapters 35 and 36). Chapter 18 is a stand-alone chapter in the macro section. It is designed for instructors who sense the need to offer more of a global perspective in the macro course, but don't have time to cover trade and finance theories.

Theory and Reality

The final chapter in the macro section serves two purposes. First, it brings together the various Keynesian, monetarist, supply-side, and growth theories into a convenient review format. No other text brings all the macro material into such a course-ending overview.

The second purpose of Chapter 19 is to examine why economic performance so often falls short of economic theory. This is a fun section, because it delves into the institutional and political constraints that shape and limit macro policy. Fiscal policy debates come alive when Republicans and Democrats start arguing over the size and content of anti-terrorism stimulus policy (see News, p. 407). The chapter ends the macro course with the suggestion that the real world offers choices between imperfect markets and imperfect government intervention.

DISTINCTIVE MICRO

The micro section of The Economy Today focuses in on the performance of specific companies and government programs in order to showcase the principles of market structure, labor-market functioning, redistribution, and regulation.

Competitive Market Dynamics

The real power of the market originates in competitive forces that breed innovation in products and technology. Other texts treat the competitive firm as a lifeless agent buffeted by larger market forces, but this book provides very different coverage. The Economy Today is the only principles text that has two chapters on perfect competition: Chapter 22 on firm behavior and Chapter 23 on industry behavior. Chapter 23 traces the actual evolution of the computer industry from the 1976 Apple I to the iMac. It gives students a real-world sense of how market structure changes over time and lets them see how dynamic, even revolutionary, competitive markets can be. The rise and fall of “dot.coms” and the ongoing plunge in MP3 player (iPod) prices reinforce the notion that competitive markets move with lightning speed to satisfy consumer demand.

(De)Regulation

As mentioned earlier, Chapter 27 focuses on the (de)regulation of private industry. The chapter first examines the qualities of natural monopoly and the rationale for regulating its behavior. The trade-offs inherent in any regulatory strategy are highlighted in the review of the railroad, cable TV, airline, telephone, and electricity industries. As in so many areas, the choice between imperfect markets and imperfect regulation is emphasized.

Taxes and Transfers

The Economy Today offers parallel chapters on taxes and transfers. Chapters 33 and 34 emphasize the central trade-offs between equity and efficiency that plague tax and transfer policies. The varying distributional effects of specific taxes and transfers are highlighted. Examples are drawn from the Bush tax-cut packages of 2001-2003, President Bush's own 2003 tax return (p. 700), as well as the tax and benefit sides of Social Security. Taken together, the two chapters underscore the government's role in reshaping the market's answer to the FOR WHOM question.

Financial Markets

Chapter 32 emphasizes the economic rather than the institutional role of financial markets, a topic rarely found in competing texts. The stock and bond markets are viewed as arbiters of risk and mechanisms of resource allocation. The mechanisms of present value discounting are also covered. The chapter starts with the financing of Columbus' New World expedition and ends with a look at the role today's venture capitalists play in promoting growth and technology.

Real Companies, Real Products

Although real-world content is a general attribute of The Economy Today, the level of detail in the micro section is truly exceptional. Table 25.2 (p. 540) offers concentration ratios for specific products (e.g. video game consoles), not the abstract industries (e.g. electronic equipment) that inhabit other texts. No other text provides such specific data, though this is the kind of detail that students can relate to. The oligopoly chapter (25) reviews a slew of recent price-fixing cases (music CD's, laser eye surgery, auction houses) and mergers. The chapter on Monopolistic Competition (26) starts with an examination of Starbucks and ends with a look at the growing market for “branded” bottled waters. Students will recognize these names and absorb the principles of market structure. Baseball fans will gain a greater appreciation of labor-demand principles after examining the multimillion dollar salary of New York Yankees third baseman Alex Rodriguez.

DISTINCTIVE INTERNATIONAL

The global economy runs through every chapter of The Economy Today.

World Views

The most visible evidence of this globalism are in the 70 World View boxes that are distributed throughout the text. As noted earlier, these boxed illustrations offer specific global illustrations of basic principles. To facilitate their use, every World View has a brief caption that highlights the theoretical relevance of the example. The Test Bank and Student Problem Set also offer questions based on the World Views.

Global Macro

As noted earlier, Chapter 18 offers a unique global perspective on domestic macro policy. The Global Macro chapter is intended as a substitute for the traditional trade and finance chapters. It is designed for instructors who want to offer some international perspectives in the macro course but don't have time to cover trade and finance theory. In courses with more scope for international coverage, the global macro chapter can be used as a capstone to the more traditional chapters.

Vested Interests

Consistent with the reality-based content of the entire text, the discussions of trade and finance theory go beyond basic principles to policy trade-offs and constraints. It's impossible to make sense of trade policy without recognizing the vested interests that battle trade principles. Chapters 35 and 36 emphasize that there are both winners and losers associated with every change in trade flows or exchange rates. Because vested interests are typically highly concentrated and well organized, they can often bend trade rules and flows to their advantage. Trade disputes over Mexican trucks, “dumped” steel, and sugar quotas help illustrate the realities of trade policy. The ongoing protest against the World Trade Organization is also assessed in terms of competing interests.