The Economic Way of Thinking -- Paul Heyne, Peter Boettke, David Prychitko

THE ECONOMIC WAY OF THINKING, Tenth Edition

Paul Heyne, formerly of the University of Washington, deceased
Peter J. Boettke, George Mason University
David L. Prychitko, Northern Michigan University

"Ideal for those with little or no background in economics, this book provides an in-depth discussion of a limited, but crucial set of economic principles and concepts--then applies these tools of analysis to a wide variety of familiar situations."

"The Economic Way of Thinking develops the basic principles of micro- and macroeconomic analysis, and rigorously employs them as tools rather than ends unto themselves. This book introduces readers to a method of reasoning; to think like an economist—teaching through example and application."

CHANGES TO THE TENTH EDITION:

The tenth edition remains true to Paul Heyne's clear writing style, wit, and powerful reasoning. We live in exciting - and uncertain - political and economic times. The examples have been updated to reflect many of the new questions and issues that students face today. Previous users will find that some chapters have few alterations while other chapters have been significantly reorganized and rewritten. Many end-of-chapter questions have been either cut or streamlined in the hope that more students will be willing to give the questions an honest try – the task looks less daunting without so many long and probing questions. New questions, of course, have been added. We believe we’ve improved the flow and logic of the presentation.

We followed our own comparative advantage and divided the labor with Prychitko revising Cahpters 1 through 8, Boettke revising chapters 9 through 22, and each of us exchanging, discussing, and reworking our revisions. The final result is a true team effort.

Specific changes to the tenth edition:

• A greater emphasis on economics as the study of choice and the unintended consequences of choice is provided in Chapter 1 and continues throughout the book.

• The discussion of efficiency, exchange, and comparative advantage has been moved up front. Formerly Chapter 6, it is now Chapter 2 and has been almost totally rewritten. We felt that the case for the wealth-enhancing effects of specialization and voluntary trade should come before, rather than after, the market supply and demand presentation. The students are also presented with individual, linear production possibilities frontiers in Chapter 2.

• The theory of consumer demand and marginal values now appears in Chapter 3. Examples have been updated, with a clearer discussion of the factors that influence price elasticity.

• Chapter 4 further develops the notions of trade-offs and economizing behavior by focusing on opportunity cost and the supply of goods. The production possibilities frontier is developed further to explain increasing opportunity costs of production and the corresponding law of supply. Given the events after September 11, 2001, we decided to retain the discussion of a voluntary versus conscripted military force.

• The basic supply and demand model is developed and applied with many updated examples in Chapters 5 and 6. These chapters (formerly Chapters 4 and 5) have been thoroughly rewritten. We further clarify a continuing theme in all previous editions of The Economic Way of Thinking – the market as a coordinating process. Quantities demanded and supplied are interpreted as plans among consumers and producers. Market clearing is discussed as a meshing of these plans and as an unintended consequence of individual economizing behavior. The problem of nonmarket (socialist) coordination is discussed as well.

• In addition to thoroughly updating the examples in Chapter 6, we’ve also completely rewritten the analysis of the relationship between cost and price. A new appendix has been added to alert students to common errors and abuses in the economic way of things, such as confusions between demand and quantity demanded, and dire forecasts of growing and permanent shortage of oil (which invariably ignore relative prices!)

• We’ve applied the notion of specialization and comparative advantage – developed in Chapter 2 – to explain the cost-reducing effects of middlemen and speculators in Chapter 7.

• Profit and Loss (formerly Chapter 11) now appears as Chapter 8, following directly after our discussion of middlemen, speculators, and information. We think this is most fitting. The chapter itself has been completely reorganized. We’ve added a lengthy discussion of the difference between accounting profit and economic profit, and we provide a focus on entrepreneurship and the role it plays in coordinating the plans of buyers and sellers. Entrepreneurship is the driving force of markets, yet it is something that few if any other principles books discuss. (You don’t believe us? Go take a look for yourself.)

• Following on the theme of entrepreneurship as the driving force of the market economy, we have emphasized the dynamic element of competition and the importance of the competitive market process in teaching market participants how to behave in an economically rational manner. The optimality rules of marginal cost pricing are not the consequence of behavioral postulates assumed by the economists, but, as Armen Alchian and F. A. Hayek long maintained, emerge through the filter of the competitive process.

• In the macro chapters, we’ve updated the data throughout the year 2000 on income distribution, unemployment, inflation, economic fluctuations, and international economic growth.

• We’ve also added a discussion of the “boom-bust” theory of the business cycle. This explanation of industrial fluctuations emphasizes how a credit expansion can distort market signals and misguide entrepreneurial expectations of profit and loss, creating malinvestment in the industrial sector. Most mainstream textbooks, wedded exclusively to the aggregate supply and demand model, fail to discuss this elementary microfoundation of macroeconomic fluctuations. Our strategy is experimentally to offer this discussion now and, if it seems to work well, expand quite a bit upon the boom-bust theory in future editions.

• In our discussion of the performance of economic systems we incorporate data from the Index of Economic Freedom to emphasize our argument that the security of property, freedom of contract, open trade, and monetary and fiscal constraint are essential policy ingredients that explain why some countries perform well and others not so well. This discussion of recent empirical research on the relationship between economic freedom and economic growth fits well with the traditional theme of The Economic Way of Thinking – the coordinative properties of the market economy are largely a function of the institutional framework within which they operate.

- Peter Boettke and Dave Prychitko

READER REVIEWS:

"I feel very positive about this revision. I liked The Economic Way of Thinking before and now I like it better." — Howard Swaine, Northern Michigan University (Has used Heyne since the first edition.)

"It is a bit like Zen economics ... It is an excellent introduction to economics text that explains not only some of the technical aspects of economics (supply and demand, comparative advantage, marginal analysis, etc.) but also the social science dimensions of the discipline (and sometimes the philosophical and ethical aspects of the discipline). It uses language, as opposed to math or graphs, to convey the concepts. Heyne is very clever and the book is beautifully written. I think it stands in the first rank of introductory economics texts along with Samuelson and Alchain & Allen..." — Mark McNeil, Irvine Valley College, California

"The strengths of this text are its intellectual approach—it seems to be written as a whole and not just a few principles chapters thrown together..." — James Swofford, University of Southern Alabama

"The new authors have made a serious and successful attempt to maintain the comfortable narrative style of Heyne's previous editions. In my role as a teacher ... I am delighted with the direction of change as well as the reordering of chapters. From what I have seen of the Tenth Edition, there are discussions that are entirely appropriate for my audience and they are pitched at approximately the right level of reading skill and experiential background. — Joseph Fuhrig, Golden Gate University

A TRIBUTE TO PAUL HEYNE (1931 - 2000)
By Douglass North

On a rare occasion, if you are fortunate, you will run across an individual who lives and acts upon the ideals that we profess. I was fortunate. Paul Heyne came into my life in 1975. Out of the blue, he sent me a letter that began as follows:

I’m going to be moving to Seattle at the end of the current academic year and I’d like to find a college or university in the city at which I could be an economics teacher. Those are two separate decisions. I’ll be moving to Seattle whether or not I find a position in an economics department there. But teaching and especially the teaching of introductory economics is one of the things I think I do well and something I would continue doing.

I had assumed the chairmanship of the department of economics at the University of Washington in 1967 and set out to make it one of the best in the country. My definition of best included not only scholarly eminence, which we were in the process of achieving, but the effective, caring teaching of the multitude of undergraduates that populated a large state university. The University played lip service to good teaching but the reward system was geared to publication and most, but not all, of my colleagues acted accordingly. Shortly after assuming the chairmanship, I decided I should go back to teaching the introductory course to see just what we did. I was dismayed to find that it had not changed an iota form my undergraduate days. The textbooks were full of the formal jargon of economic theory elucidating the perfectly competitive model, imperfect competition a la Chamberlin and Joan Robinson, and monopoly replete with all the marginal analysis and appropriate graphs. Following the tradition, I was in the midst or my fourth lecture on perfect competition illustrating it with the case of American agriculture when a student in the back of the auditorium noisily took exception to what I was saying. I thought I would teach him a lesson and invited him the address the class, explaining himself. He did, describing effectively the myriad of price supports, milk marketing acts, sugar production subsidies, etc. that pervaded agriculture and made it far from the competitive model. I slunk back to my office and began a search for a more effect teaching program. I was some year into an attempt when Paul’s letter arrived. I wrote back asking what he would like to do as a teacher. His reply, in part:

I would like to teach at a college whose faculty was enthusiastically committed to providing a liberal education for undergraduates. I would like to be a member of a faculty that was continuously asking about the nature and significance of liberal education and looking critically at its own efforts to provide one. The members of such a faculty would use their own disciplines as bases for venturing into other disciplines and not as castles within which to enjoy untroubled lives. In the college of my fantasies, there would be some core requirements for all to satisfy; not so much because anyone can specify particular knowledge that a liberally educated person must have as because a liberal arts college requires some common core if it wants to be a lively intellectual community. Mastery of the core would be expected first of all of faculty members. (I’ve often thought how much more profitable faculty curriculum discussions would be if every faculty member knew that he would be taking all courses imposed on undergraduates and that his colleagues would be evaluating any course he himself wanted to offer in the common core.)

Paul left a tenured professorship at Southern Methodist university to come to Washington as a non-tenured lecturer and he retained that untenured rank until he died in March 2000. I am not sure we lived up to Paul’s fantasies of the ideal faculty; I know we didn’t but he did change the way economics was taught at the University; revamping the undergraduate program, overhauling the introductory course, and meeting regularly with the graduate teaching assistant to improve the quality of their teaching. But much more than that, Paul was a continuing inspiration for those of us who took seriously a quality liberal education for undergraduates.

The Economic Way of Thinking embodies Paul’s approach to economics and to a liberal education. It was a radical change from the textbooks of the time. Its focus on the problems of a society and the way in which economic reasoning could shed light on those problems made economics interesting to the students. More than that, the book recognized that the strength of economics was precisely described in the title of the book – as a way of thinking. Comprehending that way of thinking was, and continues to be, the revolutionary contribution of economics to the social sciences and to a better understanding of the world around us.

I open the seminar for freshmen that I teach every fall with a lecture on Paul, the human being – his Seminary education, ordination, the way he got drawn into economics, and the way he combined a rigorous economics (and make no mistake about it, Paul’s economics is rigorous) with a broad and active concern for community and social welfare. He believed in individual freedom and the demands that that freedom imposed on responsible human beings. And he and his wife, Julie, lived their lives accordingly.