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Economics: A Very Short Introduction
Very Short Introductions are for anyone wanting a stimulating
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THE CELTS Barry Cunliffe economics Partha Dasgupta
Partha Dasgupta

ECONOMICS
A Very Short Introduction




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Great Clarendon Street, Oxford o x 2 6 d p
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Oxford is a registered trade mark of Oxford University Press
in the UK and in certain other countries
Published in the United States
by Oxford University Press Inc., New York
© Partha Dasgupta 2007
The moral rights of the author have been asserted
Database right Oxford University Press (maker)
First published as a Very Short Introduction 2007
All rights reserved. No part of this publication may be reproduced,
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without the prior permission in writing of Oxford University Press,
or as expressly permitted by law, or under terms agreed with the appropriate
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outside the scope of the above should be sent to the Rights Department,
Oxford University Press, at the address above
You must not circulate this book in any other binding or cover
and you must impose this same condition on any acquirer
British Library Cataloguing in Publication Data
Data available
Library of Congress Cataloging in Publication Data
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Typeset by Re¬neCatch Ltd, Bungay, Suffolk
Printed in Great Britain by
Ashford Colour Press Ltd., Gosport, Hampshire

ISBN 978“0“19“285345“5

1 3 5 7 9 10 8 6 4 2
Contents




Preface x

List of illustrations xiii

List of tables xiv

Prologue 1

1 Macroeconomic history 14

2 Trust 30

3 Communities 64

4 Markets 72

5 Science and Technology as institutions 90

6 Households and ¬rms 100

7 Sustainable economic development 117

8 Social well-being and democratic government 139

Epilogue 158

Further reading 161

Index 163
Preface




Writing an introduction to economics is both easy and hard. It™s
easy because in one way or another we are all economists. No one,
for example, has to explain to us what prices are “ we face them
every day. Experts may have to explain why banks offer interest on
saving deposits or why risk aversion is a tricky concept or why the
way we measure wealth misses much of the point of measuring it,
but none of these is an alien idea. As economics matters to us, we
also have views on what should be done to put things right when we
feel they are wrong. And we hold our views strongly because our
ethics drive our politics and our politics inform our economics.
When thinking economics we don™t entertain doubts. So, the very
reasons we want to study economics act as stumbling blocks even as
we try to uncover the pathways by which the economic world gets
shaped. But as economics is in large measure about those pathways
“ it™s as evidence-based a social science as is possible “ it shouldn™t
be surprising that most often disagreements people have over
economic issues are, ultimately, about their reading of ˜facts™, not
about the ˜values™ they hold. Which is why writing an introduction
to economics is hard.

When I ¬rst drew up plans to write this book, I had it in mind to
offer readers an overview of economics as it appears in leading
economics journals and textbooks. But even though the analytical
and empirical core of economics has grown from strength to
strength over the decades, I haven™t been at ease with the selection
of topics that textbooks offer for discussion (rural life in poor
regions “ that is, the economic life of some 2.5 billion people “
doesn™t get mentioned at all), nor with the subjects that are
emphasized in leading economics journals (Nature rarely appears
there as an active player). It also came home to me that Oxford
University Press had asked me to write a very short introduction to
economics and there are economics textbooks that are over 1,000
pages long! So it struck me that I should abandon my original plan
and offer an account of the reasoning we economists apply in order
to understand the social world around us and then deploy that
reasoning to some of the most urgent problems Humanity faces
today. It™s only recently that I realized that I would be able to do that
only if I shaped the discourse round the lives of my two literary
grandchildren “ Becky and Desta. Becky™s and Desta™s lives are as
different as they can be, but as they are both my grandchildren, I
believe I understand them. More importantly, economics has
helped me to understand them.

The ideas developed here were framed and explored in my book, An
Inquiry into Well-Being and Destitution (Oxford: Clarendon Press,
1993). While writing that book I realized that economics had
increasingly driven my ethics and that my ethics in turn had
informed my politics. As that is an unusual causal chain, the earlier
book was more technical and a lot ˜heavier™. Theoretical and
empirical advances since it was published have led me to hold the
viewpoint I advanced there even more strongly now. I understand
things much better than I did then “ including why I don™t
understand many things. The present work is a natural extension of
my earlier book.

While preparing this monograph I have bene¬ted greatly from
correspondence and discussions with Kenneth Arrow, Gretchen
Daily, Carol Dasgupta, Paul Ehrlich, Petra Geraats, Lawrence
Goulder, Timothy Gowers, Rashid Hassan, Sriya Iyer, Pramila
Krishnan, Simon Levin, Karl-Göran M¤ler, Eric Maskin, Pranab
Mukhopadhay, Kevin Mumford, Richard Nolan, Sheilagh Ogilvie,
Kirsten Oleson, Alaknanda Patel, Subhrendu Pattanaik, William
Peterson, Hamid Sabourian, Dan Schrag, Priya Shyamsundar, Jeff
Vincent, Martin Weale, and Gavin Wright. The present version
re¬‚ects the impact of the comments I received on an earlier draft
from Kenneth Arrow, Carol Dasgupta, Geoffrey Harcourt, Mike
Shaw, Robert Solow, and Sylvana Tomaselli. Sue Pilkington has
helped me in innumerable ways to prepare the book for publication.
I am grateful to them all.

St John™s College
Cambridge
August 2006
List of illustrations




1 Becky™s home 2 7 Teff threshing in
Ethiopia 70
© John Henley/Corbis
© Jenny Matthews/Alamy
2 Becky riding to school 3
© Monica
8 Demand and supply
Dalmasso/Stone/Getty Images
curves 75
3 Desta™s home 4
9 A shopping mall in
© Mike Hughes
Becky™s world 84
Photography/Alamy
© Don Smetzer/Stone/Getty
4 Desta at work 5 Images
© Sean Sprague/Still Pictures
10 A market in Desta™s
5 Children gathering
world 85
wood 48
© Neil Cooper/Panos Pictures
© Dominic
Harcourt-Webster/Panos Pictures
11 18th-century patent for
tuning harpsichords 96
6 Relationship between
© Science Museum/SSPL
average household™s
desired fertility rate and
12 Trading at the Frankfurt
community™s fertility
Stock Exchange 115
rate 60 © Joachim Messerschmidt/Taxi/
Getty Images


The publisher and the author apologize for any errors or omissions
in the above list. If contacted they will be pleased to rectify these at
the earliest opportunity.
List of tables




1 Rich and poor nations 19

2 The progress of nations 134

3 Comparison of voting rules 153
Prologue




Becky™s world
Becky, who is 10 years old, lives with her parents and an older
brother Sam in a suburban town in America™s Midwest. Becky™s
father works in a ¬rm specializing in property law. Depending on
the ¬rm™s pro¬ts, his annual income varies somewhat, but is rarely
below 145,000 US dollars ($145,000). Becky™s parents met at
college. For a few years her mother worked in publishing, but when
Sam was born she decided to concentrate on raising a family. Now
that both Becky and Sam attend school, she does voluntary work in
local education. The family live in a two-storey house. It has four
bedrooms, two bathrooms upstairs and a toilet downstairs, a large
drawing-cum-dining room, a modern kitchen, and a family room in
the basement. There is a plot of land at the rear “ the backyard “
which the family use for leisure activities.

Although their property is partially mortgaged, Becky™s parents own
stocks and bonds and have a saving account in the local branch of a
national bank. Becky™s father and his ¬rm jointly contribute to his
retirement pension. He also makes monthly payments into a
scheme with the bank that will cover college education for Becky
and Sam. The family™s assets and their lives are insured. Becky™s
parents often remark that, because federal taxes are high, they have
to be careful with money; and they are. Nevertheless, they own two

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Economics




1. Becky™s home


cars; the children attend camp each summer; and the family take
a vacation together once camp is over. Becky™s parents also remark
that her generation will be much more prosperous than theirs.
Becky wants to save the environment and insists on biking to
school. Her ambition is to become a doctor.


Desta™s world
Desta, who is about 10 years old, lives with her parents and ¬ve
siblings in a village in subtropical, southwest Ethiopia. The family
live in a two-room, grass-roofed mud hut. Desta™s father grows
maize and teff (a staple cereal unique to Ethiopia) on half a hectare
of land that the government has awarded him. Desta™s older brother
helps him to farm the land and care for the household™s livestock,
which consist of a cow, a goat, and a few chickens. The small
quantity of teff produced is sold so as to raise cash income, but the
maize is in large measure consumed by the household as a staple.

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Prologue
2. Becky riding to school


Desta™s mother works a small plot next to their cottage, growing
cabbage, onions, and enset (a year-round root crop that also serves
as a staple). In order to supplement their household income, she
brews a local drink made from maize. As she is also responsible for
cooking, cleaning, and minding the infants, her work day usually
lasts 14 hours. Despite the long hours, it wouldn™t be possible for her
to complete the tasks on her own. (As the ingredients are all raw,
cooking alone takes 5 hours or more.) So Desta and her older sister
help their mother with household chores and mind their younger
siblings. Although a younger brother attends the local school,
neither Desta nor her older sister has ever been enrolled there. Her
parents can neither read nor write, but they are numerate.

Desta™s home has no electricity or running water. Around where
they live, sources of water, land for grazing cattle, and the
woodlands are communal property. They are shared by people in

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3. Desta™s home
Economics




Desta™s village; but the villagers don™t allow outsiders to make use
of them. Each day Desta™s mother and the girls fetch water,
collect fuelwood, and pick berries and herbs from the local
commons. Desta™s mother frequently complains that the time and
effort needed to collect their daily needs has increased over the
years.

There is no ¬nancial institution nearby to offer either credit or
insurance. As funerals are expensive occasions, Desta™s father long
ago joined a community insurance scheme (iddir) to which he
contributes monthly. When Desta™s father purchased the cow they
now own, he used the entire cash he had accumulated and stored at
home, but had to supplement that with funds borrowed from
kinfolk, with a promise to repay the debt when he had the ability to
do so. In turn, when they are in need, his kinfolk come to him for a
loan, which he supplies if he is able to. Desta™s father says that such
patterns of reciprocity he and those close to him practise are part of
their culture. He says also that his sons are his main assets, as they

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Prologue




4. Desta at work


are the ones who will look after him and Desta™s mother in their old
age.

Economic statisticians estimate that, adjusting for differences in the
cost of living between Ethiopia and the United States (US), Desta™s
family income is about $5,500 per year, of which $1,100 are

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attributable to the products they draw from the local commons.
However, as rainfall varies from year to year, Desta™s family income
¬‚uctuates widely. In bad years, the grain they store at home gets
depleted well before the next harvest. Food is then so scarce that
they all grow weaker, the younger children especially so. It is only
after harvest that they regain their weight and strength. Periodic
hunger and illnesses have meant that Desta and her siblings are
somewhat stunted. Over the years Desta™s parents have lost two
children in their infancy, stricken by malaria in one case and
diarrhoea in the other. There have also been several miscarriages.

Desta knows that she will be married (in all likelihood to a farmer,

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