About the authors Rod Hill grew up in Ontario, was educated at the University of Toronto, the University of Stockholm and the University The Economics Anti-textbook: A critical thinker’s guide to microeconomics of Western Ontario, where he obtained a PhD in economics. was first published in 2010 He has taught at the University of Windsor, the University FkXb_i^[Z_d9WdWZWXo<[hdmeeZFkXb_i^_d]BjZ")(EY[Wdl_ijWBWd[" of Regina and the University of New Brunswick, where he 8bWYaFe_dj"DelWIYej_WX&`'X& has been a professor of economics since 2003. His research 2mmm$\[hdmeeZfkXb_i^_d]$YW4 interests have included inter national trade policy, taxation FkXb_i^[Z_dj^[h[ije\j^[mehbZXoP[Z8eeaiBjZ"-9odj^_WIjh[[j"BedZed and the underground econ omy, and (as a result of growing d'/`\"kaWdZHeec*&&"'-+<_\j^7l[dk["D[mOeha"do'&&'&"kiW dissatisfaction) the content of the introductory textbooks. He 2mmm$p[ZXeeai$Ye$ka4 is a research associate with the Canadian Centre for Policy Copyright © Rod Hill and Tony Myatt 2010 Alternatives and a member of Econom ists for Peace and The rights of Rod Hill and Tony Myatt to be identified as the authors of this Security and the Progressive Economics Forum. work have been asserted by them in accordance with the Copyright, Designs and Patents Act, 1988 Tony Myatt received his PhD from McMaster University with Designed and set by Ewan Smith, London <[email protected]> Index <[email protected]> distinction in theory. He has taught at McMaster University, Cover designed by David Bradshaw the University of Western Ontario, the University of Toronto Printed and bound in Great Britain by the MPG Books Group and the University of New Brunswick, where he has been Distributed in the kiW exclusively by Palgrave Macmillan, a division of professor of economics since 1992. His research interests St Martin’s Press, bbY, 175 Fifth Avenue, New York, do 10010, kiW have included the supply-side effects of interest rates, labour All rights reserved. No part of this publication may be reproduced, stored market discrimination, unemployment rate disparities, and in a retrieval system or transmitted in any form or by any means, electronic, the methods and content of economic education. He has mechanical, photocopying or otherwise, without the prior permission of Zed developed several different introductory courses as vehicles Books Ltd. for teaching principles of economics, including ‘Economics A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data available of everyday life’, ‘Economics in the real world’ and ‘Eco- nomics through film’. Professor Myatt was the recipient of Library and Archives Canada Cataloguing in Publication: Hill, Roderick UNB’s Arts Faculty Award for Excellence in Teaching in The economics anti-textbook : a guide to critical thinking / Rod Hill 2008. and Tony Myatt. _iXd 978-1-55266-360-8 1. Economics. 2. Critical thinking. I. Myatt, Anthony II. Title. ^X171.^637 2010 330 Y2010-900699-2 _iXd 978 1 84277 938 5 hb (Zed Books) _iXd 978 1 84277 939 2 pb (Zed Books) _iXd 978 1 84813 548 2 eb (Zed Books) _iXd 978 1 55266 360 8 (Fernwood Publishing) Tables and figures Tables Contents 2.1 Labour’s productivity in England and Canada . 28 2.2 Changes in world output. 30 2.3 Percent in agreement with the proposition: ‘minimum wages increase unemployment among young and unskilled workers’ . 33 3.1 Types of market structure . 54 Tables and figures | vi 3.2 Tax incidence applications used in ten major North American Acknowledgements | ix textbooks . 61 4.1 Mary’s benefit from eating pizzas . 75 Introduction: our goals, audience and principal themes . .1 5.1 Inputs and output in the short run. 94 1 What is economics? Where you start influences where you go . .9 5.2 Costs in the short run . 95 2 Introducing economic models . 27 5.3 Downward-sloping demand and marginal revenue. 100 6.1 A pay-off matrix illustrating the prisoner’s dilemma . 129 3 How markets work (in an imaginary world) . 46 6.2 Repeated plays when Esso plays ‘tit-for-tat’. 130 4 People as consumers . 74 7.1 Classification of types of goods . 153 5 The firm. 93 7.2 Percentage changes in age-standardized cancer incidence rates . 163 8.1 Marginal cost of labour for a monopsonist. 175 6 Market structure and efficiency – or why perfect competition isn’t so perfect after all . 118 9.1 Taxation as a percentage of GDP, OECD countries, 2005 . 197 9.2 Measures of income inequality . 199 7 Externalities and the ubiquity of market failure . 150 9.3 Distribution of household net worth. 200 8 The marginal productivity theory of income distribution – 9.4 Percentage of children in households with less than half of median or you’re worth what you can get . 169 household income, circa 2000 . 202 10.1 International trade, 2007 . 220 9 Government, taxation and the (re)distribution of income: is a just society just too expensive?. 196 10.2 Estimates of the stock of foreign direct investment, by sector, 2006 . 239 11.1 Conventional economics and the blank cells of Akerlof and Shiller. 244 10 Trade and globalization without the rose-tinted glasses . 219 11.2 Conventional textbook economics and the blank cells of Robert 11 Conclusion . 243 Prasch. 250 Postscript: a case study on the global financial meltdown . 256 Figures Notes | 264 Bibliography | 274 1.1 Marginal thinking . .11 Glossary | 291 Index | 297 2.1 Wheat and cloth production in England and Canada . 29 2.2 Expanded consumption possibilities . 30 2.3 Different perceptions of reality . 41 3.1 Inelastic and elastic demand . 47 3.2 Movement towards equilibrium . 48 3.3 Comparative static analysis . 49 3.4 The effect of rent control . 50 3.5 The effect of a minimum wage. 51 vi 3.6 The incidence of taxation. 52 9.1 The Lorenz curve . 198 3.7 Multiple equilibria in the labour market . 66 9.2 The equity–efficiency trade-off. 203 3.8 Self-fulfilling prophecies . 68 9.3 Income distribution and equality . 206 4.1 Marginal benefit and price . 76 9.4 The equity–growth trade-off . 212 4.2 Market demand . 77 9.5 Relative risk of CHD death excluding other risk factors. 214 4.3 Happiness in the United States, 1994–96, by income decile . 88 9.6 The social gradient of health. 215 4.4 Happiness and per capita income across countries, 1999–2004 . 89 10.1 The effects of a tariff. 221 4.5 Happiness in the United States, 1946–2008 . 90 10.2 Average costs of producing nails in two countries . 230 5.1 The law of diminishing marginal returns . .95 5.2 Marginal and average costs . .96 5.3 Marginal product and marginal cost . 96 5.4 Marginal benefit and market price . 97 5.5 Long-run average cost relationships . 99 5.6 The long-run equilibrium for the competitive firm . 100 5.7 Relationship between demand and marginal revenue. 101 5.8 Short-run marginal costs . 103 5.9 Long-run average cost with increasing and then constant returns to scale . 105 5.10 Why the competitive firm should raise its price above the market price . 108 6.1 Derivation of the competitive firm’s supply curve . 119 6.2 The short-run response to an increase in demand. 120 6.3 The long-run response to an increase in demand . 121 6.4 The optimal quantity . 122 6.5 Non-competitive firms don’t have a supply curve . 123 6.6 Monopoly versus perfect competition. 124 6.7 Price ceilings and monopoly . 126 6.8 Natural monopoly . 126 6.9 Monopolistic competition . 128 6.10 Estimating the deadweight loss. 139 6.11 Aggregate stock price bubbles . 147 7.1 Markets are inefficient in the presence of externalities . 151 7.2 Cancer incidence per 100,000 males, age-standardized rates . 164 7.3 Cancer incidence per 100,000 females, age-standardized rates . 165 8.1 Competitive determination of the wage of welders . 171 8.2 Two types of unions in otherwise competitive markets . 173 8.3 Monopsony in the labour market . 176 8.4 Monopsony with minimum wage . 176 8.5 The adding-up problem . 178 8.6 Reswitching produces the possibility of multiple equilibria . 182 8.7 Derivation of a competitive firm’s upward-sloping supply of labour schedule . 188 8.8 Executive pay relative to average wages in the USA. 191 8.9 Dow Jones Industrial Average and CEO pay relative to average pay, 1970–2002 . 192 vii viii Acknowledgements Introduction: our goals, audience and principal themes We would like to thank Walid Hejazi, Michael Krashinsky and Jack ‘I am so displeased at the way undergraduate economics is taught. Parkinson of the University of Toronto, participants in a seminar at the Undergraduate economics is a joke … they teach this stuff that University of New Brunswick, and a variety of anonymous referees who you know is not true …’ Herb Gintis, Emeritus Professor of provided helpful comments on the initial outline of the book. Many Economics, University of Massachusetts (from Colander et al. colleagues also helped in selecting a title: Abdella Abdou (Brandon 2004: 92) University), Hafiz Akhand (University of Regina), Marilyn Gerriets (St Francis Xavier University), John Janmaat (University of British Columbia, ‘It is true that we cannot, in the time available, teach every- Okanagan), Harvey King (University of Regina), Rob Moir (University of thing that we would like. But why do we pick out for treatment New Brunswick), Saeed Moshiri (University of Saskatchewan), Michael just that selection of topics that is least likely to raise any Rushton (University of Indiana, Bloomington), Jim Sentance (University questions of fundamental importance?’ Joan Robinson of Cam- of Prince Edward Island), Calin Valsin (Bishop’s University) and Fattaneh bridge University (1965: 3) Zehtab-Jadid (Brandon University).