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A good economics textbook―of which there are several―inspires students to embrace powerful, compelling ideas that permanently sharpen their intellectual vision. A great economics textbook―which you might be holding in your hand―also does the same for the instructor. No matter how many times you've taught this material, this book will widen and deepen your understanding. Your students are about to be launched on a great voyage of intellectual discovery. Prepare to go along for the ride.

―Steven Landsburg, Professor of Economics, University of Rochester; author of Can You Outsmart an Economist?

Notation ix
Preface xi

Chapter 1 General Equilibrium in Competitive Markets 1
1.1 Introduction 1
1.2 An Exchange Economy 3
1.3 Prediction: The Contract Set 3
1.4 A Refined Prediction: Walrasian Equilibrium 5
1.5 Common Assumptions 8
1.6 Graphical Illustrations in the Edgeworth Box 10
1.7 The First Welfare Theorem 16
1.8 The Second Welfare Theorem 18
1.9 Equilibrium Existence (and Nonexistence) 22
1.10 Uniqueness, Stability, and Comparative Statics 31
1.11 Time and Uncertainty 43
1.12 Concluding Remarks 50
1.13 Appendix: A Proof Sketch of Theorem 1.3 53
1.14 Bibliographical Notes 57
Problems 58

Chapter 2 Markets and Morals I 71
2.1 Introduction 71
2.2 Obedience to Authority Leads to Immoral Behavior 73
2.3 Markets Lead to Immoral Behavior 75
2.4 Markets Lead to Moral Behavior 81
2.5 Concluding Remarks 86
2.6 Bibliographical Notes 87
Problems 88

Chapter 3 From the Jungle to Design Economics 91
3.1 Introduction 91
3.2 The Jungle Economy 92
3.3 Jungle versus Walrasian Market 97
3.4 A Metaphor for TTC in Walrasian Context 106
3.5 Matching Agents to Agents 112
3.6 Concluding Remarks 124
3.7 Bibliographical Notes 125
Problems 126

Chapter 4 Marxism, Socialism, and the Resilience of Markets 133
4.1 Introduction 133
4.2 Exploitation in a Production Economy 133
4.3 The Prevalence of Markets: The Core 140
4.4 Socialism 150
4.5 Concluding Remarks 161
4.6 Bibliographical Notes 162
Problems 162

Chapter 5 Inequality 171
5.1 Introduction 171
5.2 Risk Seeking 173
5.3 Superstars 175
5.4 Artificial Intelligence and the Future of Inequality 189
5.5 Concluding Remarks 200
5.6 Bibliographical Notes 201
Problems 201

Chapter 6 Markets and Morals II 207
6.1 Introduction 207
6.2 When Having Markets Does Not Feel Quite Right 208
6.3 A Signaling Model of Gift Giving 218
6.4 Concluding Remarks 229
6.5 Bibliographical Notes 230
Problems 230

Chapter 7 Kantian Cooperation 235
7.1 Introduction 235
7.2 Kantian Equilibrium 238
7.3 An Application to Voting 244
7.4 An Application to Responsibility 248
7.5 Concluding Remarks 249
7.6 Bibliographical Notes 250
Problems 251

Chapter 8 Unintended Consequences of Policy Interventions 257
8.1 Introduction 257
8.2 The Utilitarian Social Welfare Function 258
8.3 Routing 259
8.4 Local Public Goods 270
8.5 Concluding Remarks 274
8.6 Bibliographical Notes 274
Problems 275

Chapter 9 Coda 277
9.1 Methodological Individualism 277
9.2 Design by Constrained Optimization 279
9.3 Constraints in Economic Design 288
9.4 A Curious Case of Incompatible Constraints 289
9.5 Economics as an Art Form 294
9.6 Bibliographical Notes 295
Problems 296

References 301
Index 311

Economic concepts and techniques presented through a series of "big questions," models that show how to pose a questions rigorously and work toward an answer.

This book helps readers master economic concepts and techniques by tackling fundamental economic and political questions through a series of models. It is organized around a sequence of “big questions,” among them: When do markets help translate individuals' uncoordinated, selfish actions into outcomes that are best for all? Do markets change people, and, if so, for worse or better? Translated into the language of modern economics, do Marx's ideas have merit? Why is there so much income inequality? Or is there too little? The arguments are in the theorem-proof format, distinguishing results derived in the context of fully specified models from educated speculation. Readers will learn how to pose a question rigorously and how to work toward an answer, and to appreciate that even (especially!) the broadest and most ambitious questions call for a model. The goal of the book is not to indoctrinate but to show readers how to reason toward their own conclusions.

The first chapter, on the Walrasian model of general equilibrium, serves as the prerequisite for the rest of the book. The remaining chapters cover less conventional topics, including the morality of markets; matching theory; Marxism, socialism, and the resilience of markets; a formalization of Kant's categorical imperative; unintended consequences of policy design; and theories of justice. The book can be used as a textbook for advanced undergraduate or graduate students or as a resource for researchers in disciplines that draw on normative economics.