ECONOMICS IN THE MODERN WORLD

Economics is the study of how the goods and services we want get produced, and how they are distributed among us. This part we call economic analysis. Economics is also the study of how we can make the system of production and distribution work better. This part we call economic policy. Economic analysis is the necessary foundation for sound economic policy.This is a website about both the big economic problems of our time.

Without concrete examples such a definition conveys little meaning. Consider the follow ing examples, chosen to give you some impression of the range of problems with which economics deals. Then we shall turn in later chapters to how economists analyze such problems large and small through the use of theory and its application.

INTERNATIONAL LIVING STANDARDS

Over the face of the earth, three billion human beings live in widely varying economic circumstances. Look at Table 1-1 for a summary picture.

The figures in the table are obtained by adding together the money value of all the goods and services produced in each country in 1966 (clothes,food, buildings, machinery, automobiles, defense products), and dividing each total by the number
of people in that country. The figures shown are rough, but, with the possible exception of the socalled underdeveloped, or less developed, countries they are usable approximations. For the major Western countries, we know they are reasonably accurate.

Compare the United States per capita output of $3,770 with the figures for Communist China, India, and Ethiopia, all under $100. The United States has been called an affluent society; no word other than poverty can descibe the living standards of the hundreds of millions in the underdeveloped nations. We are the “haves,” they are the “have-nots.” Although most of the industrialized Western world falls in the $1,000-and-up per capita output group, nearly two-thirds of the world’s population—nearly two billion human beings—live in countries with per capita incomes of $150 per year or less.

* Author’s estimates based on United Nations and O.E.E.C. data except for China and Russia, Converted to U.S. dollars in 1966 prices. For more complete data and an explanation of what is included and excluded, see Table 18-1.
** Extremely rough estimate.

The figures in Table 1-1 to some extent compare incomparables. The Indian or Chinese peasant, living in a rough hut in a tiny village, with no clothes except what he wears, with a monotonous diet of fish or rice, a man who lives out his years never going more than 25 miles from his birthplace, has so little in common with the American or West European that the figures may havelittle real meaning. The same is true for the African tribesman. But the figures do .say unmistakably that we are extremely rich by comparison with the billions who live in the underdeveloped countries, and that they are bitterly poor.

Why is this so? And why has the United States, a relatively new nation, raced ahead of the other major industrial nations of the Western world, most of whom were there long before us? Casual observation suggests that all the high-in-come countries in Table 1-1 are predominantly “capitalist” or “free enterprise.” Not until we reach the U.S.S.R., about halfway down the list, do we come to a “communist” country, while the very poor nations shown are either communist or have placed much less reliance on private enterprise institutions than we. Is this the answer? Or is there another reason?

Why nations, and individuals in those nations, receive the incomes they do is one of the big questions economists try to answer. It will be a major question for us throughout this website.