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Author(s): Paul Samuelson, William Nordhaus
ISBN(s): 9780073344225, 0073344222
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Language: english

MACROECONOMICS

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MACROECONOMICS
Nineteenth Edition
PAUL A. SAMUELSON
Institute Professor Emeritus
Massachusetts Institute of Technology
WILLIAM D. NORDHAUS
Sterling Professor of Economics
Yale Un iversity

MACROECONOMICS
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Samuelson, Paul Anthony, 1915-
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Includes index.
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v
ABOUT THE AUTHORS
PAUL A. SAMUELSON, founder of the
renowned MIT graduate department of economics,
was trained at the University of Chicago and Har vard.
His many scientific writings brought him world fame
at a young age, and in 1970 he was the first American
to receive a Nobel Prize in economics. One of those
rare scientists who can communicate with the lay
public, Professor Samuelson wrote an economics col-
umn for Newsweek for many years and was economic
adviser to President John F. Kennedy. He testifies
often before Congress and ser ves as academic con-
sultant to the Federal Reser ve, the U.S. Treasur y, and
various private, nonprofit organizations. Professor
Samuelson, between researches at MIT and tennis
games, is a visiting professor at New York University.
His six children (including triplet boys) have con-
tributed 15 grandchildren.
WILLIAM D. NORDHAUS is one of
America’s eminent economists. Born in Albuquer-
que, New Mexico, he received his B.A. from Yale and
his Ph.D. in economics at MIT. He is Sterling Profes-
sor of Economics at Yale University and on the staff
of the Cowles Foundation for Research in Economics
and the National Bureau of Economic Research. His
research has spanned much of economics—including
the environment, energy, technological change, eco-
nomic growth, and trends in profits and productivity.
In addition, Professor Nordhaus takes a keen inter-
est in economic policy. He ser ved as a member of
President Carter’s Council of Economic Advisers
from 1977 to 1979, ser ves on many government advi-
sor y boards and committees, and writes occasionally
for The New York Review of Books and other periodi-
cals. He regularly teaches the Principles of Econom-
ics course at Yale. Professor Nordhaus lives in New
Haven, Connecticut, with his wife, Barbara. When
not writing or teaching, he devotes his time to music,
travel, skiing, and family.

To o ur fa milies, stu dents, and colleagues

vii
Contents in Brief
A Centrist Proclamation xiv
Preface xvii
For the Student: Economics and the Inter net xxii
PART ONE BASIC CONCEPTS 1
Chapter 1 The Central Concepts of Economics 3
Appendix 1 How to Read Graphs 18
Chapter 2 The Moder n Mixed Economy 25
Chapter 3 Basic Elements of Supply and Demand 45
PART TWO MACROECONOMICS: ECONOMIC GROWTH
AND BUSINESS CYCLES 63
Chapter 4 Over view of Macroeconomics 65
Appendix 4 Macroeconomic Data for the United States 83
Chapter 5 Measuring Economic Activity 84
Chapter 6 Consumption and Investment 106
Chapter 7 Business Cycles and Aggregate Demand 126
Chapter 8 Capital, Interest, and Profi ts 151
Chapter 9 Money and the Financial System 169
Chapter 10 Monetar y Policy and the Economy 191
PART THREE GROWTH, DEVELOPMENT, AND
THE GLOBAL ECONOMY 215
Chapter 11 Economic Growth 217
Chapter 12 The Challenge of Economic Development 237
Chapter 13 Exchange Rates and the Inter national Financial System 259
Chapter 14 Open-Economy Macroeconomics 280

viii C O N T E N T S I N B R I E F
PART FOUR UNEMPLOYMENT, INFLATION , AND
ECONOMIC POLICY 303
Chapter 15 Unemployment and the Foundations of Aggregate Supply 305
Chapter 16 Infl ation 325
Chapter 17 Frontiers of Macroeconomics 346
Glossar y of Ter ms 370
Index 391

ix
A Centrist Proclamation xiv
Preface xvii
For the Student: Economics and
the Internet xxii
PART ONE
BASIC CONCEPTS
1
Chapter 1
The Central Concepts of Economics 3
A. Why Study Economics? 3
For Whom the Bell Tolls
● Scarcity and Effi ciency:
The Twin Themes of Economics 3
● Defi nitions of
Economics
● Scarcity and Effi ciency ● Microeconomics
and Macroeconomics
● The Logic of Economics 5 ●
Cool Heads at the Ser vice of War m Hear ts 6
●
B . The Three Problems of Economic Organization 7
Market, Command, and Mixed Economies 8
●
C . Society’s Technological Possibilities 8
Inputs and Outputs 9
● The Production-Possibility
Frontier 9
● Applying the PPF to Society’s
Choices
● Opportunity Costs ● Effi ciency ●
Summar y 15 ● Concepts for Review 15 ● Fur ther
Reading and Internet Websites 16
● Questions for
Discussion 16
●
Appendix 1
How to Read Graphs 18
The Production-Possibility Frontier 18
● Production-
Possibility Graph
● A Smooth Cur ve ● Slopes and
Lines
● Slope of a Cur ved Line ● Slope as the Marginal
Value
● Shifts of and Movement along Cur ves ● Some
Special Graphs
●
Summar y to Appendix 23 ● Concepts for
Review 24
● Questions for Discussion 24 ●
Chapter 2
The Modern Mixed Economy 25
A. The Market Mechanism 26
Not Chaos, but Economic Order
● How Markets
Solve the Three Economic Problems
● The Dual
Monarchy
● A Picture of Prices and Markets ● The
Invisible Hand
●
B . Trade , Money, and Capital 30
Trade, Specialization, and Division of Labor 31
●
Money: The Lubricant of Exchange 33
● Capital 33 ●
Capital and Private Property
●
C . The Visible Hand of Government 34
Effi ciency 35
● Imper fect Competition ●
Externalities
● Public Goods ● Equity 38 ●
Macroeconomic Growth and Stability 39
● The Rise of
the Welfare State 40
● Conser vative Backlash ●
The Mixed Economy Today
●
Summar y 41 ● Concepts for Review 42 ● Fur ther
Reading and Internet Websites 43
● Questions for
Discussion 43
●
Chapter 3
Basic Elements of Supply and Demand 45
A. The Demand Schedule 46
The Demand Curve 47
● Market Demand ● Forces
behind the Demand Cur ve
● Shifts in Demand ●
B . The Supply Schedule 51
The Supply Cur ve 51
● Forces behind the Supply
Cur ve
● Shifts in Supply ●
C . Equilibrium of Supply and Demand 53
Equilibrium with Supply and Demand Cur ves 54
● Effect
of a Shift in Supply or Demand
● Interpreting
Changes in Price and Quantity
● Supply, Demand, and
Immigration
● Rationing by Prices 59 ●
Summar y 60 ● Concepts for Review 61 ● Fur ther
Reading and Internet Websites 61
● Questions for
Discussion 61
●
Contents

x C O N T E N T S
PART TWO
MACROECONOMICS: ECONOMIC
GROWTH AND BUSINESS CYCLES
63
Chapter 4
Over view of Macroeconomics 65
A. Key Concepts of Macroeconomics 66
The Bir th of Macroeconomics 66
● Objectives and
Instr uments of Macroeconomics 68
● Measuring
Economic Success
● The Tools of Macroeconomic
Policy
● Inter national Linkages 74 ●
B . Aggregate Supply and Demand 75
Inside the Macroeconomy: Aggregate Supply and
Demand 75
● Defi nitions of Aggregate Supply and
Demand
● Aggregate Supply and Demand Cur ves ●
Macroeconomic Histor y: 1900–2008 78
● The Role of
Macroeconomic Policy
●
Summar y 80
● Concepts for Review 81 ● Fur ther
Reading and Internet Websites 81
● Questions for
Discussion 82
●
Appendix 4
Macroeconomic Data for the United States 83
Chapter 5
Measuring Economic Activity 84
Gross Domestic Product: The Yardstick of an
Economy’s Perfor mance 84
● Two Measures of
National Product: Goods Flow and Earnings Flow
●
National Accounts Derived from Business Accounts
●
The Problem of “Double Counting”
● Details of
the National Accounts 89
● Real vs. Nominal GDP:
“Defl ating” GDP by a Price Index
● Consumption ●
Investment and Capital Formation
● Government
Purchases
● Net Exports ● Gross Domestic Product,
Net Domestic Product, and Gross National Product
●
GDP and NDP: A Look at Numbers
● From GDP
to Disposable Income
● Saving and Investment ●
Beyond the National Accounts 98
● Price Indexes
and Infl ation 100
● Price Indexes ● Accounting
Assessment 102
●
Summar y 103
● Concepts for Review 104 ● Fur ther
Reading and Internet Websites 104
● Questions for
Discussion 104
●
Chapter 6
Consumption and Investment 106
A. Consumption and Saving 106
Budgetar y Expenditure Patterns
● Consumption,
Income, and Saving 109
● The Consumption Function ●
The Saving Function ● The Marginal Propensity
to Consume
● The Marginal Propensity to Save ●
Brief Review of Defi nitions
● National Consumption
Behavior 114
● Determinants of Consumption ● The
National Consumption Function
● Alternative Measures
of Saving
●
B . Investment 118
Deter minants of Investment 118
● Revenues ● Costs ●
Expectations
● The Investment Demand Cur ve 119 ●
Shifts in the Investment Demand Cur ve
● On to the
Theor y of Aggregate Demand 122
●
Summar y 122
● Concepts for Review 123 ● Fur ther
Reading and Internet Websites 123
● Questions for
Discussion 124
●
Chapter 7
Business Cycles and Aggregate Demand 126
A. What Are Business Cycles? 127
Features of the Business Cycle 127
● Business-Cycle
Theories 129
● Financial Crises and Business Cycles ●
B . Aggregate Demand and Business Cycles 130
The Theor y of Aggregate Demand 130
● The
Downward-Sloping Aggregate Demand Cur ve 131
●
Shifts in Aggregate Demand
● Business Cycles and
Aggregate Demand
● Is the Business Cycle Avoidable? ●
C . The Multiplier Model 135
Output Deter mined by Total Expenditures 135
●
Reminder on the Meaning of Equilibrium
● The
Adjustment Mechanism
● A Numerical Analysis ● The
Multiplier 138
● The Multiplier Model Compared with
the AS-AD Model
●
D. Fiscal Policy in the Multiplier Model 139
How Gover nment Fiscal Policies Affect Output 140
●
Impact of Taxation on Aggregate Demand
●
A Numerical Example
● Fiscal-Policy Multipliers 144 ●
Impact of Taxes
● The Multiplier Model and
the Business Cycle
● The Multiplier Model in
Perspective
●
Summar y 147
● Concepts for Review 148 ● Fur ther
Reading and Internet Websites 149
● Questions for
Discussion 149
●
Chapter 8
Capital, Interest, and Profi ts 151
A. Basic Concepts of Interest and Capital 151
What Is Capital?
● Prices and Rentals on Investments ●
Capital vs. Financial Assets
● The Rate of Return on
Investments
● Rates of Retur n and Interest Rates 152 ●
Rate of Return on Capital
● Financial Assets and
Interest Rates
● The Present Value of Assets 153 ●

C O N T E N T S xi
Reser ve Affects Bank Reser ves 195 ● Open-Market
Operations
● Discount-Window Policy: A Backstop
for Open-Market Operations
● The Role of Reser ve
Requirements
● Determination of the Federal Funds
Rate
●
B . The Monetar y Transmission Mechanism 200
A Summar y Statement
● The Effect of Changes in
Monetar y Policy on Output
● The Challenge of
a Liquidity Trap
● Monetar y Policy in the AS -AD
Framework
● Monetar y Policy in the Long Run ●
C . Applications of Monetar y Economics 205
Monetarism and the Quantity Theor y of Money and
Prices 205
● The Roots of Monetarism ● The Equation
of Exchange and the Velocity of Money
● The Quantity
Theor y of Prices
● Modern Monetarism ● The
Monetarist Platform: Constant Money Growth
● The
Monetarist Experiment
● The Decline of Monetarism ●
Monetar y Policy in an Open Economy 209
●
International Linkages
● Monetar y Transmission in
the Open Economy 210
● From Aggregate Demand to
Aggregate Supply 211
●
Summar y 211
● Concepts for Review 212 ● Fur ther
Reading and Internet Websites 213
● Questions for
Discussion 213
●
PART THREE
GROWTH, DEVELOPMENT,
AND THE GLOBAL ECONOMY
215
Chapter 11
Economic Growth 217
The Long-Term Signifi cance of Growth
●
A. Theories of Economic Growth 218
The Four Wheels of Growth 218
● Human Resources ●
Natural Resources
● Capital ● Technological Change
and Innovation
● Theories of Economic Growth 222 ●
The Classical Dynamics of Smith and Malthus
●
Economic Growth with Capital Accumulation: The
Neoclassical Growth Model
● Geometrical Analysis
of the Neoclassical Model
● The Central Role of
Technological Change
● Technological Change as an
Economic Output
●
B . The Patterns of Growth in the United States 228
The Facts of Economic Growth
● Relationship of the
Seven Trends to Economic-Growth Theories
● The
Sources of Economic Growth
● Recent Trends in
Productivity 232
● The Productivity Rebound ●
Summar y 234
● Concepts for Review 235 ● Fur ther
Reading and Internet Websites 235
● Questions for
Discussion 236
●
Present Value for Perpetuities ● General Formula for
Present Value
● Acting to Maximize Present Value ●
The Mysterious World of Interest Rates 155
● Real vs.
Nominal Interest Rates
●
B . The Theor y of Capital, Profi ts , and Interest 159
Basic Capital Theor y 159
● Roundaboutness ●
Diminishing Returns and the Demand for Capital
●
Determination of Interest and the Return on Capital
●
Graphical Analysis of the Return on Capital
● Profi ts as
a Retur n to Capital 163
● Reported Profi t Statistics ●
Determinants of Profi ts
● Empirical Evidence on
Returns to Labor and Capital
●
Summar y 165
● Concepts for Review 166 ● Fur ther
Reading and Internet Websites 166
● Questions for
Discussion 167
●
Chapter 9
Money and the Financial System 169
Over view of the Monetar y Transmission Mechanism
●
A. The Modern Financial System 170
The Role of the Financial System
● The Functions of
the Financial System
● The Flow of Funds ● A Menu of
Financial Assets 172
● Review of Interest Rates ●
B . The Special Case of Money 174
The Evolution of Money 174
● The Histor y of Money ●
Components of the Money Supply
● The Demand
for Money 177
● Money’s Functions ● The Costs of
Holding Money
● Two Sources of Money Demand ●
C . Banks and the Supply of Money 179
How Banks Developed from Goldsmith Establishments
●
Fractional-Reser ve Banking
● Final System
Equilibrium
● A Modern Banking System ●
D. The Stock Market 181
Risk and Return on Different Assets
● Bubbles and
Crashes
● Effi cient Markets and the Random Walk ●
Personal Financial Strategies 186
●
Summar y 187
● Concepts for Review 188 ● Fur ther
Reading and Internet Websites 189
● Questions for
Discussion 189
●
Chapter 10
Monetar y Policy and the Economy 191
A. Central Banking and the Federal Reser ve System 191
The Essential Elements of Central Banking 192
●
Histor y
● Structure ● Goals of Central Banks ●
Functions of the Federal Reser ve
● Central-Bank
Independence
● How the Central Bank Deter mines
Shor t-Ter m Interest Rates 194
● Over view of the Fed’s
Operations
● Balance Sheet of the Federal Reser ve
Banks
● Operating Procedures ● How the Federal

xii C O N T E N T S
Summar y 276 ● Concepts for Review 277 ● Fur ther
Reading and Internet Websites 278
● Questions for
Discussion 278
●
Chapter 14
Open-Economy Macroeconomics 280
A. Foreign Trade and Economic Activity 280
Net Exports and Output in the Open Economy
●
Determinants of Trade and Net Exports
● Shor t-Run
Impact of Trade on GDP 282
● The Marginal Propensity
to Import and the Spending Line
● The Open-Economy
Multiplier
● Trade and Finance for the United States
Under Flexible Exchange Rates 285
● The Monetar y
Transmission Mechanism in an Open Economy 287
●
B . Interdependence in the Global Economy 290
Economic Growth in the Open Economy 290
● Saving and
Investment in the Open Economy 290
● Determination of
Saving and Investment at Full Employment
● Promoting
Growth in the Open Economy 294
●
C . International Economic Issues 296
Competitiveness and Productivity 296
● “The
Deindustrialization of America”
● Trends in
Productivity
● The European Monetar y Union 297 ●
Toward a Common Currency: The Euro
● Costs and
Benefi ts of Monetar y Union
● Final Assessment 299 ●
Summar y 299
● Concepts for Review 301 ● Fur ther
Reading and Internet Websites 301
● Questions for
Discussion 301
●
PART FOUR
UNEMPLOYMENT, INFLATION ,
AND ECONOMIC POLICY
303
Chapter 15
Unemployment and the Foundations of
Aggregate Supply 305
A. The Foundations of Aggregate Supply 305
Deter minants of Aggregate Supply 306
● Potential
Output
● Input Costs ● Aggregate Supply in the Shor t
Run and Long Run 309
● Sticky Wages and Prices and
the Upward-Sloping AS Cur ve
●
B . Unemployment 310
Measuring Unemployment 311
● Impact of
Unemployment 311
● Economic Impact ● Social
Impact
● Okun’s Law 313 ● Economic Interpretation
Chapter 12
The Challenge of Economic Development 237
A. Population Growth and Development 237
Malthus and the Dismal Science 237
● Limits to Growth
and Neo-Malthusianism
●
B . Economic Growth in Poor Countries 240
Aspects of a Developing Countr y 240
●
Human Development
● The Four Elements
in Development 241
● Human Resources ● Natural
Resources
● Capital ● Technological Change and
Innovations
● Vicious Cycles to Virtuous Circles ●
Strategies of Economic Development 247
● The
Backwardness Hypothesis
● Industrialization
vs. Agriculture
● State vs. Market ● Growth and
Outward Orientation
● Summar y Judgment ●
C . Alternative Models for Development 249
A Bouquet of “ISMS” 249
● The Central Dilemma:
Market vs. Command
● The Asian Models 250 ● Asian
Dragons
● The Rise of China ● Socialism 251 ●
The Failed Model: Centrally Planned Economies 252
●
Baleful Prophesies
● From Textbooks to Tactics: Soviet-
Style Command Economy
● From Marx to Market ●
A Final Note of Cautious Optimism
●
Summar y 255
● Concepts for Review 256 ● Fur ther
Reading and Internet Websites 256
● Questions for
Discussion 257
●
Chapter 13
Exchange Rates and the International
Financial System 259
Trends in Foreign Trade 260
●
A. The Balance of International Payments 261
Balance-of-Payments Accounts 261
● Debits and
Credits
● Details of the Balance of Payments ●
B . The Determination of Foreign Exchange Rates 264
Foreign Exchange Rates 264
● The Foreign Exchange
Market 265
● Effects of Changes in Trade ● Exchange
Rates and the Balance of Payments
● Purchasing-Power
Parity and Exchange Rates
●
C . The International Monetar y System 269
Fixed Exchange Rates: The Classical Gold
Standard 270
● Hume’s Adjustment Mechanism ●
Updating Hume to Modern Macroeconomics
●
Inter national Monetar y Institutions After World
War II 273
● The International Monetar y Fund ●
The World Bank
● The Bretton Woods System ●
Inter vention
● Flexible Exchange Rates 275 ● Today’s
Hybrid System 276
● Concluding Thoughts ●

C O N T E N T S xiii
Chapter 17
Frontiers of Macroeconomics 346
A. The Economic Consequences of
the Government Debt 346
Fiscal Histor y 347
● Gover nment Budget Policy 348 ●
Actual, Structural, and Cyclical Budgets
● The
Economics of the Debt and Defi cits 349
● The Shor t-
Run Impact of Gover nment Defi cits 349
● Short
Run vs. Long Run
● Fiscal Policy and the Multiplier
Model
● Gover nment Debt and Economic Growth 350 ●
Historical Trends
● External vs. Internal Debt ●
Effi ciency Losses from Taxation
● Displacement of
Capital
● Debt and Growth ●
B . Advances in Modern Macroeconomics 354
Classical Macroeconomics and Say’s Law 355
● Say’s Law
of Markets
● Moder n Classical Macroeconomics 355 ●
Rational Expectations
● Real Business Cycles ● The
Ricardian View of Fiscal Policy
● Effi ciency Wages ●
Supply-Side Economics
● Policy Implications 358 ●
Policy Ineffectiveness
● The Desirability of Fixed Rules ●
A New Synthesis?
●
C . Stabilizing the Economy 359
The Interaction of Monetar y and Fiscal Policies 359
●
Demand Management
● The Fiscal-Monetar y Mix ●
Rules vs. Discretion 362
● Budget Constraints on
Legislatures?
● Monetar y Rules for the Fed? ●
D. Economic Growth and Human Welfare 364
The Spirit of Enterprise 365
● Fostering Technological
Advance
●
Summar y 366
● Concepts for Review 368 ● Fur ther
Reading and Internet Websites 368
● Questions for
Discussion 368
●
Glossar y of Terms 370
Index 391
of Unemployment 313 ● Equilibrium Unemployment ●
Disequilibrium Unemployment
● Microeconomic
Foundations of Infl exible Wages
● Labor Market
Issues 317
● Who Are the Unemployed? ● Duration
of Unemployment
● Sources of Joblessness ●
Unemployment by Age
●
Summar y 322
● Concepts for Review 323 ● Fur ther
Reading and Internet Websites 323
● Questions for
Discussion 323
●
Chapter 16
Infl ation 325
A. Defi nition and Impact of Infl ation 325
What Is Infl ation? 325
● The Histor y of Infl ation ●
Three Strains of Infl ation
● Anticipated vs.
Unanticipated Infl ation
● The Economic Impacts
of Infl ation 330
● Impacts on Income and Wealth
Distribution
● Impacts on Economic Effi ciency ●
Macroeconomic Impacts
● What Is the Optimal Rate of
Infl ation?
●
B . Modern Infl ation Theor y 332
Prices in the AS - AD Framework 333
● Expected
Infl ation
● Demand-Pull Infl ation ● Cost-Push Infl ation
and “Stagfl ation”
● Expectations and Infl ation ● Price
Levels vs. Infl ation
● The Phillips Cur ve 336 ● Short-
Run Phillips Cur ve
● The Nonaccelerating Infl ation Rate
of Unemployment
● From Short Run to Long Run ●
The Vertical Long-Run Phillips Cur ve
● Quantitative
Estimates
● Doubts about the NAIRU ● Review ●
C . Dilemmas of Anti-Infl ation Policy 340
How Long Is the Long Run?
● How Much Does It Cost
to Reduce Infl ation?
● Credibility and Infl ation ●
Policies to Lower Unemployment
●
Summar y 343
● Concepts for Review 344 ● Fur ther
Reading and Internet Websites 344
● Questions for
Discussion 345
●

xiv
Sciences advance. But they can also recede. That is true of economics as well. By the
end of World War II, the leading introductor y textbooks in economics had lost their
vitality and relevance. Nature abhors a vacuum. The fi rst edition of this textbook
appeared as the 1948 edition of Samuelson’s ECONOMICS. It introduced macro-
economics into our colleges and ser ved as the gold standard for teaching economics
in an increasingly globalized world.
B o t h t h e e c o n o m y a n d e c o n o m i c s h a v e c h a n g e d g r e a t l y o v e r t h e y e a r s .
S u c c e s s i v e e d i t i o n s o f t h i s t e x t b o o k , w h i c h b e c a m e S a m u e l s o n - N o r d h a u s
E C O N O M I C S , h a v e d o c u m e n t e d t h e e v o l u t i o n a r y c h a n g e s i n t h e w o r l d e c o n o m y
a n d h a v e p r o v i d e d t h e l a t e s t r i g o r o u s e c o n o m i c t h i n k i n g a t t h e f r o n t i e r o f t h e
d i s c i p l i n e .
To our surprise, this nineteenth edition may be one of the most signifi cant of
all revisions. We call this the centrist edition. It proclaims the value of the mixed
economy — an economy that combines the tough discipline of the market with fair-
minded governmental oversight.
Centrism is of vital importance today because the global economy is in a ter-
rible meltdown — perhaps worse than any cyclical slump since the Great Depression
of the 1930s. Alas, many textbooks have strayed too far toward over-complacent
libertarianism. They joined the celebration of free-market fi nance and supported
dismantling regulations and abolishing oversight. The bitter har vest of this celebra-
tion was seen in the irrationally exuberant housing and stock markets that collapsed
and led to the current fi nancial crisis.
The centrism we describe is not a prescription that is intended to persuade
readers away from their beliefs. We are analysts and not cult prescribers. It is not
ideology that breeds centrism as our theme. We sift facts and theories to determine
the consequences of Hayek-Friedman libertarianism or Marx-Lenin bureaucratic
communism. All readers are free to make up their own minds about best ethics and
value judgments.
Having sur veyed the terrain, this is our reading: Economic histor y confi rms that
neither unregulated capitalism nor overregulated central planning can organize a
modern society effectively.
The follies of the left and right both mandate centrism. Tightly controlled cen-
tral planning, which was widely advocated in the middle decades of the last centur y,
was abandoned after it produced stagnation and unhappy consumers in communist
countries.
What exactly was the road to ser fdom that Hayek and Friedman warned us
against? They were arguing against social security, a minimum wage, national parks,
progressive taxation, and government rules to clean up the environment or slow
global warming. People who live in high-income societies support these programs
with great majorities. Such mixed economies involve both the rule of law and the
limited liberty to compete.
A Centrist Proclamation

A C E N T R I S T P R O C L A M AT I O N xv
We sur vey the centrist approach to economics in the pages that follow. Millions
of students in China, India, Latin America, and emerging societies have sought
economic wisdom from these pages. Our task is to make sure that the latest and best
thinking of economists is contained here, describing the logic of the modern mixed
economy, but always presenting in a fair manner the views of those who criticize it
from the left and the right.
But we go a step further in our proclamation. We hold that there must be a
limited centrism. Our knowledge is imper fect, and society’s resources are limited.
We are also mindful of our current predicament. We see that unfettered capitalism
has generated painful inequalities of income and wealth, and that supply-side fi s-
cal doctrines have produced large government defi cits. We obser ve that the major
innovations of modern fi nance, when operating in an unregulated system, have pro-
duced trillions of dollars of losses and led to the ruin of many venerable fi nancial
institutions.
Only by steering our societies back to the limited center can we ensure that the
global economy returns to full employment where the fruits of progress are more
equally shared.
Paul A. Samuelson
Februar y 2009

xvii
Preface
As we complete this nineteenth edition of Macro-
economics, the U.S. economy has fallen into a deep
recession as well as the most serious fi nancial crisis
since the Great Depression of the 1930s. The federal
government has invested hundreds of billions of dol-
lars to protect the fragile network of the U.S. and
indeed the world fi nancial system. The new Obama
administration has worked with Congress to pass the
largest stimulus package in American histor y. The
economic turmoil, and the manner in which coun-
tries respond to it, will shape the American economy,
its labor market, and the world fi nancial system for
years to come.
We should remember, however, that the fi nan-
cial crisis of 2007–2009 came after more than a
half- centur y of spectacular increases in the living
standards of most of the world, particularly those
living in the affl uent countries of North America,
Western Europe, and East Asia. People are asking,
“Will the twenty-fi rst centur y repeat the successes
of the last centur y? Will the affl uence of the few
spread to poor countries? Alternatively, will the four
horsemen of the economic apocalypse—famine,
war, environmental degradation, and depression—
spread to the North? Do we have the wisdom to
reshape our fi nancial systems so that they can con-
tinue to provide the investments that have fueled
economic growth up to now? And what should we
think about environmental threats such as global
warming?”
These are ultimately the questions we address in
this new edition of Macroeconomics.
The G rowing Ro le o f Ma rkets
Yo u m i g h t t h i n k t h a t p r o s p e r i t y w o u l d l e a d t o a
d e c l i n i n g i n t e r e s t i n e c o n o m i c a f f a i r s , b u t p a r a -
d o x i c a l l y a n u n d e r s t a n d i n g o f t h e e n d u r i n g t r u t h s
o f e c o n o m i c s h a s b e c o m e e v e n m o r e v i t a l i n t h e
a f f a i r s o f p e o p l e a n d n a t i o n s . T h o s e w h o r e m e m -
b e r h i s t o r y k n o w r e c o g n i z e t h a t t h e c r i s e s t h a t
t h r e a t e n e d fi n a n c i a l m a r k e t s i n t h e t w e n t y - fi r s t
c e n t u r y w e r e t h e m o d e r n c o u n t e r p a r t o f p a n i c s o f
a n e a r l i e r e r a .
I n t h e l a r g e r s c e n e , t h e w o r l d h a s b e c o m e
i n c r e a s i n g l y i n t e r c o n n e c t e d a s c o m p u t e r s a n d
c o m m u n i c a t i o n s c r e a t e a n e v e r m o r e c o m p e t i -
t i v e g l o b a l m a r k e t p l a c e . D e v e l o p i n g c o u n t r i e s l i k e
C h i n a a n d I n d i a — t w o g i a n t s t h a t r e l i e d h e a v i l y
o n c e n t r a l p l a n n i n g u n t i l r e c e n t l y — n e e d a fi r m
u n d e r s t a n d i n g o f t h e i n s t i t u t i o n s o f a m a r k e t
e c o n o m y i f t h e y a r e t o a t t a i n t h e l i v i n g s t a n d a r d s
o f t h e a f fl u e n t . A t t h e s a m e t i m e , t h e r e i s g r o w i n g
c o n c e r n a b o u t i n t e r n a t i o n a l e n v i r o n m e n t a l p r o b -
l e m s a n d t h e n e e d t o f o r g e a g r e e m e n t s t o p r e s e r v e
o u r p r e c i o u s n a t u r a l h e r i t a g e . A l l t h e s e f a s c i n a t i n g
c h a n g e s a r e p a r t o f t h e m o d e r n d r a m a t h a t w e c a l l
e c o n o m i c s .
ECONOMICS Reb orn
For more than half a centur y, this book has ser ved as
the standard-bearer for the teaching of introductor y
economics in classrooms in America and throughout
the world. Each new edition distills the best think-
ing of economists about how markets function and
about what countries can do to improve people’s
living standards. But economics has changed pro-
foundly since the fi rst edition of this text appeared
in 1948. Moreover, because economics is above all a
living and evolving organism, Economics is born anew
each edition as the authors have the exciting oppor-
tunity to present the latest thinking of modern econ-
omists and to show how the subject can contribute to
a more prosperous world.
Our task then is this: We strive to present a clear,
accurate, and interesting introduction to the prin-
ciples of modern economics and to the institutions
of the American and world economies. Our primar y
goal is emphasize the core economic principles that
will endure beyond today’s headlines.

xviii P R E FA C E
THE NINETEENTH ED ITION
As economics and the world around it evolve, so does
this book. Our philosophy continues to emphasize
six basic principles that underlie earlier editions and
this revision:
1. The Core Truths of Economics . Often, economics
appears to be an endless procession of new puzzles,
problems, and dilemmas. But as experienced teach-
ers have learned, there are a few basic concepts that
underpin all of economics. Once these concepts have
been mastered, learning is much quicker and more
enjoyable. We have therefore chosen to focus on the cen-
tral core of economics—on those enduring tr uths that will
be just as impor tant in the twenty-fi rst centur y as they were
in the twentieth. In macroeconomics, we emphasize
the two central approaches of Keynesian econom-
ics to understand business cycles, and we emphasize
the neoclassical growth model to understand longer-
term growth trends. Within these frameworks, estab-
lished approaches such as the consumption function
take place alongside new developments in fi nancial
macroeconomics.
2. Innovation in Economics . Economics has made
many advances in understanding the role of inno-
vation. We are accustomed to the dizzying speed of
invention in software, where new products appear
monthly. The Internet is revolutionizing communi-
cations and study habits and is making inroads into
commerce.
In addition, we emphasize innovations in eco-
nomics itself. Economists are innovators and inven-
tors in their own way. Histor y shows that economic
ideas can produce tidal waves when they are applied
to real-world problems. Among the important inno-
vations we sur vey is the application of economics
to our environmental problems through emissions-
trading plans. We explain how behavioral economics
has changed views of consumer theor y and fi nance.
One of the most important innovations for our com-
mon future is dealing with global public goods like
climate change, and we analyze new ways to deal
with international environmental problems, includ-
ing approaches such as the Kyoto Protocol. We must
also track innovations in policy, such as the chang-
ing approach to monetar y policy in the Federal
Reser ve.
3. Small Is Beautiful. Economics has increased its
scope greatly over the past half-centur y. The fl ag of
economics fl ies over its traditional territor y of the
marketplace, but it also covers the environment, legal
studies, statistical and historical methods, gender and
racial discrimination, and even family life. But at its
core, economics is the science of choice. That means
that we, as authors, must choose the most important
and enduring issues for this text. In a sur vey, as in a
meal, small is beautiful because it is digestible.
Choosing the subjects for this text required many
hard choices. To select these topics, we continually
sur vey teachers and leading scholars to determine
the issues most crucial for an informed citizenr y and
a new generation of economists. We drew up a list
of key ideas and bid farewell to material we judged
inessential or dated. At ever y stage, we asked whether
the material was, as best we could judge, necessar y for a
student’s understanding of the economics of the twenty-fi rst
centur y . Only when a subject passed this test was it
included. The result of this campaign is a book that
has lost more than one-quarter of its weight in the
last few editions and has trimmed three chapters for
this edition. Farm economics, the histor y of labor
unions, Marxian economics, advanced treatment
of general equilibrium, regulator y developments,
and the lump-of-labor fallacy have been trimmed to
make room for modern fi nancial theor y, real busi-
ness cycles, and global public goods.
4. Policy Issues for Today. For many students, the lure
of economics is its relevance to public policy. An area
of central importance is fi nancial and monetar y eco-
nomics. We have completely revised our treatment
here. Previous treatment emphasized the quantity of
money as the prime channel through which the cen-
tral bank infl uences the economy. This approach no
longer refl ects the realities of a modern fi nancial sys-
tem. Today, the Fed exercises its policies by targeting
the short-run interest rate and providing liquidity to
markets. With the nineteenth edition, we fully incor-
porate these changes in three central chapters.
5. Debates about Globalization. The last decade
has witnessed pitched battles over the role of inter-
national trade in our economies. Some argue that
“outsourcing” is leading to the loss of thousands of
jobs to India and China. Immigration has been a
hot-burner issue, particularly in communities with

P R E FA C E xix
the careful layering of the more advanced material.
Hard-pressed courses can skip the advanced sections
and chapters, covering the core of economic analysis
without losing the thread of the economic reasoning.
This book will challenge the most advanced young
scholar. Indeed, many of today’s leading economists
have written to say they have relied upon Economics
all along their pilgrimage to the Ph.D.
Format
The nineteenth edition employs in-text logos and
material to help illustrate the central topics. You
will fi nd a distinctive logo indicating warnings for
the fl edgling economist, examples of economics in
action, and biographical material on the great econo-
mists of the past and present. But these central topics
are not drifting off by themselves in unattached boxes.
Rather, they are integrated right into the chapter so
that students can read them and see how they illus-
trate the core material. Keep these sections in mind
as you read through the text. Each one is either:
●
A warning that students should pause to ensure
that they understand a diffi cult or subtle point.
●
An interesting example or application of the
analysis, often representing one of the major
innovations of modern economics.
●
A biography of an important economic fi gure.
New features in this edition include fresh end-of-
chapter questions, with a special accent upon short
problems that reinforce the major concepts sur veyed
in the chapter.
Terms printed in bold type in the text mark the
fi rst occurrence and defi nition of the most important
words that constitute the language of economics.
But these many changes have not altered one bit
the central stylistic beacon that has guided Economics
since the fi rst edition: to use simple sentences, clear
explanations, and concise tables and graphs.
Auxiliar y Teaching a nd St udy Aids
Students of this edition will benefi t greatly from the
Study Guide . This carefully designed supplement
was updated by Walter Park of the American Uni-
versity. When used alongside classroom discussions
and when employed independently for self-study,
the Study Guide has proved to be an impressive suc-
cess. There is a full-text Study Guide , as well as micro
and macro versions. The Study Guides are available
high unemployment rates. Whatever the causes, the
United States was defi nitely faced with the puzzle
of rapid output growth and a ver y slow growth in
employment in the fi rst decade of the twenty-fi rst
centur y.
One of the major debates of recent years has been
over “globalization,” which concerns the increasing
economic integration of different countries. Ameri-
cans have learned that no countr y is an economic
island. Immigration and international trade have
profound effects on the goods that are available,
the prices we pay, and the wages we earn. Terrorism
can wreck havoc on the economy at home, while war
causes famines, migration, and reduced living stan-
dards in Africa. No one can fully understand the
impact of growing trade and capital fl ows without a
careful study of the theor y of comparative advantage.
We will see how the fl ow of fi nancial capital has an
enormous infl uence on trading patterns as well as
understand why that poor countries like China save
while rich countries like the United States are bor-
rowers. The nineteenth edition continues to increase
the material devoted to international economics and
the interaction between international trade and
domestic economic events.
6. Clarity. Although there are many new features in
the nineteenth edition, the pole star for our pilgrim-
age for this edition has been to present economics
clearly and simply. Students enter the classroom with
a wide range of backgrounds and with many precon-
ceptions about how the world works. Our task is not
to change students’ values. Rather, we strive to help
students understand enduring economic principles
so that they may better be able to apply them—to
make the world a better place for themselves, their
families, and their communities. Nothing aids under-
standing better than clear, simple exposition. We
have labored over ever y page to improve this sur vey
of introductor y economics. We have received thou-
sands of comments and suggestions from teachers
and students and have incorporated their counsel in
the n ineteenth ed ition.
Optional Ma tter
Economics courses range from one-quarter sur veys
to year-long intensive honors courses. This textbook
has been carefully designed to meet all situations.
If yours is a fast-paced course, you will appreciate

xx P R E FA C E
r e a d i n g a n d a d d r e s s e s o f w e b s i t e s t h a t c a n b e u s e d
t o d e e p e n s t u d e n t u n d e r s t a n d i n g o r fi n d d a t a a n d
c a s e s t u d i e s .
Acknowledgments
This book has two authors but a multitude of col-
laborators. We are profoundly grateful to colleagues,
reviewers, students, and McGraw-Hill’s staff for
contributing to the timely completion of the nine-
teenth edition of Macroeconomics . Colleagues at
MIT, Yale, and elsewhere who have graciously con-
tributed their comments and suggestions over the
years include William C. Brainard, E. Car y Brown,
John Geanakoplos, Robert J. Gordon, Lyle Gramley,
Gerald Jaynes, Paul Joskow, Alfred Kahn, Richard
Levin, Robert Litan, Barr y Nalebuff, Merton J. Peck,
Gustav Ranis, Herbert Scar f, Robert M. Solow, James
Tobin, Janet Yellen, and Gar y Yohe.
In addition, we have benefi ted from the tireless
devotion of those whose experience in teaching ele-
mentar y economics is embodied in this edition. We
are particularly grateful to the reviewers of the nine-
teenth edition. They include:
Esmael A dibi , Chapman University
Abu D owlah , Saint Francis College
Adam Fores t , University of Washington, Tacoma
Harold H orowitz , Touro College
Jui-Chi H uang , Har risburg Area Community College
Carl Jen sen , Iona College, New Rochelle
Craig Ju mper , Rich Mountain Community College
Carlos Liard-Muriente , Central Connecticut State University
Phillip Let ting , Har risburg Area Community College
Ibrahim O weiss , Georgetown University
Walter Park , American University
Gordana P esakovic , Argosy University, Sarasota
Harold P eterson , Boston College
David R uccio , University of Notre Dame
Derek T runkey , George Washington University
Mark Wit te , Nor thwestern University
Jiawen Y ang , George Washington University
Students at MIT, Yale, and other colleges and uni-
versities have ser ved as an “invisible college.” They
constantly challenge and test us, helping to make this
edition less imper fect than its predecessor. Although
they are too numerous to enumerate, their infl uence
is woven through ever y chapter. Nancy King helped
in logistics at the New Haven end of the operation.
We are particularly grateful for the contribution of
electronically for online purchase or packaged with
the text via code-card access.
In addition, instructors will fi nd both the Instr uc-
tor’s Resource Manual, updated for this edition by
Carlos Liard-Muriente of Central Connecticut
State University, and the Test Bank, fully revised by
Craig Jumper of Rich Mountain Community Col-
lege. These supplements are incredibly useful for
instructors planning their courses and preparing
multiple sets of test questions in both print and
computerized formats. The graphs and fi gures
in this edition can also be viewed electronically as
PowerPoint slides. The slides can be downloaded
from our website ( www.mhhe.com/samuelson19e ).
The website also contains chapter summaries, self-
grading practice quizzes, and links to the websites
suggested for further research at the end of each
chapter.
Cour seSmar t eT extbook
For roughly half the cost of a print book, you can
reduce your impact on the environment by pur-
chasing the electronic edition of the nineteenth
edition of Samuelson and Nordhaus, Economics.
CourseSmart eTextbooks, available in a standard
online reader, retain the exact content and layout
of the print text, plus offer the advantage of digi-
tal navigation to which students are accustomed.
Students can search the text, highlight, take notes,
and use e-mail tools to share notes with their class-
mates. CourseSmart also includes tech support in
case help is ever needed. To buy Economics, 19e as an
eTextbook, or to learn more about this digital solu-
tion, visit www.CourseSmar t.com and search by title,
author, or ISBN.
Economics in the Computer Age
The electronic age has revolutionized the way that
scholars and students can access information. In eco-
nomics, the information revolution allows us quick
access to economic statistics and research. An impor-
tant feature of the nineteenth edition is the section
“Economics and the Internet,” which appears just
before Chapter 1. This little section provides a road
map for the state of economics on the Information
Superhighway.
I n a d d i t i o n , e a c h c h a p t e r h a s a n u p d a t e d
s e c t i o n a t t h e e n d w i t h s u g g e s t i o n s f o r f u r t h e r

P R E FA C E xxi
The I ntellectual Ma rketplace
Just what is the market that students in repressed
societies are agitating for? In the pages that follow,
you will learn about the promise and perils of global-
ization, about the fragility of fi nancial markets, about
unskilled labor and highly trained neurosurgeons.
You have probably read in the newspaper about the
gross domestic product, the consumer price index, the
Federal Reser ve, and the unemployment rate. After
you have completed a thorough study of this textbook,
you will know precisely what these words mean. Even
more important, you will also understand the eco-
nomic forces that infl uence and determine them.
There is also a marketplace of ideas, where con-
tending schools of economists fashion their theories
and tr y to persuade their scientifi c peers. You will
fi nd in the chapters that follow a fair and impartial
review of the thinking of the intellectual giants of our
profession—from the early economists like Adam
Smith, David Ricardo, and Karl Marx to modern-day
titans like John Maynard Keynes, Milton Friedman,
and James Tobin.
Skoal!
As you begin your journey into the land of the mixed
economy, it would be understandable if you are anx-
ious. But take heart. The fact is that we envy you,
the beginning student, as you set out to explore the
exciting world of economics for the fi rst time. This is
a thrill that, alas, you can experience only once in a
lifetime. So, as you embark, we wish you bon voyage!
Paul A. Samuelson
William D. Nordhaus
Caroleen Verly, who read the manuscript and made
many suggestions for improvement. We are grateful
to Dr. Xi Chen, who prepared the economic globes
and reviewed the manuscript.
T h i s p r o j e c t w o u l d h a v e b e e n i m p o s s i b l e w i t h o u t
t h e s k i l l e d t e a m f r o m M c G r a w - H i l l w h o n u r t u r e d
t h e b o o k a t e v e r y s t a g e . We p a r t i c u l a r l y w o u l d l i k e t o
t h a n k , i n c h r o n o l o g i c a l o r d e r t o t h e i r a p p e a r a n c e
o n t h e s c e n e : D o u g l a s R e i n e r, K a r e n F i s h e r, N o e l l e
F o x , S u s a n n e R e i d e l l , L o r i H a z z a r d , M a t t B a l d w i n ,
a n d J e n L a m b e r t . T h i s g r o u p o f s k i l l e d p r o f e s s i o n -
a l s t u r n e d a p i l e o f fi l e s a n d a m o u n t a i n o f p a p e r
i n t o a fi n e l y p o l i s h e d w o r k o f a r t .
A WORD TO THE
SOVEREIGN STUDENT
Yo u h a v e r e a d i n t h e h i s t o r y b o o k s o f r e v o l u t i o n s
t h a t s h a k e c i v i l i z a t i o n s t o t h e i r r o o t s — r e l i g i o u s
c o n fl i c t s , w a r s f o r p o l i t i c a l l i b e r a t i o n , s t r u g g l e s
a g a i n s t c o l o n i a l i s m a n d i m p e r i a l i s m . Tw o d e c a d e s
a g o , e c o n o m i c r e v o l u t i o n s i n E a s t e r n E u r o p e , i n
t h e f o r m e r S o v i e t U n i o n , i n C h i n a , a n d e l s e w h e r e
t o r e t h o s e s o c i e t i e s a p a r t . Yo u n g p e o p l e b a t t e r e d
d o w n w a l l s , o v e r t h r e w e s t a b l i s h e d a u t h o r i t y, a n d
a g i t a t e d f o r d e m o c r a c y a n d a m a r k e t e c o n o m y
b e c a u s e o f d i s c o n t e n t w i t h t h e i r c e n t r a l i z e d s o c i a l -
i s t g o v e r n m e n t s .
Students like yourselves were marching, and
even going to jail, to win the right to study radical
ideas and learn from Western textbooks like this
one in the hope that they may enjoy the freedom
and economic prosperity of democratic market
economies.

xxii
The Information Age is revolutionizing our lives. Its
impact on scholars and students has been particularly
profound because it allows inexpensive and rapid
access to vast quantities of information. The Internet,
which is a huge and growing public network of linked
computers and information, is changing the way we
study, shop, share our culture, and communicate
with our friends and family.
In economics, the Internet allows us quick access
to economics statistics and research. With just a few
clicks of a mouse, we can fi nd out about the most
recent unemployment rate, track down information
on poverty and incomes, or investigate the intricacies
of our banking system. A few years ago, it might have
taken weeks to dig out the data necessar y to analyze
an economic problem. Today, with a computer and
a little practice, that same task can be done in a few
minutes.
This book is not a manual for driving on the
Information Superhighway. That skill can be learned
in classes on the subject or from informal tutorials.
Rather, we want to provide a road map that shows
the locations of major sources of economic data and
research. With this map and some rudimentar y navi-
gational skills, you can explore the various sites and
fi nd a rich array of data, information, studies, and
chat rooms. Additionally, at the end of each chapter
there is a list of useful websites that can be used to
follow up the major themes of that chapter.
Note that some of these sites may be free, some
may require a registration or be available through
your college or university, and others may require
paying a fee. Pricing practices change rapidly, so
while we have attempted to include primarily free
sites, we have not excluded high-quality sites that
may charge a fee.
Data a nd I nstitutions
The Internet is an indispensable source of useful
data and other information. Since most economic
data are provided by governments, the fi rst place to
For the Student: Economics and the Internet
look is the web pages of government agencies and
international organizations. The starting point for
U.S. government statistics, www.fedstats.gov , provides
one-stop shopping for federal statistics with links to
over 70 government agencies that produce statisti-
cal information. Sources are organized by subject
or by agency, and the contents are fully searchable.
Another good launching site into the federal statisti-
cal system is the Economic Statistics Briefi ng Room
at www.whitehouse.gov/fsbr/esbr.html . Additionally, the
Commerce Department operates a huge database
at www.stat-usa.gov, but use of parts of this database
requires a subscription (which may be available at
your college or university).
The best single statistical source for data on the
United States is the Statistical Abstract of the United
States, published annually. It is available online at
www.census.gov/compendia/statab . If you want an over-
view of the U.S. economy, you can read the Economic
Repor t of the President at www.gpoaccess.gov/eop/index.
html.
Most of the major economic data are produced by
specialized agencies. One place to fi nd general data
is the Department of Commerce, which encompasses
the Bureau of Economic Analysis (BEA) ( www.bea.gov )
and the Census Bureau ( www.census.gov ). The BEA site
includes all data and articles published in the Sur vey
of Cur rent Business , including the national income and
product accounts, international trade and investment
fl ows, output by industr y, economic growth, personal
income and labor series, and regional data.
The Census Bureau site goes well beyond a nose
count of the population. It also includes the economic
census as well as information on housing, income
and poverty, government fi nance, agriculture, for-
eign trade, construction, manufacturing, transpor-
tation, and retail and wholesale trade. In addition
to making Census Bureau publications available, the
site allows users to create custom extracts of popular
microdata sources including the Sur vey of Income
and Program Participation, Consumer Expenditure

F O R T H E S T U D E N T: E C O N O M I C S A N D T H E I N T E R N E T xxiii
For scholarly writings, many journals are mak-
ing their contents available online. WebEc at www.
helsinki.fi /WebEc/ contains a listing of websites for
many economic journals. The archives of many
journals are available at www.jstor.or g .
There are now a few websites that bring many
resources together at one location. One place to
start is Resources for Economists on the Inter net, spon-
sored by the American Economic Association and
edited by Bill Goffe, at www.r fe.or g . Also see WWW
Resources in Economics , which has links to many dif-
ferent branches of economics at netec.wustl.edu/
WebEc/ WebEc.html . For working papers, the National
Bureau of Economic Research (NBER) website at
www.nber.or g contains current economic research.
The NBER site also contains general resources,
including links to data sources and the offi cial U.S.
business-cycle dates.
An excellent site that archives and ser ves as a
depositor y for working papers is located at econwpa.
wustl.edu/wpawelcome.html. This site is particularly
useful for fi nding background material for research
papers.
Did someone tell you that economics is the dis-
mal science? You can chuckle over economist jokes
(mostly at the expense of economists) at netec.mcc.
ac.uk/JokEc.html .
A Word o f Warning
It is an unfortunate fact that, because of rapid tech-
nological change, this list will soon be out of date.
New sites with valuable information and data are
appearing ever y day . . . and others are disappearing
almost as rapidly.
Before you set off into the wonder ful world of
the Web, we would pass on to you some wisdom from
experts. Remember the old adage: You only get what
you pay for.
Warning: Be careful to determine that your
sources and data are reliable. The Internet and other
electronic media are easy to use and equally easy to
abuse.
The Web is the closest thing in economics to a
free lunch. But you must select your items carefully
to ensure that they are palatable and digestible.
Sur vey, Current Population Sur vey, American Hous-
ing Sur vey, and, of course, the most recent census.
The Bureau of Labor Statistics (at www.bls.gov )
provides easy access to commonly requested labor
data, including employment and unemployment,
prices and living conditions, compensation, productiv-
ity, and technology. Also available are labor-force data
from the Current Population Sur vey and payroll statis-
tics from the Current Employment Statistics Sur vey.
A useful source for fi nancial data is the website
of the Federal Reser ve Board at www.federalreser ve.gov .
This site provides historical U.S. economic and fi nan-
cial data, including daily interest rates, monetar y
and business indicators, exchange rates, balance-of-
payments data, and price indexes. In addition, the
Offi ce of Management and Budget at www.gpo.gov/
usbudget/index.html makes available the federal bud-
get and related documents.
International statistics are often harder to fi nd.
The World Bank, at www.worldbank.org, has infor-
mation on its programs and publications at its site,
as does the International Monetar y Fund, or IMF,
at www.imf.org . The United Nations website ( www.
unsystem.org ) is slow and confusing but has links
to most international institutions and their data-
bases. A good source of information about high-
income countries is the Organisation for Economic
Cooperation and Development, or OECD, at www.
oecd.org . The OECD’s website contains an array of
data on economics, education, health, science and
technology, agriculture, energy, public management,
and other topics.
Economic Research and Journalism
The Internet is rapidly becoming the world’s librar y.
Newspapers, magazines, and scholarly publications
are increasingly posting their writing in electronic
form. Most of these present what is already available
in the paper publications. Some interesting sources
can be found at the Economist at www.economist.com
and the Financial Times ( www.ft.com ). The Wall Street
Journal at www.wsj.com is currently expensive and not
a cost-effective resource. Current policy issues are
discussed at www.policy.com . The online magazine
Slate at www.slate.com occasionally contains excellent
essays on economics.

P A
R
T

O
N
E
Basic Conce pts

3
C H A P T E R
1
The Age of Chivalr y is gone; that of sophisters, economists, and
calculators has succeeded.
Edmund Bu rke
The Central Concepts of Economics
A . W H Y S T U DY E C O N O M I C S ?
As you open this textbook, you may be wondering,
Why should I study economics? Let us count the ways.
Many study economics to help them get a good
job.
Some people feel they should understand more
deeply what lies behind reports on infl ation and
unemployment.
Or people want to understand what kinds of poli-
cies might slow global warming or what it means to
say an iPod is “made in China.”
For Whom t he Bell Tolls
All these reasons, and many more, make good sense.
Still, as we have come to realize, there is one overrid-
ing reason to learn the basic lessons of economics:
All your life—from cradle to grave and beyond—you
will run up against the brutal truths of economics.
As a voter, you will make decisions on issues that
cannot be understood until you have mastered the
rudiments of this subject. Without studying econom-
ics, you cannot be fully informed about international
trade, tax policy, or the causes of recessions and high
unemployment.
C h o o s i n g y o u r l i f e ’s o c c u p a t i o n i s t h e m o s t
i m p o r t a n t e c o n o m i c d e c i s i o n y o u w i l l m a k e . Yo u r
f u t u r e d e p e n d s n o t o n l y o n y o u r o w n a b i l i t i e s b u t
a l s o o n h o w n a t i o n a l a n d r e g i o n a l e c o n o m i c f o r c e s
a f f e c t y o u r w a g e s . A l s o , y o u r k n o w l e d g e o f e c o n o m -
i c s c a n h e l p y o u m a k e w i s e d e c i s i o n s a b o u t h o w
t o b u y a h o m e , p a y f o r y o u r c h i l d r e n ’s e d u c a t i o n ,
a n d s e t a s i d e a n e s t e g g f o r r e t i r e m e n t . O f c o u r s e ,
s t u d y i n g e c o n o m i c s w i l l n o t m a k e y o u a g e n i u s .
B u t w i t h o u t e c o n o m i c s t h e d i c e o f l i f e a r e l o a d e d
a g a i n s t y o u .
T h e r e i s n o n e e d t o b e l a b o r t h e p o i n t . We
h o p e y o u w i l l fi n d t h a t , i n a d d i t i o n t o b e i n g u s e -
f u l , e c o n o m i c s i s e v e n a f a s c i n a t i n g fi e l d . G e n -
e r a t i o n s o f s t u d e n t s , o f t e n t o t h e i r s u r p r i s e , h a v e
d i s c o v e r e d h o w s t i m u l a t i n g i t i s t o l o o k b e n e a t h
t h e s u r f a c e a n d u n d e r s t a n d t h e f u n d a m e n t a l l a w s
o f e c o n o m i c s .
SCARCITY AND EF FICIENCY: THE
TWIN THEMES OF ECONOMICS
Defi nitions o f Eco nomics
Let us begin with a defi nition of economics. Over
the last half-centur y, the study of economics has
expanded to include a vast range of topics. Here are

4 C H A P T E R 1 • T H E C E N T R A L C O N C E P T S O F E C O N O M I C S
some of the major subjects that are covered in this
book:
1

●
Economics explores the behavior of the fi nancial
markets, including interest rates, exchange rates,
and stock prices.
●
The subject examines the reasons why some peo-
ple or countries have high incomes while others
are poor; it goes on to analyze ways that poverty
can be reduced without harming the economy.
●
It studies business cycles—the fl uctuations in
credit, unemployment, and infl ation—along with
policies to moderate them.
●
Economics studies international trade and fi nance
and the impacts of globalization, and it particu-
larly examines the thorny issues involved in open-
ing up borders to free trade.
●
It asks how government policies can be used to
pursue important goals such as rapid economic
growth, effi cient use of resources, full employ-
ment, price stability, and a fair distribution of
income.
This is a long list, but we could extend it many times.
However, if we boil down all these defi nitions, we
fi nd one common theme:
Economics is the study of how societies use scarce
resources to produce valuable goods and ser vices and
distribute them among different individuals.
Scarcity a nd Effi ciency
If we think about the defi nitions, we fi nd two key
ideas that run through all of economics: that goods
are scarce and that society must use its resources effi -
ciently. Indeed, the concerns of economics will not go away
because of the fact of scarcity and the desire for ef fi ciency.
Consider a world without scarcity. If infi nite quan-
tities of ever y good could be produced or if human
desires were fully satisfi ed, what would be the con-
sequences? People would not worr y about stretching
out their limited incomes because they could have
ever ything they wanted; businesses would not need to
1
This list contains several specialized terms that you will need
to understand. If you are not familiar with a particular word
or phrase, you should consult the Glossar y at the back of this
book. The Glossar y contains most of the major technical eco-
nomic terms used in this book. All terms printed in boldface
are defi ned in the Glossar y.
fret over the cost of labor or health care; governments
would not need to struggle over taxes or spending
or pollution because nobody would care. Moreover,
since all of us could have as much as we pleased, no
one would be concerned about the distribution of
incomes among different people or classes.
In such an Eden of affl uence, all goods would be
free, like sand in the desert or seawater at the beach.
All prices would be zero, and markets would be
unnecessar y. Indeed, economics would no longer be
a useful subject.
But no society has reached a utopia of limit-
less possibilities. Ours is a world of scarcity , full of
economic goods . A situation of scarcity is one in
which goods are limited relative to desires. An objec-
tive obser ver would have to agree that, even after two
centuries of rapid economic growth, production in
the United States is simply not high enough to meet
ever yone’s desires. If you add up all the wants, you
quickly fi nd that there are simply not enough goods
and ser vices to satisfy even a small fraction of ever y-
one’s consumption desires. Our national output
would have to be many times larger before the aver-
age American could live at the level of the average
doctor or major-league baseball player. Moreover,
outside the United States, particularly in Africa, hun-
dreds of millions of people suffer from hunger and
material deprivation.
Given unlimited wants, it is important that an
economy make the best use of its limited resources.
That brings us to the critical notion of effi ciency.
Effi ciency denotes the most effective use of a soci-
ety’s resources in satisfying people’s wants and needs.
By contrast, consider an economy with unchecked
monopolies or unhealthy pollution or government
corruption. Such an economy may produce less than
would be possible without these factors, or it may pro-
duce a distorted bundle of goods that leaves consum-
ers worse off than they other wise could be — either
situation is an ineffi cient allocation of resources.
Economic effi ciency requires that an economy
produce the highest combination of quantity and
quality of goods and ser vices given its technology
and scarce resources. An economy is producing effi -
ciently when no individual’s economic welfare can be
improved unless someone else is made worse off.
The essence of economics is to acknowledge the
reality of scarcity and then fi gure out how to organize

T H E L O G I C O F E C O N O M I C S 5
society in a way which produces the most effi cient
use of resources. That is where economics makes its
unique c ontribution.
Microeconomics a nd Ma croeconomics
Economics is today divided into two major subfi elds,
microeconomics and macroeconomics. Adam Smith
is usually considered the founder of microeconomics ,
the branch of economics which today is concerned
with the behavior of individual entities such as mar-
kets, fi rms, and households. In The Wealth of Nations
(1776), Smith considered how individual prices are
set, studied the determination of prices of land,
labor, and capital, and inquired into the strengths
and weaknesses of the market mechanism. Most
important, he identifi ed the remarkable effi ciency
properties of markets and explained how the self-
interest of individuals working through the competi-
tive market can produce a societal economic benefi t.
Microeconomics today has moved beyond the early
concerns to include the study of monopoly, the role
of international trade, fi nance, and many other vital
subjects.
The other major branch of our subject is macro-
economics , which is concerned with the overall per-
formance of the economy. Macroeconomics did not
even exist in its modern form until 1936, when John
Maynard Keynes published his revolutionar y General
Theor y of Employment, Interest and Money. At the time,
England and the United States were still stuck in the
Great Depression of the 1930s, with over one-quarter
of the American labor force unemployed. In his new
theor y Keynes developed an analysis of what causes
business cycles, with alternating spells of high unem-
ployment and high infl ation. Today, macroeconom-
ics examines a wide variety of areas, such as how total
investment and consumption are determined, how
central banks manage money and interest rates, what
causes international fi nancial crises, and why some
nations grow rapidly while others stagnate. Although
macroeconomics has progressed far since his fi rst
insights, the issues addressed by Keynes still defi ne
the study of macroeconomics today.
THE LOGIC OF ECONOMICS
Economic life is an enormously complicated hive
of activity, with people buying, selling, bargaining,
investing, and persuading. The ultimate purpose of
economic science and of this text is to understand
this complex undertaking. How do economists go
about their task?
Economists use the scientifi c approach to under-
stand economic life. This involves observing economic
affairs and drawing upon statistics and the historical
record. For complex phenomena like the impacts of
budget defi cits or the causes of infl ation, historical
research has provided a rich mine of insights.
Often, economics relies upon analyses and the-
ories. Theoretical approaches allow economists to
make broad generalizations, such as those concern-
ing the advantages of international trade and special-
ization or the disadvantages of tariffs and quotas.
In addition, economists have developed a special-
ized technique known as econometrics, which applies
the tools of statistics to economic problems. Using
econometrics, economists can sift through moun-
tains of data to extract simple relationships.
Budding economists must also be alert to com-
mon fallacies in economic reasoning. Because eco-
nomic relationships are often complex, involving
many different variables, it is easy to become con-
fused about the exact reason behind events or the
impact of policies on the economy. The following are
some of the common fallacies encountered in eco-
nomic reasoning:
●
The post hoc fallacy. The fi rst fallacy involves the
inference of causality. The post hoc fallacy occurs
when we assume that, because one event occur red
before another event, the fi rst event caused the second
event.
2
An example of this syndrome occurred in
the Great Depression of the 1930s in the United
States. Some people had obser ved that periods of
business expansion were preceded or accompa-
nied by rising prices. From this, they concluded
that the appropriate remedy for depression was
to raise wages and prices. This idea led to a host
of legislation and regulations to prop up wages
and prices in an ineffi cient manner. Did these
measures promote economic recover y? Almost
surely not. Indeed, they probably slowed recov-
er y, which did not occur until total spending
began to rise as the government increased mili-
tar y spending in preparation for World War II.
2
“Post hoc” is shorthand for post hoc, ergo propter hoc. Translated
from the Latin, the full expression means “after this, there-
fore necessarily because of this.”

6 C H A P T E R 1 • T H E C E N T R A L C O N C E P T S O F E C O N O M I C S
individuals. Often the behavior of the aggregate
looks ver y different from the behavior of individ-
ual people.
We mention these fallacies only briefl y in this
introduction. Later, as we introduce the tools of
economics, we will provide examples of how inatten-
tion to the logic of economics can lead to false and
sometimes costly errors. When you reach the end of
this book, you can look back to see why each of these
paradoxical examples is true.
Positive Economics versus Normative
Economics
When considering economic issues, we
must carefully distinguish questions of fact
from questions of fairness. Positive economics describes
the facts of an economy, while normative economics
involves value judgments.
Positive economics deals with questions such as:
Why do doctors earn more than janitors? Did the Nor th
American Free Trade Agreement (NAFTA) raise or lower
the incomes of most Americans? Do higher interest rates
slow the economy and lower infl ation? Although these may
be diffi cult questions to answer, they can all be resolved
by reference to analysis and empirical evidence . That puts
them in the realm of positive economics.
Normative economics involves ethical precepts
and norms of fairness. Should unemployment be raised
to ensure that price infl ation does not become too rapid?
Should the United States negotiate fur ther agreements to
lower tariffs on impor ts? Has the distribution of income
in the United States become too unequal? There are no
right or wrong answers to these questions because they
involve ethics and values rather than facts. While economic
analysis can inform these debates by examining the likely
consequences of alternative policies, the answers can be
resolved only by discussions and debates over society’s
fundamental values.
COOL HEA DS AT THE S ERVICE
OF WARM HEA RTS
Economics has, over the last centur y, grown from
a tiny acorn into a mighty oak. Under its spread-
ing branches we fi nd explanations of the gains
from international trade, advice on how to reduce
●
Failure to hold other things constant. A second pit-
fall is failure to hold other things constant when
thinking about an issue. For example, we might
want to know whether raising tax rates will raise
or lower tax revenues. Some people have put
forth the seductive argument that we can eat
our fi scal cake and have it too. They argue that
cutting tax rates will at the same time raise gov-
ernment revenues and lower the budget defi cit.
They point to the Kennedy-Johnson tax cuts of
1964, which lowered tax rates sharply and were
followed by an increase in government revenues
in 1965. Hence, they argue, lower tax rates pro-
duce h igher reven ues.

Why is this reasoning fallacious? The argu-
ment assumes that other things were constant—
in particular, it overlooked the growth in the
overall economy from 1964 to 1965. Because
people’s incomes grew during that period, total
tax revenues grew even though tax rates were
lower. Careful econometric studies indicate that
total tax revenues would have been even higher in
1965 if tax rates had been held at the same level
as in 1964. Hence, this analysis fails to hold other
things constant in making the calculations.

Remember to hold other things constant when you
are analyzing the impact of a variable on the economic
system.
●
The fallacy of composition. Sometimes we assume
that what holds true for part of a system also
holds true for the whole. In economics, however,
we often fi nd that the whole is different from the
sum of the parts. When you assume that what is tr ue
for the par t is also tr ue for the whole, you are commit-
ting the fallacy of composition.

Here are some true statements that might
surprise you if you ignored the fallacy of composi-
tion: (1) If one farmer has a bumper crop, she has
a higher income; if all farmers produce a record
crop, farm incomes will fall. (2) If one person
receives a great deal more money, that person will
be better off; if everyone receives a great deal more
money, the society is likely to be worse off. (3) If a
high tariff is put on a product such as shoes or steel,
the producers in that industry are likely to profi t; if
high tariffs are put on all products, the economic
welfare of the nation is likely to be worse off.

These examples contain no tricks or magic.
Rather, they are the results of systems of interacting

C O O L H E A D S AT T H E S E R V I C E O F WA R M H E A RT S 7
maintain a healthy economy, governments must pre-
ser ve incentives for people to work and to save.
Societies can support the unemployed for a while,
but when unemployment insurance pays too much
for too long, people may come to depend upon the
government and stop looking for work. If they begin
to believe that the government owes them a living,
this may dull the cutting edge of enterprise. Just
because government programs pursue lofty goals
cannot exempt them from careful scrutiny and effi -
cient management.
Society must strive to combine the discipline of the
marketplace with the compassion of social programs.
By using cool heads to inform warm hearts, economic
science can do its part in fi nding the appropriate bal-
ance for an effi cient, prosperous, and just society.
B . T H E T H R E E P R O B L E M S O F
E C O N O M I C O R G A N I Z AT I O N
Ever y human society—whether it is an advanced
industrial nation, a centrally planned economy, or
an isolated tribal nation—must confront and resolve
three fundamental economic problems. Ever y soci-
ety must have a way of determining what commodi-
ties are produced, how these goods are made, and for
whom they are produced.
Indeed, these three fundamental questions of
economic organization— what, how, and for whom —
are as crucial today as they were at the dawn of human
civilization. Let’s look more closely at them:
●
What commodities are produced and in what
quantities? A society must determine how much
of each of the many possible goods and ser vices
it will make and when they will be produced. Will
we produce pizzas or shirts today? A few high-
quality shirts or many cheap shirts? Will we use
scarce resources to produce many consumption
goods (like pizzas)? Or will we produce fewer
consumption goods and more investment goods
(like pizza-making machines), which will boost
production and consumption tomorrow?
●
How are goods produced? A society must deter-
mine who will do the production, with what
resources, and what production techniques they
will use. Who farms and who teaches? Is electricity
unemployment and infl ation, formulas for investing
your retirement funds, and proposals to auction lim-
ited carbon dioxide emissions permits to help slow
global warming. Throughout the world, economists
are laboring to collect data and improve our under-
standing of economic trends.
You might well ask, What is the purpose of this army
of economists measuring, analyzing, and calculating?
The ultimate goal of economic science is to improve the living
conditions of people in their ever yday lives. Increasing the
gross domestic product is not just a numbers game.
Higher incomes mean good food, warm houses, and
hot water. They mean safe drinking water and inocu-
lations against the perennial plagues of humanity.
Higher incomes produce more than food and
shelter. Rich countries have the resources to build
schools so that young people can learn to read and
develop the skills necessar y to use modern machin-
er y and computers. As incomes rise further, nations
can afford scientifi c research to determine agricul-
tural techniques appropriate for a countr y’s climate
and soils or to develop vaccines against local diseases.
With the resources freed up by economic growth, peo-
ple have free time for artistic pursuits, such as poetr y
and music, and the population has the leisure time
to read, to listen, and to per form. Although there is
no single pattern of economic development, and cul-
tures differ around the world, freedom from hunger,
disease, and the elements is a universal human goal.
But centuries of human histor y also show that
warm hearts alone will not feed the hungr y or heal
the sick. A free and effi cient market will not neces-
sarily produce a distribution of income that is socially
acceptable. Determining the best route to economic
progress or an equitable distribution of society’s
output requires cool heads that objectively weigh
the costs and benefi ts of different approaches, tr y-
ing as hard as humanly possible to keep the analysis
free from the taint of wishful thinking. Sometimes,
economic progress will require shutting down an
outmoded factor y. Sometimes, as when centrally
planned countries adopted market principles, things
get worse before they get better. Choices are particu-
larly diffi cult in the fi eld of health care, where lim-
ited resources literally involve life and death.
You may have heard the saying, “From each
according to his ability, to each according to his
need.” Governments have learned that no society
can long operate solely on this utopian principle. To

8 C H A P T E R 1 • T H E C E N T R A L C O N C E P T S O F E C O N O M I C S
such as the one which operated in the Soviet Union
during most of the twentieth centur y, the govern-
ment owns most of the means of production (land
and capital); it also owns and directs the operations
of enterprises in most industries; it is the employer
of most workers and tells them how to do their jobs;
and it decides how the output of the society is to be
divided among different goods and ser vices. In short,
in a command economy, the government answers the
major economic questions through its ownership of
resources and its power to enforce decisions.
No contemporar y society falls completely into
either of these polar categories. Rather, all societies
are mixed economies , with elements of market and
command.
Economic life is organized either through hierar-
chical command or decentralized voluntar y markets.
Today most decisions in the United States and other
high-income economies are made in the market-
place. But the government plays an important role
in overseeing the functioning of the market; govern-
ments pass laws that regulate economic life, produce
educational and police ser vices, and control pollu-
tion. Most societies today operate mixed economies.
C . S O C I E T Y ’ S T E C H N O L O G I C A L
P O S S I B I L I T I E S
Ever y gun that is made, ever y warship launched,
ever y rocket fi red signifi es, in the fi nal sense, a
theft from those who hunger and are not fed.
President Dwight D. Eisenhower
Each economy has a stock of limited resources—
labor, technical knowledge, factories and tools, land,
energy. In deciding what and how things should be
produced, the economy is in reality deciding how to
allocate its resources among the thousands of differ-
ent possible commodities and ser vices. How much
land will go into growing wheat? Or into housing the
population? How many factories will produce com-
puters? How many will make pizzas? How many chil-
dren will grow up to play professional sports or to be
professional economists or to program computers?
Faced with the undeniable fact that goods are
scarce relative to wants, an economy must decide
generated from oil, from coal, or from the sun?
Will factories be run by people or robots?
●
For whom are goods produced? Who gets to eat
the fruit of economic activity? Is the distribution
of income and wealth fair and equitable? How
is the national product divided among different
households? Are many people poor and a few
rich? Do high incomes go to teachers or athletes
or autoworkers or venture capitalists? Will soci-
ety provide minimal consumption to the poor, or
must people work if they are to eat?
MARKET, COMMAND, AND MIXED
ECONOMIES
What are the different ways that a society can answer
the questions of what, how, and for whom? Different
societies are organized through alternative economic sys-
tems, and economics studies the various mechanisms
that a society can use to allocate its scarce resources.
We generally distinguish two fundamentally differ-
ent ways of organizing an economy. At one extreme,
government makes most economic decisions, with
those on top of the hierarchy giving economic com-
mands to those further down the ladder. At the other
extreme, decisions are made in markets, where indi-
viduals or enterprises voluntarily agree to exchange
goods and ser vices, usually through payments of
money. Let’s briefl y examine each of these two forms
of economic organization.
In the United States, and increasingly around the
world, most economic questions are settled by the
market mechanism. Hence their economic systems
are called market economies. A market economy is
one in which individuals and private fi rms make the
major decisions about production and consumption.
A system of prices, of markets, of profi ts and losses, of
incentives and rewards determines what, how, and for
whom. Firms produce the commodities that yield the
highest profi ts (the what ) by the techniques of pro-
duction that are least costly (the how ). Consumption
is determined by individuals’ decisions about how to
spend the wages and property incomes generated by
their labor and property ownership (the for whom ).
The extreme case of a market economy, in which the
government keeps its hands off economic decisions,
is called a laissez-faire ec onomy.
By contrast, a command economy is one in which
the government makes all important decisions about
production and distribution. In a command economy,

T H E P R O D U C T I O N - P O S S I B I L I T Y F R O N T I E R 9
Restating the three economic problems in these
terms, society must decide (1) what outputs to pro-
duce, and in what quantity; (2) how, or with what
inputs and techniques, to produce the desired out-
puts; and (3) for whom the outputs should be pro-
duced an d d istributed.
THE P RODUCTION-POSSIBILITY
FRONTIER
We learn early in life that we can’t have ever ything.
“You can have chocolate or vanilla ice cream. No,
not both,” we might hear. Similarly, the consump-
tion opportunities of countries are limited by the
resources and the technologies available to them.
The need to choose among limited opportunities
is dramatized during wartime. In debating whether
the United States should invade Iraq in 2003, people
wanted to know how much the war would cost. The
administration said it would cost only $50 billion,
while some economists said it might cost as much as
$2000 billion. These are not just mountains of dollar
bills. These numbers represent resources diverted
from other purchases. As the numbers began to
climb, people naturally asked, Why are we policing
Baghdad rather than New York, or repairing the
electrical system in the Middle East rather than in
the U.S. Midwest? People understand, as did former
general and president Eisenhower, that when output
is devoted to militar y tasks, there is less available for
civilian consumption and investment.
Let us dramatize this choice by considering an
economy which produces only two economic goods,
guns and butter. The guns, of course, represent
militar y spending, and the butter stands for civil-
ian spending. Suppose that our economy decides to
throw all its energy into producing the civilian good,
butter. There is a maximum amount of butter that
can be produced per year. The maximal amount of
butter depends on the quantity and quality of the
economy’s resources and the productive effi ciency
with which they are used. Suppose 5 million pounds
of butter is the maximum amount that can be pro-
duced with the existing technology and resources.
At the other extreme, imagine that all resources
are instead devoted to the production of guns. Again,
because of resource limitations, the economy can pro-
duce only a limited quantity of guns. For this exam-
ple, assume that the economy can produce 15,000
guns of a certain kind if no butter is produced.
how to cope with limited resources. It must choose
among different potential bundles of goods (the
what ), select from different techniques of production
(the how ), and decide in the end who will consume
the goods (the for whom ).
INPUTS AND OU TPUTS
To answer these three questions, ever y society must
make choices about the economy’s inputs and out-
puts. Inputs are commodities or ser vices that are
used to produce goods and ser vices. An economy
uses its existing technology to combine inputs to pro-
duce outputs. Outputs are the various useful goods or
ser vices that result from the production process and
are either consumed or employed in further produc-
tion. Consider the “production” of pizza. We say that
the eggs, fl our, heat, pizza oven, and chef ’s skilled
labor are the inputs. The tasty pizza is the output. In
education, the inputs are the time of the faculty and
students, the laboratories and classrooms, the text-
books, and so on, while the outputs are informed,
productive, and well-paid citizens.
Another term for inputs is factors of production .
These can be classifi ed into three broad categories:
land, labor, and capital.
●
Land —or, more generally, natural resources—
represents the gift of nature to our societies. It
consists of the land used for farming or for under-
pinning houses, factories, and roads; the energy
resources that fuel our cars and heat our homes;
and the nonenergy resources like copper and
iron ore and sand. In today’s congested world,
we must broaden the scope of natural resources
to include our environmental resources, such as
clean air and drinkable water.
●
L a b o r c o n s i s t s o f t h e h u m a n t i m e s p e n t i n
production—working in automobile factories,
writing software, teaching school, or baking piz-
zas. Thousands of occupations and tasks, at all
skill levels, are per formed by labor. It is at once
the most familiar and the most crucial input for
an advanced industrial economy.
●
Capital resources form the durable goods of an
economy, produced in order to produce yet other
goods. Capital goods include machines, roads, com-
puters, software, trucks, steel mills, automobiles,
washing machines, and buildings. As we will see
later, the accumulation of specialized capital goods
is essential to the task of economic development.

10 C H A P T E R 1 • T H E C E N T R A L C O N C E P T S O F E C O N O M I C S
combinations of guns and butter, we have the con-
tinuous green cur ve shown as the production-possibility
frontier, or PPF , in Figure 1-2.
The production-possibility frontier (or PPF ) shows
the maximum quantity of goods that can be effi ciently
produced by an economy, given its technological
knowledge and the quantity of available inputs.
Applying t he PPF to Society’s Choices
The PPF is the menu of choices that an economy has
to choose from. Figure 1-2 shows a choice between
guns and butter, but this concept can be applied to
a broad range of economic choices. Thus the more
resources the government uses to spend on public
highways, the less will be left to produce private goods
like houses; the more we choose to consume of food,
the less we can consume of clothing; the more an
economy consumes today, the less can be its produc-
tion of capital goods to turn out more consumption
goods in the future.
The graphs in Figures 1-3 to 1-5 present some
important applications of PPF s. Figure 1-3 shows the
effect of economic growth on a countr y’s produc-
tion possibilities. An increase in inputs, or improved
technological knowledge, enables a countr y to pro-
duce more of all goods and ser vices, thus shifting
These are two extreme possibilities. In between
are many others. If we are willing to give up some but-
ter, we can have some guns. If we are willing to give
up still more butter, we can have still more guns.
A schedule of possibilities is given in Table 1-1.
Combination F shows the extreme, where all but-
ter and no guns are produced, while A depicts the
opposite extreme, where all resources go into guns.
In between—at E, D, C, and B —increasing amounts
of butter are given up in return for more guns.
How, you might well ask, can a nation turn butter
into guns? Butter is transformed into guns not physi-
cally but by the alchemy of diverting the economy’s
resources from one use to the other.
We can represent our economy’s production
possibilities more vividly in the diagram shown in
Figure 1-1. This diagram measures butter along the
horizontal axis and guns along the vertical one. (If
you are unsure about the different kinds of graphs
or about how to turn a table into a graph, consult
the appendix to this chapter.) We plot point F in Fig-
ure 1-1 from the data in Table 1-1 by counting over
5 butter units to the right on the horizontal axis and
going up 0 gun units on the vertical axis; similarly, E
is obtained by going 4 butter units to the right and
going up 5 gun units; and fi nally, we get A by going
over 0 butter units and up 15 gun units.
If we fi ll in all intermediate positions with new
green-colored points representing all the different
Alternative Production Possibilities
Possibilities
Butter
(millions of pounds)
Guns
(thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
TABLE 1-1. Limitation of Scarce Resources Implies the
Guns-Butter Tradeoff
Scarce inputs and technology imply that the production
of guns and butter is limited. As we go from A to B . . .
to F, we are transferring labor, machines, and land from
the gun industr y to butter and can thereby increase butter
production.
Guns (thousands)
15
12
9
6
3
1 2 3 4 5
Butter (millions of pounds)
A
B
C
D
E
F
0
FIGURE 1-1. The Production Possibilities in a Graph
This fi gure displays the alternative combinations of pro-
duction pairs from Table 1-1.

T H E P R O D U C T I O N - P O S S I B I L I T Y F R O N T I E R 11
The Production-Possibility Frontier
Guns (thousands)
15
12
9
6
3
0 1 2 3 4 5
Butter (millions of pounds)
A
B
C
D
I
E
F
G
B
U
FIGURE 1-2. A Smooth Cur ve Connects the Plotted Points
of the Numerical Production Possibilities
This frontier shows the schedule along which society can choose
to substitute guns for butter. It assumes a given state of technol-
ogy and a given quantity of inputs. Points outside the frontier
(such as point I ) are infeasible or unattainable. Any point inside
the cur ve, such as U, indicates that the economy has not attained
productive effi ciency, as is the case, for instance, when unem-
ployment is high during severe business cycles.
L
N e c e s s i t i e s ( f o o d , . . . )
L
(a) Poor Nation
N e c e s s i t i e s ( f o o d , . . . )
A
F
B
F
(b) High-Income Nation
L u x u r i e s ( c a r s , s t e r e o s , . . . )
A
L u x u r i e s ( c a r s , s t e r e o s , . . . )
FIGURE 1-3. Economic Growth Shifts the PPF Outward
(a) Before development, the nation is poor. It must devote almost all its resources to food
and enjoys few comforts. (b) Growth of inputs and technological change shift out the PPF.
With economic growth, a nation moves from A to B, expanding its food consumption little
compared with its increased consumption of luxuries. It can increase its consumption of
both goods if it desires.

12 C H A P T E R 1 • T H E C E N T R A L C O N C E P T S O F E C O N O M I C S
C
A
3
A
2
A
1
Current consumption0
Capital investment
(a) Today’s Choices (b) Future Consequences
B
3
B
2
B
1
Future consumption0
Country 1
Country 2
Country 3
II
C
Capital investment
FIGURE 1-5. Investment for Future Consumption Requires Sacrifi cing Cur rent Consumption
A nation can produce either current-consumption goods (pizzas and concerts) or invest-
ment goods (pizza ovens and concert halls). (a) Three countries start out even. They have
the same PPF, shown in the panel on the left, but they have different investment rates.
Countr y 1 does not invest for the future and remains at A
1
(merely replacing machines).
Countr y 2 abstains modestly from consumption and invests at A
2
. Countr y 3 sacrifi ces a
great deal of current consumption and invests heavily. (b) In the following years, countries
that invest more heavily forge ahead. Thus thrifty Countr y 3 has shifted its PPF far out,
while Countr y 1’s PPF has not moved at all. Countries that invest heavily can have both
higher investment and consumption in the future.
(a) Frontier Society (b) Urban Society
P r i v a t e g o o d s ( f o o d , . . . )
Pr
P u
P u b l i c g o o d s ( c l e a n a i r, . . . )
A
B
C
Pr
P u
A
P r i v a t e g o o d s ( f o o d , . . . )
P u b l i c g o o d s ( c l e a n a i r, . . . )
FIGURE 1-4. Economies Must Choose between Public Goods and Private Goods
(a) A poor frontier society lives from hand to mouth, with little left over for public goods
like clean air or public health. (b) A modern urbanized economy is more prosperous and
chooses to spend more of its higher income on public goods and government ser vices
(roads, environmental protection, and education).

T H E P R O D U C T I O N - P O S S I B I L I T Y F R O N T I E R 13
you decide whether to study economics, buy a car, or
go to college, you will give something up—there will
be a forgone opportunity. The next-best good that is
forgone represents the opportunity cost of a decision.
The concept of opportunity cost can be illus-
trated using the PPF. Examine the frontier in Fig-
ure 1-2, which shows the tradeoff between guns and
butter. Suppose the countr y decides to increase its
gun purchases from 9000 guns at D to 12,000 units at
C. What is the opportunity cost of this decision? You
might calculate the cost in dollar terms. But in eco-
nomics we always need to “pierce the veil” of money
to examine the real impacts of alternative decisions.
On the most fundamental level, the opportunity cost
of moving from D to C is the butter that must be
given up to produce the extra guns. In this example,
the opportunity cost of the 3000 extra guns is 1 mil-
lion pounds of butter forgone.
Or consider the real-world example of the cost of
opening a gold mine near Yellowstone National Park.
The developer argues that the mine will have but a
small cost because Yellowstone’s revenues will hardly
be affected. But an economist would answer that the
dollar receipts are too narrow a measure of cost. We
should ask whether the unique and precious qualities
of Yellowstone might be degraded if a gold mine were
to operate, with the accompanying noise, water and
air pollution, and decline in amenity values for visitors.
While the dollar cost might be small, the opportunity
cost in lost wilderness values might be large indeed.
In a world of scarcity, choosing one thing means
giving up something else. The oppor tunity cost of a
decision is the value of the good or ser vice forgone.
Effi ciency
Economists devote much of their study to exploring
the effi ciency of different kinds of market structures,
incentives, and taxes. Remember that effi ciency
means that the economy’s resources are being used
as effectively as possible to satisfy people’s desires.
One important aspect of overall economic effi ciency
is productive effi ciency, which is easily pictured in
terms of the PPF. Effi ciency means that the economy
is on the frontier rather than inside the production-
possibility frontier.
Productive effi ciency occurs when an economy
cannot produce more of one good without produc-
ing less of another good; this implies that the econ-
omy is on its production-possibility frontier.
out the PPF . The fi gure also illustrates that poor
countries must devote most of their resources to
food production while rich countries can afford
more luxuries as productive potential increases.
Figure 1-4 depicts the choice between private
goods (bought at a price) and public goods (paid for
by taxes). Poor countries can afford little of public
goods like public health and primar y education. But
with economic growth, public goods as well as envi-
ronmental quality take a larger share of output.
Figure 1-5 portrays an economy’s choice between
( a ) current-consumption goods and ( b ) investment
in capital goods (machines, factories, etc.). By sac-
rifi cing current consumption and producing more
capital goods, a nation’s economy can grow more
rapidly, making possible more of both goods (con-
sumption and investment) in the future.
Be N ot Time’s F ool
The great American poet Carl Sandburg
wrote , “Time is the coin of your life . It is
the only coin you have , and only you can
determine how it will be spent. Be careful lest you let other
people spend it for you.” This emphasizes that one of the
most impor tant decisions that people confront is how to
use their time .
We can illustrate this choice using the production-
possibility frontier. For example , as a student, you might
have 10 hours to study for upcoming tests in both eco-
nomics and histor y. If you study only histor y, you will get
a high grade there and do poorly in economics, and vice
versa. Treating the grades on the two tests as the “output”
of your studying, sketch out the PPF for grades, given your
limited time resources. Alternatively, if the two student
commodities are “grades” and “fun,” how would you draw
this PPF? Where are you on this frontier? Where are your
lazy friends?
Recently, the United States collected data on how
Americans use their time . Keep a diar y of your time use
for two or three days. Then go to www.bls .gov/tus/home .htm
and compare how you spend your time with the results
for o ther pe ople .
Oppor tunity C osts
When Robert Frost wrote of the road not taken, he
pointed to one of the deepest concepts of economics,
opportunity cost. Because our resources are limited, we
must decide how to allocate our incomes or time. When

14 C H A P T E R 1 • T H E C E N T R A L C O N C E P T S O F E C O N O M I C S
not suddenly declined during those years. Rather,
reduced overall spending pushed the economy tem-
porarily inside its PPF for that period.
A different kind of ineffi ciency occurs when
markets are failing to refl ect true scarcities, as with
environmental degradation. Suppose that an unreg-
ulated business decides to dump chemicals in a river,
killing fi sh and ruining recreational opportunities.
The fi rm is not necessarily doing this because it has
evil intent. Rather, the prices in the marketplace do
not refl ect true social priorities—the price on pol-
luting in an unregulated environment is zero rather
than the true opportunity cost in terms of lost fi sh
and recreation.
Environmental degradation can also push the
economy inside its PPF. The situation is illustrated in
Figure 1-4(b). Because businesses do not face correct
prices, the economy moves from point B to point C.
Private goods are increased, but public goods (like
clean air and water) are decreased. Effi cient regula-
tion of the environment could move northeast back
to the dashed effi cient frontier.
As we close this introductor y chapter, let us return
briefl y to our opening theme, Why study economics?
Perhaps the best answer to the question is a famous
one given by Keynes in the fi nal lines of The General
Theor y of Employment, Interest and Money:
The ideas of economists and political philosophers,
both when they are right and when they are wrong,
are more power ful than is commonly understood.
Indeed the world is ruled by little else. Practical men,
who believe themselves to be quite exempt from any
intellectual infl uences, are usually the slaves of some
defunct economist. Madmen in authority, who hear
voices in the air, are distilling their frenzy from some
academic scribbler of a few years back. I am sure that
the power of vested interests is vastly exaggerated
compared with the gradual encroachment of ideas.
Not, indeed, immediately, but after a certain inter val;
for in the fi eld of economic and political philosophy
there are not many who are infl uenced by new theo-
ries after they are twenty-fi ve or thirty years of age, so
that the ideas which civil ser vants and politicians and
even agitators apply to current events are not likely to
be the newest. But, soon or late, it is ideas, not vested
interests, which are dangerous for good or evil.
To understand how the power ful ideas of econom-
ics apply to the central issues of human societies—
ultimately, t his is wh y we s tudy ec onomics.
Let’s see why productive effi ciency requires being
on the PPF. Start in the situation shown by point D
in Figure 1-2. Say the market calls for another mil-
lion pounds of butter. If we ignored the constraint
shown by the PPF , we might think it possible to pro-
duce more butter without reducing gun production,
say, by moving to point I , to the right of point D.
But point I is outside the frontier, in the “infeasible”
region. Starting from D , we cannot get more butter
without giving up some guns. Hence point D displays
productive effi ciency, while point I is infeasible.
One further point about productive effi ciency
can be illustrated using the PPF: Being on the PPF
means that producing more of one good inevitably
requires sacrifi cing other goods. When we produce
more guns, we are substituting guns for butter. Substi-
tution is the law of life in a full-employment economy,
and the production-possibility frontier depicts the
menu of society’s choices.
Wa s t e f ro m B u s i n e s s C y c l e s a n d E nv i ro n m e n t a l
D e g ra d a t i o n . E c o n o m i e s s u f f e r f r o m i n e f fi c i e n t
use of resources for many reasons. When there are
unemployed resources, the economy is not on its
production-possibility frontier at all but, rather,
somewhere inside it. In Figure 1-2, point U represents
a point inside the PPF; at U , society is producing only
2 units of butter and 6 units of guns. Some resources
are unemployed, and by putting them to work, we
can increase our output of all goods; the economy
can move from U to D , producing more butter and
more guns, thus improving the economy’s effi ciency.
We can have our guns and eat more butter too.
Historically, one source of ineffi ciency occurs
during business cycles. From 1929 to 1933, in the
Great Depression, the total output produced in the
American economy declined by 25 percent. The econ-
omy did not suffer from an inward shift of the PPF
because of technological forgetting. Rather, panics,
bank failures, bankruptcies, and reduced spending
moved the economy inside its PPF. A decade later, the
militar y expenditures for World War II expanded
demand, and output grew rapidly as the economy
pushed back to the PPF.
S i m i l a r s i t u a t i o n s o c c u r p e r i o d i c a l l y d u r i n g
business-cycle recessions. The latest growth slowdown
occurred in 2007–2008 when problems in housing
and credit markets spread through the entire econ-
omy. The economy’s underlying productivity had

C O N C E P T S F O R R E V I E W 15
A. Why Study Economics?
1. What is economics? Economics is the study of how
societies choose to use scarce productive resources
that have alternative uses, to produce commodities of
various kinds, and to distribute them among different
groups. We study economics to understand not only
the world we live in but also the many potential worlds
that reformers are constantly proposing to us.
2. Goods are scarce because people desire much more than
the economy can produce. Economic goods are scarce,
not free, and society must choose among the limited
goods that can be produced with its available resources.
3. Microeconomics is concerned with the behavior of
individual entities such as markets, fi rms, and house-
holds. Macroeconomics views the per formance of the
economy as a whole. Through all economics, beware
of the fallacy of composition and the post hoc fallacy,
and remember to keep other things constant.
B. The Three Problems of Economic Organization
4. Ever y society must answer three fundamental ques-
tions: what, how, and for whom? What kinds and quanti-
ties are produced among the wide range of all possible
goods and ser vices? How are resources used in produc-
ing these goods? And for whom are the goods produced
(that is, what is the distribution of income and con-
sumption among different individuals and classes)?
5. Societies answer these questions in different ways. The
most important forms of economic organization today
are command and market. The command economy is
directed by centralized government control; a market
economy is guided by an informal system of prices
and profi ts in which most decisions are made by pri-
vate individuals and fi rms. All societies have different
combinations of command and market; all societies
are mixed economies.
C . Society’s Technological Possibilities
6. With given resources and technology, the production
choices between two goods such as butter and guns can
be summarized in the production-possibility frontier ( PPF ).
The PPF shows how the production of one good (such
as guns) is traded off against the production of another
good (such as butter). In a world of scarcity, choosing
one thing means giving up something else. The value
of the good or ser vice forgone is its opportunity cost.
7. Productive effi ciency occurs when production of one
good cannot be increased without curtailing produc-
tion of another good. This is illustrated by the PPF.
When an economy is on its PPF , it can produce more
of one good only by producing less of another good.
8. Production-possibility frontiers illustrate many basic
economic processes: how economic growth pushes out
the frontier, how a nation chooses relatively less food
and other necessities as it develops, how a countr y
chooses between private goods and public goods, and
how societies choose between consumption goods and
capital goods that enhance future consumption.
9. S o c i e t i e s a r e s o m e t i m e s i n s i d e t h e i r p r o d u c t i o n -
possibility frontier because of macroeconomic business
cycles or microeconomic market failures. When credit
conditions are tight or spending suddenly declines, a
society moves inside its PPF in recessions; this occurs
because of macroeconomic rigidities, not because of
technological forgetting. A society can also be inside
its PPF if markets fail because prices do not refl ect
social priorities, such as with environmental degrada-
tion from air and water pollution.
S U M M A RY
C O N C E P T S F O R R E V I E W
Fundamental Conce pts
scarcity and effi ciency
free goods vs. economic goods
macroeconomics and microeconomics
normative vs. positive ec onomics
fallacy of composition, post hoc fallacy
“keep other things c onstant”
Key Problems of Economic
Organization
what, how, and for whom
alternative economic systems:
command vs. market
laissez-faire
mixed economies
Choice among Production
Possibilities
inputs and outputs
production-possibility frontier ( PPF )
productive effi ciency and ineffi ciency
opportunity cost

16 C H A P T E R 1 • T H E C E N T R A L C O N C E P T S O F E C O N O M I C S
F U R T H E R R E A D I N G A N D I N T E R N E T W E B S I T E S
Fur ther R eading
Robert Heilbroner, The Worldly Philosophers, 7th ed.
(Touchstone Books, 1999), provides a lively biography of
the great economists along with their ideas and impact.
The authoritative work on the histor y of economic analysis
is Joseph Schumpeter, Histor y of Economic Analysis (McGraw-
Hill, New York, 1954).
Websites
O n e o f t h e g r e a t e s t b o o k s o f a l l e c o n o m i c s i s A d a m
S m i t h , T h e We a l t h o f N a t i o n s ( m a n y p u b l i s h e r s , 1 7 7 6 ) .
E v e r y e c o n o m i c s s t u d e n t s h o u l d r e a d a f e w p a g e s t o
g e t t h e fl a v o r o f h i s w r i t i n g . T h e W ea l t h o f N a t i o n s c a n b e
f o u n d a t w w w. b i b l i o m a n i a . c o m / N o n F i c t i o n / S m i t h / We a l t h /
i n d e x . h t m l .
Log on to one of the Internet reference sites for economics
such as Resources for Economists on the Internet (www.r fe.org ).
Browse through some of the sections to familiarize yourself
with the site. You might want to look up your college or
university, look at recent news in a newspaper or magazine,
or check some economic data.
Two sites for excellent analyses of public policy issues in
economics are those of the Brookings Institution (www.
brook.edu ) and of the American Enterprise Institute (www.
aei.or g ). Each of these publishes books and has policy
briefs online.
Q U E S T I O N S F O R D I S C U S S I O N
1. The great English economist Alfred Marshall (1842–
1924) invented many of the tools of modern econom-
ics, but he was most concerned with the application of
these tools to the problems of society. In his inaugural
lecture, Marshall wrote:
It will be my most cherished ambition to increase the
numbers who Cambridge University sends out into the
world with cool heads but warm hearts, willing to give
some of their best powers to grappling with the social suf-
fering around them; resolved not to rest content till they
have opened up to all the material means of a refi ned and
noble life. [ Memorials of Alfred Marshall, A. C. Pigou, ed.
(Macmillan and Co., London, 1925), p. 174, with minor
edits.]
Explain how the cool head might provide the essential
positive economic analysis to implement the norma-
tive value judgments of the warm heart. Do you agree
with Marshall’s view of the role of the teacher? Do you
accept his challenge?
2. The late George Stigler, an eminent conser vative Chi-
cago economist, wrote as follows:
No thoroughly egalitarian society has ever been able to
construct or maintain an effi cient and progressive eco-
nomic system. It has been universal experience that some
system of differential rewards is necessar y to stimulate
workers. [ The Theor y of Price, 3d ed. (Macmillan, New York,
1966), p . 1 9.]
Are these statements positive or normative economics?
Discuss Stigler’s view in light of Alfred Marshall’s quote
in question 1. Is there a confl ict?
3. Defi ne each of the following terms carefully and give
examples: PPF , scarcity, productive effi ciency, inputs,
outputs.
4. Read the special section on time use (p. 13). Then do
the exercise in the last paragraph. Construct a table
that compares your time use with that of the average
American. (For a graphical analysis, see question 5 of
the appendix to this chapter.)
5. Assume that Econoland produces haircuts and shirts
with inputs of labor. Econoland has 1000 hours of labor
available. A haircut requires ½ hour of labor, while a
shirt requires 5 hours of labor. Construct Econoland’s
production-possibility frontier.
6. Assume that scientifi c inventions have doubled the
productivity of society’s resources in butter production
without altering the productivity of gun manufacture.
Redraw society’s production-possibility frontier in Fig-
ure 1-2 to illustrate the new tradeoff.
7. Some scientists believe that we are rapidly depleting
our natural resources. Assume that there are only two
inputs (labor and natural resources) producing two
goods (concerts and gasoline) with no improvement
in society’s technology over time. Show what would
happen to the PPF over time as natural resources are
exhausted. How would invention and technological
improvement modify your answer? On the basis of this
example, explain why it is said that “economic growth
is a race between depletion and invention.”
8. Say that Diligent has 10 hours to study for upcoming
tests in economics and histor y. Draw a PPF for grades,
given Diligent’s limited time resources. If Diligent

Q U E S T I O N S F O R D I S C U S S I O N 17
studies ineffi ciently by listening to loud music and
chatting with friends, where will Diligent’s grade
“output” be relative to the PPF? What will happen to
the grade PPF if Diligent increases study inputs from
10 hours to 15 hours?
9. Consider t he PPF for clean air and automobile travel.
a. Explain why unregulated air pollution in automo-
biles would push a countr y inside its PPF. Illustrate
your discussion with a carefully drawn PPF for
these two goods.
b. Next explain how putting a price on harmful auto-
mobile emissions would increase both goods and
move the countr y to its PPF. Illustrate by showing
how correcting the “market failure” would change
the fi nal outcome.

18
Alternative Production Possibilities
Possibilities Food Machines
A 0 150
B 10 140
C 20 120
D 30 90
E 40 50
F 50 0
TABLE 1A-1. The Pairs of Possible Outputs of Food and
Machines
The table shows six potential pairs of outputs that can be
produced with the given resources of a countr y. The coun-
tr y can choose one of the six possible combinations.
Machines
150
120
90
60
30
10 20 30 40 50
Food
A
B
C
D
E
F
0
FIGURE 1A-1. Six Possible Pairs of Food-Machine
Production Levels
This fi gure shows the data of Table 1A-1 in graphical form.
The data are exactly the same, but the visual display pres-
ents the data more vividly.
Appendix 1
HOW TO READ GRAPHS
A picture is wor th a thousand words.
Chinese P roverb
Before you can master economics, you must have a
working knowledge of graphs. They are as indispens-
able to the economist as a hammer is to a carpenter.
So if you are not familiar with the use of diagrams,
invest some time in learning how to read them—it
will be time well spent.
What is a graph? It is a diagram showing how two
or more sets of data or variables are related to one
another. Graphs are essential in economics because,
among other reasons, they allow us to analyze eco-
nomic concepts and examine historical trends.
You will encounter many different kinds of graphs
in this book. Some graphs show how variables change
over time (see, for example, the inside of the front
cover); other graphs show the relationship between
different variables (such as the example we will turn
to in a moment). Each graph in the book will help
you understand an important economic relationship
or trend.
THE P RODUCTION-POSSIBILITY
FRONTIER
The fi rst graph that you encountered in this text
was the production-possibility frontier. As we showed
in the body of this chapter, the production-possibility
frontier, or PPF , represents the maximum amounts
of a pair of goods or ser vices that can both be pro-
duced with an economy’s given resources, assuming
that all resources are fully employed.
L e t ’s f o l l o w u p a n i m p o r t a n t a p p l i c a t i o n , t h a t o f
c h o o s i n g b e t w e e n f o o d a n d m a c h i n e s . T h e e s s e n -
t i a l d a t a f o r t h e P P F a r e s h o w n i n Ta b l e 1 A - 1 , w h i c h
i s v e r y m u c h l i k e t h e e x a m p l e i n Ta b l e 1 - 1 . R e c a l l
t h a t e a c h o f t h e p o s s i b i l i t i e s g i v e s o n e l e v e l o f f o o d
p r o d u c t i o n a n d o n e l e v e l o f m a c h i n e p r o d u c t i o n .
A s t h e q u a n t i t y o f f o o d p r o d u c e d i n c r e a s e s , t h e
p r o d u c t i o n o f m a c h i n e s f a l l s . T h u s , i f t h e e c o n -
o m y p r o d u c e d 1 0 u n i t s o f f o o d , i t c o u l d p r o d u c e
a m a x i m u m o f 1 4 0 m a c h i n e s , b u t w h e n t h e o u t -
p u t o f f o o d i s 2 0 u n i t s , o n l y 1 2 0 m a c h i n e s c a n b e
m a n u f a c t u r e d .
Production-Possibility G raph
The data shown in Table 1A-1 can also be presented
as a graph. To construct the graph, we represent each
of the table’s pairs of data by a single point on a two-
dimensional plane. Figure 1A-1 displays in a graph

T H E P R O D U C T I O N - P O S S I B I L I T Y F R O N T I E R 19
slope of the cur ve in Figure 1A-2 tells us the precise
change in machiner y production that would take
place. Slope is an exact numerical measure of the relation-
ship between the change in Y and the change in X .
We can use Figure 1A-3 to show how to measure
the slope of a straight line, say, the slope of the line
between points B and D. Think of the movement
from B to D as occurring in two stages. First comes a
horizontal movement from B to C indicating a 1-unit
increase in the X value (with no change in Y ). Sec-
ond comes a compensating vertical movement up or
down, shown as s in Figure 1A-3. (The movement of
1 horizontal unit is purely for convenience. The for-
mula holds for movements of any size.) The two-step
movement brings us from one point to another on
the straight line.
Because the BC movement is a 1-unit increase in X ,
the length of CD (shown as s in Figure 1A-3) indicates
the change in Y per unit change in X. On a graph,
this change is called the slope of the line ABDE.
Often slope is defi ned as “the rise over the run.”
The rise is the vertical distance; in Figure 1A-3, the
rise is the distance from C to D. The run is the hori-
zontal distance; it is BC in Figure 1A-3. The rise over
the run in this instance would be CD over BC. Thus
the relationship between the food and machine out-
puts shown in Table 1A-1. Each pair of numbers is
represented by a single point in the graph. Thus the
row labeled “A” in Table 1A-1 is graphed as point A in
Figure 1A-1, and similarly for points B , C , and so on.
In Figure 1A-1, the vertical line at left and the
horizontal line at the bottom correspond to the two
variables—food and machines. A variable is an item
of interest that can be defi ned and measured and
that takes on different values at different times or
places. Important variables studied in economics are
prices, quantities, hours of work, acres of land, dol-
lars of income, and so forth.
The horizontal line on a graph is referred to as
the horizontal axis, or sometimes the X axis. In Fig-
ure 1A-1, food output is measured on the black hori-
zontal axis. The vertical line is known as the ver tical
axis, or Y axis. In Figure 1A-1, it measures the num-
ber of machines produced. Point A on the vertical
axis stands for 150 machines. The lower left-hand
corner, where the two axes meet, is called the origin.
It signifi es 0 food and 0 machines in Figure 1A-1.
A Smo oth C ur ve
In most economic relationships, variables can change
by small amounts as well as by the large increments
shown in Figure 1A-1. We therefore generally draw
economic relationships as continuous cur ves. Fig-
ure 1A-2 shows the PPF as a smooth cur ve in which
the points from A to F have been connected.
By comparing Table 1A-1 and Figure 1A-2, we
can see why graphs are so often used in economics.
The smooth PPF refl ects the menu of choice for the
economy. It is a visual device for showing what types
of goods are available in what quantities. Your eye
can see at a glance the relationship between machine
and f ood p roduction.
Slopes a nd L ines
Figure 1A-2 depicts the relationship between maxi-
mum food and machine production. One important
way to describe the relationship between two vari-
ables is by the slope of the graph line.
The slope of a line represents the change in one
variable that occurs when another variable changes.
More precisely, it is the change in the variable Y on
the vertical axis per unit change in the variable X on
the horizontal axis. For example, in Figure 1A-2, say
that food production rose from 25 to 26 units. The
FIGURE 1A-2. A Production-Possibility Frontier
A smooth cur ve fi lls in between the plotted points, creating
the production-possibility frontier.
The Production-Possibility Frontier
Machines
150
120
90
60
30
0 10 20 30 40 50
Food
A
B
C
D
E
F

20 A P P E N D I X 1 • H O W T O R E A D G R A P H S
2
1
Y
(a) (b)
2
1
Y
X
1 2 3 4
X
0 10
2 3 4
FIGURE 1A-4. Steepness Is Not the
Same as Slope
Note that even though (a) looks steeper
than (b), they display the same relation-
ship. Both have a slope of ½, but the X
axis has been stretched out in (b).
Direct relationships occur when variables move
in the same direction (that is, they increase or
decrease together); inverse relationships occur
when the variables move in opposite directions
(that is, one increases as the other decreases).
Thus a negative slope indicates the X-Y relation
is inverse, as it is in Figure 1A-3( a ). Why? Because an
increase in X calls for a decrease in Y.
People sometimes confuse slope with the appear-
ance of steepness. This conclusion is often but not
always valid. The steepness depends on the scale of
the graph. Panels ( a ) and ( b ) in Figure 1A-4 both
the slope of BD is CD/BC. (For those who have stud-
ied calculus, question 7 at the end of this appendix
relates slopes to derivatives.)
The key points to understand about slopes are
the following:
1. The slope can be expressed as a number. It mea-
sures the change in Y per unit change in X , or
“the rise over the run.”
2. If the line is straight, its slope is constant
ever ywhere.
3. The slope of the line indicates whether the rela-
tionship between X and Y is direct or inverse.
Y
A
B
D
C1
s
E
Y
X
E
B
D
C1
s
A
X
(a) Inverse Relation (b) Direct Relation
FIGURE 1A-3. Calculation of Slope for Straight Lines
It is easy to calculate slopes for straight lines as “rise over run.” Thus in both (a) and (b), the
numerical value of the slope is rise/run ⫽ CD/BC ⫽ s/1 ⫽ s. Note that in (a), CD is negative,
indicating a negative slope, or an inverse relationship between X and Y.

T H E P R O D U C T I O N - P O S S I B I L I T Y F R O N T I E R 21
portray exactly the same relationship. But in ( b ), the
horizontal scale has been stretched out compared
with ( a ). If you calculate carefully, you will see that
the slopes are exactly the same (and are equal to ½).
Slope of a Cur ved Line
A cur ved or nonlinear line is one whose slope
changes. Sometimes we want to know the slope at a
given point, such as point B in Figure 1A-5. We see that
the slope at point B is positive, but it is not obvious
exactly how to calculate the slope.
To fi nd the slope of a smooth cur ved line at a
point, we calculate the slope of the straight line that
just touches, but does not cross, the cur ved line at
the point in question. Such a straight line is called a
tangent to the cur ved line. Put differently, the slope
of a cur ved line at a point is given by the slope of the
straight line that is tangent to the cur ve at the given
point. Once we draw the tangent line, we fi nd the
slope of the tangent line with the usual right-angle
measuring technique discussed earlier.
To fi nd the slope at point B in Figure 1A-5, we
simply construct straight line FBJ as a tangent to the
cur ved line at point B. We then calculate the slope of
the tangent as NJ/MN. Similarly, the tangent line GH
gives the slope of the cur ved line at point D.
Another example of the slope of a nonlinear line
is shown in Figure 1A-6. This shows a typical micro-
economics cur ve, which is dome-shaped and has a
maximum at point C. We can use our method of
slopes as tangents to see that the slope of the cur ve
is always positive in the region where the cur ve is ris-
ing and negative in the falling region. At the peak
or maximum of the cur ve, the slope is exactly zero.
A zero slope signifi es that a tiny movement in the X
variable around the maximum has no effect on the
value of the Y variable .
1

1
For those who enjoy algebra, the slope of a line can be remem-
bered as follows: A straight line (or linear relationship) is writ-
ten as Y⫽a⫹bX. For this line, the slope of the cur ve is b,
which measures the change in Y per unit change in X.

A cur ved line or nonlinear relationship is one involving
terms other than constants and the X term. An example of a
nonlinear relationship is the quadratic equation Y⫽ (X⫺ 2)
2
.
You can verify that the slope of this equation is negative for
X ⬍ 2 and positive for X ⬎ 2. What is its slope for X ⫽ 2?

For those who know calculus: A zero slope comes where
the derivative of a smooth cur ve is equal to zero. For example,
plot and use calculus to fi nd the zero-slope point of a cur ve
defi ned by the function Y ⫽ (X ⫺ 2)
2
.
Y
X
A
F
B
G
D
E
H
NM
J
FIGURE 1A-5. Tangent as Slope of Cur ved Line
By constructing a tangent line, we can calculate the slope
of a cur ved line at a given point. Thus the line FBMJ is
tangent to smooth cur ve ABDE at point B. The slope at
B is calculated as the slope of the tangent line, that is, as
NJ/MN.
Y
X
Z e r o s l o p e
P o s i t iv e s l o p e
N e g a t ive sl o p e
C
B D
A E
FIGURE 1A-6. Different Slopes of Nonlinear Cur ves
Many cur ves in economics fi rst rise, then reach a maxi-
mum, then fall. In the rising region from A to C the slope is
positive (see point B). In the falling region from C to E the
slope is negative (see point D). At the cur ve’s maximum,
point C, the slope is zero. (What about a U-shaped cur ve?
What is the slope at its minimum?)

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Niels pitied her with all his heart, but he left her alone as she
desired.
It was hard to look on and not help, to sit apart and dream her
happy, in stupid dreams, or to wait and calculate, with the cold
knowledge of the physician, how long she had to suffer. He told
himself, in this dreary wisdom, that there could be no relief until her
old hope in the fair, gleaming treasures of life had bled to death and
a more sluggish stream had entered her veins, making her dull
enough to forget, blunt enough to accept, and, at last, at last,
coarse enough to rejoice in the thick atmosphere of a bliss many
heavens lower than that which she had meekly hoped and humbly
prayed for wings to reach.—He was full of disgust with all the world
when he thought that she, to whom he had once knelt in adoration,
had come to such a pass that she had been forced to a slave’s
estate, and stood at the gate shivering with cold, while he rode past
on his high horse with the large coins of life jingling in his pocket.
One Sunday afternoon, in the latter part of August, Niels rowed
across the fjord. Fennimore was at home alone when he came; he
found her lying on a sofa in the corner room, and very miserable.
Her breath came with that low, monotonous moaning which seems
to afford relief from pain, and she said that she had a frightful
headache. There was no one to help her, for she had given the maid
leave to go home to Hadssund, and soon afterward some one had
come and carried off Erik; she could not understand where they had
gone in the rain. Now she had been lying there for two hours trying
to sleep, but it was impossible, the pain was so bad. She had never
had it before, and it had come on so suddenly—at dinner-time there
had been nothing the matter. First it was in the temples, and then it
seemed to dig deeper and deeper and deeper in; now it seemed to
be behind her eyes—if it only was not anything dangerous. She was
not used to being ill, and was very frightened and unhappy.
Niels comforted her as well as he could, telling her to lie still,
close her eyes, and not speak. He found a heavy shawl, which he
wrapped around her feet, fetched vinegar from the buffet, and made

a cold compress, which he laid on her brow. Then he sat down
quietly by the window, and looked out at the rain.
From time to time, he stole over to her on tiptoe and changed
the compress without speaking, merely nodding to her, as she
looked up at him gratefully between his hands. Sometimes she
wanted to speak, but he hushed her with a look, shaking his head,
and returned to his seat again.
At last she fell asleep.
One hour passed and another, and she was still sleeping. Slowly
one quarter slipped into the other, while the melancholy daylight
faded, and the shadows in the room waxed larger, as if they were
growing out of the furniture and the walls. Outside the rain fell,
evenly and steadily, blotting out every other sound in its low,
incessant patter.
She was still sleeping.
The fumes of the vinegar and the vanilla scent of the heliotrope,
mingling in a pungent odor like wine, filled the room. Warmed by
their breath, the air covered the gray window-panes with a dewy
film, which grew denser with the increasing coolness of the evening.
By this time, he was far away in memories and dreams, though a
part of his consciousness still watched over the sleeper and followed
her sleep. Gradually, as the darkness pressed in, his fancy wearied of
feeding these dreams that flickered up and died down, just as the
soil gets tired of bringing forth the same crop again and again; and
the dreams grew feebler, more sterile, and stiffer, losing the luxuriant
details that had entwined them like long shoots of clinging vines. His
thoughts left the distance and came homing back.—How quiet
everything was! Was it not as if they were together, he and she, on
an island of silence rising above the monotonous sea of sound made
by the soft patter of the rain? And their souls were still, calm and
safe, while the future seemed to slumber in a cradle of peace.
Would that it might never awaken, and that all might remain as
now—no more happiness than that of peace, but neither any misery

nor irking unrest! Would that the present might close as a bud closes
around itself, and that no spring would follow!
Fennimore called. She had been lying awake for some time, too
happy in being free from pain to think of speaking. Now she wanted
to get up and light the lamp, but Niels continued to act as physician,
and compelled her to lie still. It was not good for her to get up yet;
he had matches and could easily find the lamp.
When he had lit it, he put it on the flower stand in the corner,
where its milky white globe shone softly veiled by the delicate,
slumbering leaves of an acacia. The room was just light enough so
that they could see each other’s face.
He sat down in front of her, and they spoke about the rain and
said how lucky it was that Erik had taken his rain-coat, and how wet
poor Trine would be. Then their conversation came to a standstill.
Fennimore’s thoughts were not quite awake yet, and in her
weakness it seemed pleasant to lie thus musing without speaking.
Nor was Niels inclined to talk, for he was still under the spell of the
afternoon’s long silence.
“Do you like this house?” Fennimore asked at last.
“Why yes, fairly well.”
“Really? Do you remember the furniture at home?”
“At Fjordby? Yes indeed, perfectly.”
“You don’t know how I love it, and how I long for it sometimes.
The things we have here don’t belong to us—they are only rented—
and have no association with anything, and we are not going to live
with them any longer than we stay in this place. You may think it
queer, but I assure you, I often feel lonely here among all these
strange pieces of furniture that stand around here so indifferent and
stupid and take me for what I am without caring the least bit about
me. And as I know they are not going with me—that they will just
stay here and be rented by other people—I can’t get fond of them or
interested in them as I should if I knew that my home would always

be theirs, and that whatever came to me of good or ill would come
in the midst of them. Do you think it childish? Perhaps it is, but I
can’t help it.”
“I don’t know what it is, but I have felt it too. When I was left
alone abroad, my watch stopped, and when it came back from the
watchmaker and was going as before, it was—just what you mean. I
liked the feeling; there was something peculiar about it, something
genuinely good.”
“Yes indeed! Oh, I should have kissed it, if I had been you.”
“Would you?”
“Do you know,” she said suddenly, “you have never told me
anything about Erik as a boy? What was he like?”
“Everything that is good and fine, Fennimore. Splendid, brave—a
boy’s ideal of a boy, not exactly a mother’s or a teacher’s ideal, but
the other, which is so much better.”
“How did you get along together? Were you very fond of each
other?”
“Yes, I was in love with him, and he didn’t mind—that is about
how it was. We were very different. I always wanted to be a poet
and become famous, but what do you suppose he said he wanted to
be, one day when I asked him?—An Indian, a real red Indian with
war paint and all the rest! I remember that I couldn’t understand it
at all. It was incomprehensible to me how any one could want to be
a savage—civilized creature that I was!”
“But was it not strange, then, that he should become an artist?”
said Fennimore, and there was something cold and hostile in her
tone, as she asked.
Niels noticed it with a little start. “Not at all,” he answered; “it is
really rare that people become artists with the whole of their nature.
And such strong fellows overflowing with vitality like Erik often have
an unutterable longing for what is fine-grained and delicate: for an
exquisite virginal coldness, a lofty sweetness—I hardly know how to

express it. Outwardly they may be robust and full-blooded enough,
even coarse, and no one suspects what strange, romantic,
sentimental secrets they carry about with them, because they are so
bashful—spiritually bashful, I mean—that no pale little maiden can
be more shy about her soul than are these big, hard-stepping
menfolks. Don’t you understand, Fennimore, that such a secret,
which can’t be told in plain words right out in common every-day air,
may dispose a man to be an artist? And they can’t express it in
words, they simply can’t; we have to believe that it is there and lives
its quiet life within them, as the bulb lives in the earth; for once in a
while they do send fragrant, delicately tinted flowers up to the light.
Do you understand?—Don’t demand anything for yourself of this
blossoming strength, believe in it, be glad to nourish it and to know
that it is there.—Forgive me, Fennimore, but it seems to me that you
and Erik are not really good to each other. Can’t you make a
change? Don’t think of who is right or how great the wrong is, and
don’t treat him according to his deserts—how would even the best of
us fare if we got our deserts! No, think of him as he was in the hour
when you loved him most; believe me, he is worthy of it. You must
not measure and weigh. There are moments in love, I know, full of
bright, solemn ecstasy, when we would give our lives for the beloved
if need be. Is not that true? Remember it now, Fennimore, for his
sake and your own.”
He was silent.
She said nothing either, but lay very still with a melancholy smile
on her lips, pale as a flower.
Then she half rose and stretched out her hand to Niels. “Will you
be my friend?” she asked.
“I am your friend, Fennimore,” and he took her hand.
“Will you, Niels?”
“Always,” he replied, lifting the hand to his lips reverently.
When he rose, it seemed to Fennimore that he held himself more
erect than she had ever seen him before.

A little later Trine came in to announce her return, and then there
was tea, and at last the rowing back through the dreary rain.
Toward morning Erik came home, and when Fennimore saw him
by the cold, truthful light of dawn, preparing to go to bed, heavy and
unsteady with drink, his eyes glazed from gambling and his face
dirty-pale after the sleepless night, then all the fair words Niels had
spoken seemed to her quite visionary. The bright promises she had
made to her own heart fainted and paled before the oncoming day—
vapory dreams and fumes of fancy: a fairy flock of lies!
What was the use of struggling with this weight dragging them
both down? It was futile to lighten it by lies; their life would never
have its old buoyancy. The frost had been there, and the wealth of
vines and creepers and clustering roses and blossoms fairer than
roses that had entwined them had shed every tiny leaf, lost every
blossom, and nothing remained but the tough, naked withes binding
them together in an unbreakable tether. What did it avail that she
roused the feelings of former days to an artificial life by the warmth
of memories, that she put her idol up on its pedestal again, that she
called back the light of admiration to her eyes, the words of
adoration to her lips, and the flush of happiness to her cheeks! What
did it all avail, when he would not take upon himself to be the priest
of the idol and so help her to a pious fraud? He! He did not even
remember her love. Not one of her words echoed in his ears, not
one of all their days was hidden in his soul.
No, dead and cold was the ardent love of their hearts. The
fragrance, the glamor, and the tremulous tones—all had been wafted
away. There they sat, from force of habit, he with his arm around
her waist, she with her head resting on his shoulder, drearily sunk in
silence, forgetting each other; she, to remember the glorious hero
he had never been; he, to transform her in his dreams to the ideal
which he now always saw shining in the sky high above her head.
Such was their life together, and the days came and went without
bringing any change, and day after day they gazed out over the
desert of their lives, and told themselves that it was a desert, that

there were no flowers nor any hope of flowers or springs or green
palms.
As the autumn advanced, Erik’s drinking-bouts became more
frequent. What was the use, he said to Niels, of sitting at home
waiting for ideas that never came, until his thoughts turned to stone
in his head? Moreover, he did not get much comfort from Niels’s
society; he needed people with some grit in them, people of lusty
flesh and blood, not a whim-wham of delicate nerves. Niels and
Fennimore were therefore left much alone, for Niels came over to
Marianelund every day.
The covenant of friendship they had made and the talk they had
had on that Sunday afternoon put them at their ease with each
other, and, lonely as they both were, they drew closer together in a
warm and tender friendship, which soon gained a strong hold over
both. It absorbed them so that their thoughts, whether they were
together or apart, always turned to this bond, as birds building the
same nest look on everything they gather or pass by with the one
pleasant goal of making the nest snug and comfortable for each
other and themselves.
If Niels came while Erik was away, they nearly always, even on
rainy and stormy days, took long walks in the woods behind the
garden. They had fallen in love with that forest, and grew fonder of
it as they watched the summer life die out. There were a thousand
things to see. First, how the leaves turned yellow and red and
brown, then how they fell off, whirling on a windy day in yellow
swarms, or softly rustling in still air, single leaf after leaf, down
against the stiff boughs and between the pliant brown twigs. And
when the leaves fell from trees and bushes, the hidden secrets of
summer were revealed in nest upon nest. What treasures on the
ground and on the branches, dainty seeds and bright-colored
berries, brown nuts, shining acorns and exquisite acorn cups, tassels
of coral on the barberry, polished black berries on the buckthorn,
and scarlet urns on the dog-rose. The bare beeches were finely
dotted with prickly beechnuts, and the roan bent under the weight

of its red clusters, acid in fragrance like apple cider. Late
brambleberries lay black and brown among the wet leaves at the
wayside; red whortleberries grew among the heather, and the wild
raspberries brought forth their dull crimson fruit for the second time.
The ferns turned all colors as they faded, and the moss was a
revelation, not only the deep, luscious moss in the hollows and on
the slopes, but the faint, delicate growth on the tree-trunks,
resembling what one might imagine the cornfields of the elves to be
as it sent forth the finest of stalks with dark brown buds like ears of
corn at the tip.
They scoured the forest from end to end, eager to find all its
treasures and marvels. They had divided it between them as children
do; the part on one side of the road was Fennimore’s property, and
that on the other side was Niels’s, and they would compare their
realms and quarrel about which was the more glorious. Everything
there had names—clefts and hillocks, paths and stiles, ditches and
pools; and when they found a particularly magnificent tree, they
gave that too a name. In this way they took complete possession
and created a little world of their own which no one else knew and
no one else was at home in, and yet they had no secret which all the
world might not have heard.
As yet they had not.
But love was in their hearts, and was not there, as the crystals
are present in a saturated solution, and yet are not present, not until
a splinter or the merest particle of the right matter is thrown into the
solution, releasing the slumbering atoms as if by magic, and they
rush to meet one another, joining and riveting themselves together
according to unsearchable laws, and in the same instant there is
crystal—crystal.
So it was a trifle that made them feel they loved.
There is nothing to tell. It was a day like all other days, when
they were alone together in the sitting-room, as they had been a
hundred times before; their conversation was about things of no

moment, and that which happened was outwardly as common and
as every-day-like as possible. It was nothing except that Niels stood
looking out of the window, and Fennimore came over to him and
looked out too. That was all, but it was enough, for in a flash like
lightning, the past and present and future were transformed for Niels
Lyhne by the consciousness that he loved the woman standing by
his side, not as anything bright and sweet and happy and beautiful
that would lift him to ecstasy or rapture—such was not the nature of
his love—but he loved her as something he could no more do
without than the breath of life itself, and he reached out, as a
drowning man clutches, and pressed her hand to his heart.
She understood him. With almost a scream, in a voice full of
terror and agony, she cried out to him an answer and a confession:
“Oh, yes, Niels!” and snatched away her hand in the same instant. A
moment she stood, pale and shrinking, then sank down with one
knee in an upholstered chair, hiding her face against the harsh velvet
of the back, and sobbed aloud.
Niels stood a few seconds as though blinded, groping around
among the bulb-glasses for support. It was only for a very few
seconds; then he stepped over to the chair where she was lying, and
bent over without touching her, resting one hand on the back of the
chair.
“Don’t be so unhappy, Fennimore! Look up and let us talk about
it. Will you, or will you not? Don’t be afraid! Let us bear it together,
my own love! Come, try if you can’t!”
She raised her head slightly and looked up at him. “Oh, God,
what shall we do! Isn’t it terrible, Niels! Why should such a thing
happen to me? And how lovely it all could have been—so happy!”
and she sobbed again.
“Should I not have spoken?” he moaned. “Poor Fennimore, would
you rather never have known it?”
She raised her head again and caught his hand. “I wish I knew it
and were dead. I wish I were in my grave and knew it, that would

be good—oh, so peaceful and good!”
“It is bitter for us both, Fennimore, that the first thing our love
brings us should be only misery and tears. Don’t you think so?”
“You must not be hard on me, Niels. I can’t help it. You can’t see
it as I do—I am the one that should be strong, because I am the
one that is bound. I wish I could take my love and force it back into
the most secret depth of my soul and lock it in and be deaf to all its
wailing and its prayers, and then tell you to go far, far away; but I
can’t, I have suffered so much, I can’t suffer that too—I can’t, Niels.
I can’t live without you—see, can I? Do you think I can?”
She rose and flung herself on his breast.
“Here I am, and I won’t let you go; I won’t send you away, while
I sit here alone in the old darkness. It is like a bottomless pit of
loathing and misery. I won’t throw myself into it. I would rather
jump into the fjord, Niels. Even if the new life brings other agonies,
at least they are new agonies, and haven’t the dull sting of the old,
and can’t stab home like the old, which know my heart so cruelly
well. Am I talking wildly? Yes, of course I am, but it is so good to
talk to you without any reserve and without having to be careful not
to say what I have no right to. For now you have the first right of all!
I wish you could take me wholly, so that I could belong to you
utterly and not to any one else at all. I wish you could lift me out of
all relations that hedge me in!”
“We must break through them, Fennimore. I will arrange
everything as well as possible. Don’t be afraid! Some day, before any
one suspects anything, we shall be far away.”
“No, no, we mustn’t run away, anything but that, anything else
rather than have my parents hear their daughter had run away. It is
impossible! I will never do it. By God in heaven, Niels, I will never do
it.”
“Oh, but you must, girlie, you must. Can’t you see all the
baseness and ugliness that will rise and close in around us
everywhere, if we stay, all the lies and deceptions that will entangle

us and drag us down? I won’t have you smooched by all that. I
refuse to let it eat into our love like corroding rust.”
But she was immovable.
“You don’t know what you are condemning us to,” he said sadly.
“It would be far better to crush under iron heels now instead of
sparing. Believe me, Fennimore, we must let our love be everything
to us, the first and only thing in the world, that which must be
saved, even at the cost of stabbing where we would rather heal and
bringing sorrow where we would rather keep every shadow of
sorrow far away. If we don’t do that, you will see that the yoke we
bend our necks under now will weigh on us and at last force us to
our knees, unmercifully, inexorably.—A fight on our knees, you don’t
know how hard that is! Shall we fight the fight anyway, girlie, side by
side, against everything?”
For the first few days Niels persisted in his attempts to persuade her
to flight. Then he began to picture to himself what a blow it would
be to Erik if he were to come home one day and find friend and wife
gone away together, and by degrees the whole thing took on an
unnaturally tragic air of the impossible. He accustomed himself not
to think of it, as he did with many other things that he might have
wished different, and threw himself with his whole soul into the
situation as it was, without any conscious attempts to make it over
by dreams or cover its defects with imaginary festoons and garlands.
But, oh, how sweet it was to love for once with the love of real life;
for now he knew that nothing of what he had imagined to be love
was real love, neither the turgid longing of the lonely youth, nor the
passionate yearning of the dreamer, nor yet the nervous foreboding
of the child. These were currents in the ocean of love, single
reflections of its full light, fragments of love as the meteors rushing
through space are splinters of a world—for that was love: a world
complete in itself, fully rounded, vast, and orderly. It was no medley
of confused sensations and moods rushing one upon another! Love

was like nature, ever changing, ever renewing; no feeling died and
no emotion withered without giving life to the seed of something still
more perfect which was imbedded in it. Quietly, sanely, with full,
deep breaths—it was good to love so and love with all his soul. The
days fell, bright and new-coined, down from heaven itself; they no
longer followed one upon another as a matter of course like the
hackneyed pictures in a peep-show. Every one was a revelation.
With each day that passed, he felt stronger, greater, and nobler. He
had never known such strength and fullness of feeling; there were
moments when he seemed to himself titanic, much more than man,
so inexhaustible was the wellspring of his soul, so broad-winged the
tenderness that swelled his heart, so wondrous the sweep of his
vision, so infinite the gentleness of his judgments.
This was the beginning of happiness, and they were happy long.
The daily falsehood and deception and the atmosphere of
dishonor in which they lived had not yet gained power over them,
and could not touch them on those ecstatic heights to which Niels
had lifted their relationship and, with it, themselves. For he was not
simply a man who seduced his friend’s wife—or rather, so he told
himself defiantly, he was that man, but he was also the one who
saved an innocent woman whom life had wounded, stoned, and
defiled, a woman who had lain down to let her soul die. This woman
he had given back her confidence in life, her faith in the powers of
good; he had lifted her spirit to noble heights, had given her
happiness. What, then, was best, the old blameless misery or that
which he had won for her? He did not ask, he had made his choice.
He did not quite mean this, if the truth were told. Man often
builds for himself theories in which he refuses to dwell. Thoughts
often run faster than the sense of right and wrong is willing to
follow. Yet the conception was really present in his mind, and it took
away some of the cankerous venom inherent in the craftiness,
falseness, and duplicity of their lives.
Yet the evil effects were soon noticeable. The poison was
working on so many fine nerve filaments that it could not but do

harm and cause suffering, and the time was hastened when Erik,
shortly after New Year, announced that he had caught an idea—
something with a green tunic and a threatening attitude, he told
Niels. Did he remember the green in Salvator Rosa’s Jonah?
Something on that order.
Although Erik’s work consisted chiefly in lying on the couch in his
studio, smoking shag and reading Marryat, it had at least the effect
of keeping him at home for the time being, thereby forcing them to
use more caution and necessitating new lies and artifices.
Fennimore’s ingenuity in this direction was what brought the first
cloud to their heaven. It was scarcely perceptible at first, only a
doubt, light as thistle-down, flitting through Niels’s mind as to
whether his love were not nobler than the one he loved. It had not
yet taken shape as a thought, it was only a dim foreboding which
pointed in that direction, a vague giving way in his mind, a leaning
to that side.
Yet it came again and brought others in its wake, thoughts at
first vague and indistinct, then clearer and sharper for each time
they appeared. It was astonishing with what furious haste these
thoughts could undermine, debase, and take away the glamor. Their
love was not lessened. On the contrary, it glowed more passionately
while it sank, but these handclasps stolen under table-covers, these
kisses snatched in passages and behind doors, these long looks right
under the eyes of him they deceived, took away all the lofty tenor.
Happiness no longer stood still above their heads; they had to filch
her smiles and her light as best they could, and after a while their
wiles and cunning were no longer necessary evils, but amusing
triumphs. Deception became their natural element and made them
contemptible and petty. There were degrading secrets, too, over
which they had hitherto grieved separately, assuming ignorance in
each other’s eyes, but which they now had to share; for Erik was not
bashful, and would often caress his wife in Niels’s presence, kiss her,
take her on his lap, and embrace her, while Fennimore had neither

courage nor dignity sufficient to repel these caresses; the
consciousness of her guilt made her uncertain and afraid.
So it sank and went on sinking, that lofty castle of their love,
from the pinnacles of which they had gazed so proudly out over the
world, and within which they had felt so strong and noble.
Still they were happy among the ruins.
When they walked in the woods now, it was usually on gloomy
days, when the fog hung under the dark branches and thickened
between the wet trunks, so that none should see how they kissed
and embraced, both here and there, and none should hear how their
frivolous talk rang with peals of wanton laughter.
The melancholy of eternity, which had exalted their love, was
gone; now there was nothing but smiles and jests between them.
With feverish haste they snatched greedily at the fleeting seconds of
joy, as though they must hurry in their love and had not a lifetime
before them.
It brought no change when Erik, after a while, grew tired of his
idea and again began his carousing so eagerly that he was rarely at
home for forty-eight hours at a stretch. Where they had fallen, there
they lay. Once in a great while, perhaps, in lonely hours, they gazed
regretfully toward the heights from which they had fallen, or perhaps
they only wondered, and thought what a strain it must have been to
stay on that level, and felt themselves more snugly housed where
they were. There was no change. At least there was no return to the
former days, but the flabby uncleanness of living as they did and not
running away together became more present in their consciousness
and linked them together in a closer and baser union through the
common sense of guilt; for neither of them wished any change in
things as they were. Nor did they pretend to each other that they
did, for there had developed a cynical intimacy between them such
as often exists between fellow criminals, and there was nothing in
their relations that they shrank from putting into words. With sinister

frankness, they called things by their right names and, as they put it
to themselves, faced the facts as they were.
In February it had seemed that the winter was over, but then Mother
March had come shaking her white mantle with its loose lining, and
snowstorm after snowstorm covered the ground with thick layers.
Then followed calm weather and hard frost, and the fjord settled
under a crust of ice six inches thick, which lay there a long time.
One evening toward the end of the month, Fennimore was sitting
alone in her parlor after tea and waiting.
The room was brightly illumined; the piano stood open with
candles lit, and the silk shade had been taken from the lamp. The
gilded moldings caught the light, and the pictures on the walls
seemed to stand out with a kind of vigilance. The hyacinths had
been moved from the windows to the writing-table, where they
made a mass of delicate colors, filling the air with a penetrating
fragrance that seemed cool in its purity. The fire in the stove burned
with a pleasant subdued crackle.
Fennimore was walking up and down the room almost as if she
were balancing on a dark red stripe in the carpet. She wore a
somewhat old-fashioned black silk dress with a heavily embroidered
edge that weighed it down and trailed, first on one side, then on the
other, with every step she took.
She was humming to herself and holding with both hands a
string of large pale yellow amber beads that hung from her neck.
Whenever she wavered on the red stripe, she would stop humming,
but still grasped the necklace. Perhaps she was making an omen for
herself: if she could walk a certain number of times up and down
without getting off the red stripe and without letting go with her
hands, Niels would come.
He had been there in the morning, when Erik went away, and
had stayed till late in the afternoon, but he had promised to come

again as soon as the moon was up and it was light enough to see
the holes in the ice on the fjord.
Fennimore had obtained her omen, whatever it was, and stepped
over to the window.
It looked as if there would not be any moon to-night; the sky
was very black, and the darkness must be more intense out there on
the gray-blue fjord than on land where the snow lay. Perhaps it was
best that he did not attempt it. She sat down at the piano with a
sigh of resignation, then got up again to look at the clock. She came
back and resolutely propped up a big book of music before her, but
did not play, merely turning the leaves absent-mindedly, lost in her
own thoughts.
Suppose, after all, that he was standing on the opposite shore
this very moment, fastening on his skates. He could be here in an
instant! She saw him plainly, a little bit out of breath after skating,
and blinking with his eyes against the light on coming from the
darkness outside. He would bring a breath of cold air, and his beard
would be full of tiny little bright drops. Then he would say—what
would he say?
She smiled and glanced down at herself.
And still the moon did not appear.
She went over to the window again and stood gazing out, till the
darkness seemed to be filled before her eyes with tiny white sparks
and rainbow-colored rings. But they were only a vague glimmer. She
wished they would be transformed into fireworks out there, rockets
shooting up in long, long curves and then turning to tiny snakes that
bored their way into the sky and died in a flicker; or into a great,
huge pale ball that hung tremulous in the sky and slowly sank down
in a rain of myriad-colored stars. Look! Look! Soft and rounded like a
curtsy, like a golden rain that curtsied.—Farewell! Farewell! There
went the last one.—Oh dear, if he would only come! She did not
want to play—and at that she turned to the piano, struck an octave
harshly, and held the keys down till the tones had quite died away,

then did the same again, and again, and yet again. She did not want
to play, did not want to.—She would rather dance! For a moment
she closed her eyes, and in imagination she felt herself whirling
through a vast hall of red and white and gold. How delicious it would
be to have danced and to be hot and tired and drink champagne!
Suddenly she remembered how she and a school friend had
concocted champagne from soda water and eau de cologne, and
how sick it had made them when they drank it.
She straightened herself and walked across the room,
instinctively smoothing her dress as after a dance.
“And now let us be sensible!” she said, took her embroidery and
settled herself in a large armchair near the lamp.
Yet she did not work; her hands sank down into her lap, and
soon she snuggled down into the chair with little lazy movements,
fitting herself into its curves, her face resting on her hand, her dress
wrapped around her feet.
She wondered curiously whether other wives were like her,
whether they had made a mistake and been unhappy and then had
loved some one else. She passed in review the ladies at home in
Fjordby, one by one. Then she thought of Mrs. Boye. Niels had told
her about Mrs. Boye, and she had always been a tantalizing riddle to
her—this woman whom she hated and felt humiliated by.
Erik, too, had once told her that he had been madly in love with
Mrs. Boye.
Ah, if one could know everything about her!
She laughed at the thought of Mrs. Boye’s new husband.
All the time, while her thoughts were thus engaged, she was
longing and listening for Niels, and imagined him coming, always
coming out there on the ice. She little guessed that for the last two
hours a tiny black dot had been working its way over the snowy
meadows with a message for her very different from the one she
was expecting from across the fjord. It was only a man in homespun

and greased boots, and now he tapped on the kitchen window,
frightening the maid.
It was a letter, Trine said when she came in to her mistress.
Fennimore took it. It was a telegram. Quietly she gave the maid the
receipt and dismissed her; she was not in the least alarmed, for Erik
of late had often telegraphed that he would bring one or two guests
home with him the following day.
Then she read.
Suddenly she turned white and darted wildly from her seat out
into the middle of the room, staring at the door with expectant
terror.
She would not let it come into the house, did not dare to, and
with one bound she threw herself against the door, pressing her
shoulder against it, and turned the key till it cut her hand. But it
would not turn, no matter how hard she tried. Her hand dropped.
Then she remembered that the thing was not here at all—it was far
away from her in a strange house.
She began to shake, her knees would no longer support her, and
she slid along the door to the floor.
Erik was dead. The horses had run away, had overturned the
carriage at a street corner, and hurled Erik with his head against the
wall. His skull had been fractured, and now he lay dead at Aalborg.
That was the way it had happened, and most of this story was told
in the telegram. No one had been with him in the carriage except
the white-necked tutor known as the Arab. It was he who had
telegraphed.
She crouched on the floor moaning feebly, both palms spread out
on the carpet, her eyes staring with a fixed, empty look, as she
swayed helplessly to and fro.
Only a moment ago everything had been light and fragrance
around her, and, however much she tried, she could not instantly
put all this out of her consciousness to admit the inky black night of

grief and remorse. It was not her fault that her mind was still
haunted by fitful, dazzling gleams of love’s happiness and love’s
pleasure; that intense, foolish desires would force their way out of
the whirl, seeking the bliss of forgetfulness, or trying to stop with a
frenzied wrench the revolving wheel of fortune.
But it soon passed.
In black swarms, from everywhere, dark thoughts came flying
like ravens, lured by the corpse of her happiness, and hacked it beak
by beak, even while the warmth of life still lingered in it. They tore
and slashed and made it hideous and unrecognizable, until the
whole thing was nothing but a carrion of loathing and horror.
She rose and walked about, supporting herself by chairs and
tables like one who is ill. Desperately she looked around for some
cobweb of help, if it were only a comforting glance, a sympathetic
pat of the hand, but her eyes met nothing but the glaring family
portraits, all the strangers who had been witnesses of her fall and
her crime—sleepy old gentlemen, prim-mouthed matrons, and their
ever-present gnome child, the girl with the great round eyes and
bulging forehead. It had acquired memories enough at last, this
strange furniture, the table over there, and that chair, the footstool
with the black poodle-dog, and the portière like a dressing-gown,—
she had saturated them all with memories, adulterous memories,
which they now spewed out and flung after her. Oh, it was terrible to
be locked in with all these spectres of crime and with herself. She
shuddered at herself; she pointed accusing fingers at herself, at this
dishonored Fennimore who crouched at her feet; she pulled her
dress away from between her imploring hands. Mercy? No, there
was no mercy! How could there be mercy before those dead eyes in
the strange town, those eyes which had become seeing, now that
they were glazed in death, and saw how she had thrown his honor
in the mud, lied at his lips, been faithless at his heart.
She could feel those dead eyes riveted on her; she did not know
whence they came, but they followed her, gliding down her body like
two ice-cold rays. As she looked down, while every thread of the

carpet, every stitch in the footstools, seemed unnaturally clear in the
strong, sharp light, she felt something walking about her with the
footsteps of dead men, felt it brushing against her dress so distinctly
that she screamed with terror, and darted to one side. But it came in
front of her like hands and yet not like hands, something that
clutched at her slowly, clutched derisively and triumphantly at her
heart, that marvel of treachery, that yellow pearl of deceit! And she
retreated till she backed up against the table, but it was still there,
and her bosom gave no protection against it; it clutched through her
skin and flesh.... She almost died of terror, as she stood there,
helplessly bending back over the table, while every nerve contracted
with fear, and her eyes stared as if they were being murdered in
their sockets.
Then that passed.
She looked around with a haunted look, then sank down on her
knees and prayed a long time. She repented and confessed, wildly
and unrestrainedly, in growing passion, with the same fanatic self-
loathing that drives the nun to scourge her naked body. She sought
fervently after the most grovelling expressions, intoxicating herself
with self-abasement and with a humility that thirsted for
degradation.
At last she rose. Her bosom heaved violently, and there was a
faint light in the pale cheeks, which seemed to have grown fuller
during her prayer.
She looked around the room as if she were taking a silent vow.
Then she went into the adjoining room, closed the door after her,
stood still a moment as though to accustom herself to the darkness,
groped her way to the door which opened on the glass-enclosed
veranda, and went out.
It was lighter there. The moon had risen, and shone through the
close-packed frozen crystals on the glass; the light came yellowish
through the panes, blue and red through the squares of colored
glass that framed them.

She melted a hole in the ice with her hand and carefully wiped
away the moisture with her handkerchief.
As yet there was no one in sight out on the fjord.
She began to walk up and down in her glass cage. There was no
furniture out there except a settee of cane and bent wood, covered
with withered ivy leaves from the vines overhead. Every time she
passed it, the leaves rustled faintly with the stirring of the air, and
now and then her dress caught a leaf on the floor, drawing it along
with a scratching sound over the boards.
Back and forth she walked on her dreary watch, her arms folded
over her breast, hardening herself against the cold.
He came.
She opened the door with a quick wrench, and stepped out into
the frozen snow in her thin shoes. She had no pity on herself, she
could have gone bare-footed to that meeting.
Niels had slowed up at the sight of the black figure against the
snow and was skating toward land with hesitating, tentative strokes.
That stealthy figure seemed to burn into her eyes. Every familiar
movement and feature struck her as a shameless insult, as a boast
of degrading secrets. She shook with hatred; her heart swelled with
curses, and she could scarcely control her anger.
“It is I!” she cried out to him jeeringly, “the harlot, Fennimore!”
“But for God’s sake, sweetheart?” he asked, astonished, as he
came within a few feet of her.
“Erik is dead.”
“Dead! When?” He had to step out into the snow with his skates
to keep from falling. “Oh, but tell me!” Eagerly he took a step nearer.
They were now standing close together, and she had to restrain
herself from striking that pale, distorted face with her clenched fist.

“I will tell you, never fear,” she cried. “He is dead, as I said. He
had a runaway in Aalborg and got his head crushed, while we were
deceiving him here.”
“It is terrible!” Niels moaned, pressing his hands to his temples.
“Who could have dreamed—Oh, I wish we had been faithful to him,
Fennimore! Erik, poor Erik!—I wish I were in his place!“ He sobbed
aloud, writhing with pain.
“I hate you, Niels Lyhne!”
“Oh, what does it matter about us?” Niels groaned; “if we could
only get him back! Poor Fennimore!” he said with a change of
feeling. “Never mind me. You hate me, you say? You may well hate
me.” He rose suddenly. “Let us go in,” he said. “I don’t know what I
am saying. Who was it that telegraphed, did you say?”
“In!” Fennimore screamed, infuriated by his failure to notice her
hostility. “In there! Never shall you set your craven, despicable foot
inside that house again. How dare you think of it, you wretch, you
false dog, who came sneaking in here and stole your friend’s honor,
because it was too poorly hidden! What, did you not steal it under
his very eyes, because he thought you were honest, you house-
thief!”
“Hush, hush, are you mad? What is the matter with you! What
sort of language are you using?” He had caught her arm firmly,
drawing her to him, and looked straight into her face in amazement.
“You must try to come to your senses, child,” he said in a gentler
tone. “You can’t mend matters by slinging ugly words.”
She wrenched her arm away with such force that he staggered
and almost lost his uncertain foothold.
“Can’t you hear that I hate you!” she screamed shrilly. “And isn’t
there so much of a decent man’s brain left in you that you can
understand it! How blind I must have been when I loved you, you
patched together with lies, when I had him at my side, who was ten
thousand times better than you. I shall hate and despise you to the
end of my life. Before you came, I was honest, I had never done

anything wicked; but then you came with your poetry and your
rubbish and dragged me down with your lies, into the mud with you.
What have I done to you that you could not leave me alone—I who
should have been sacred to you above all others! Now I have to live
day after day with this shameful blot on my soul, and I shall never
meet any one so base but that I know myself to be baser. All the
memories of my girlhood you have poisoned. What have I to look
back on that is clean and good now! You have tainted everything. It
is not only he that is dead, everything bright and good that has been
between us is dead, too, and rotten. Oh, God help me, is it fair that I
can’t get any revenge on you after all you have done? Make me
honest again, Niels Lyhne, make me pure and good again! No, no—
but it ought to be possible to torture you into undoing the wrong
you have done. Can you undo it with lies? Don’t stand there and
crouch under your own helplessness. I want to see you suffer, here
before my eyes, and writhe in pain and despair and be miserable.
Let him be miserable, God, do not let him steal my revenge too! Go,
you wretch, go! I cast you off, but be sure that I drag you with me
through all the agonies my hate can call down over you.”
She had stretched out her arms menacingly. Now she turned and
went in, and the veranda door rattled softly, as she closed it.
Niels stood looking after her in amazement, almost with disbelief.
That pale, vengeful face seemed to be still there before him, so
strangely base-souled and coarse, all its delicate beauty of contour
gone, as if a rough, barbarous hand had ploughed up all its lines.
He stumbled cautiously down to the ice and began to skate
slowly toward the mouth of the fjord, with the moonlight in front of
him and the wind in his back. Gradually he increased his speed, as
his thoughts took his attention from the surroundings, till the ice
splinters flew from the runners of his skates and rattled on the
smooth surface, blown along with him by the rising frost wind.
So that was the end! So that was the way he had saved this
woman soul and lifted it and given it happiness! It was certainly
beautiful, his relation to the dead friend, his childhood friend, for

whom he would have sacrificed his future, his life, his all! He with his
sacrificing and his saving! Let heaven and earth behold in him a man
who preserved his life on the heights of honor without spot or
blemish in order not to cast a shadow over the Idea he served and
was called to promulgate.
No doubt that was another of his boastful fancies that his paltry
little life could put spots on the sun of the Idea. Good God, he was
always taking these high and mighty views of himself, it was bred in
his bone. If he could not be anything better, he must at least be a
Judas and call himself Iscariot in grandiose gloom. That sounded like
something. Was he forever going to put on airs as if he were a
responsible minister to the Idea, a member of its privy council,
getting everything concerning humanity at first hand! Would he
never learn to do his duty in barrack service for the Idea with all
simplicity as a private of a very subordinate class?
There were red fires out on the ice, and he skated so near them
that a gigantic shadow shot out for a moment from his feet, turned
forward, and disappeared again.
He thought of Erik and of what kind of a friend he had been to
Erik. He! His childhood memories wrung their hands over him; his
youthful dreams covered their heads and wept over him; his whole
past stared after him with a long look full of reproach. He had
betrayed it all for a love as small and mean as himself. There had
been exaltation in this love, but he had betrayed that too.
Whither could he flee to escape these attempts that always
ended in the ditch? All his life had been nothing else, and it would
never be anything else in the future; he knew that and felt it with
such certainty that he sickened at the thought of all this futile
endeavor, and he wished with all his soul that he could run away and
escape this meaningless fate. If only the ice would break under him
now as he skated, and all would be over with a gasp and a spasm in
the cold water!

He stopped, exhausted, and looked back. The moon had gone
down, and the fjord stretched long and dark between the white hills
on either side. Then he turned and worked his way back against the
wind. It was very strong now, and he was tired. He skated closer to
the shore to get the shelter of the hills, but, as he struggled thus, he
came on a hole in the ice made by the winds sweeping down from
the hills, and he felt the thin, elastic crust give way under him with a
crackling sound.
Ah, he breathed more easily, in spite of all, when he set foot on
the firm ice again! Under the stimulus of fear, his exhaustion had
almost left him, and he skated on vigorously.
While he was struggling out there, Fennimore sat in the lighted
room, baffled and miserable. She felt herself cheated out of her
revenge. She hardly knew what she had expected, but it was
something entirely different; she had had a vision of something
mighty and majestic, something of swords and red flames, or—not
that, but something that would sweep her along and lift her to a
throne, but instead it had all turned out so small and paltry, and she
had felt more like a common scold than like one who utters
curses....
After all, she had learned something from Niels.
Early in the morning of the following day, while Niels, overcome with
exhaustion, was still asleep, she left the house.

Chapter XII
or the better part of two years Niels Lyhne had roamed about on
the Continent.
He was very lonely, without kith or kin or any close friend of his
heart. Yet there was another and greater loneliness that
encompassed him; for however desolate and forsaken a man may
feel when he has no single spot on all this vast earth to which his
affections can cling, which he can bless when the heart will overflow
and yearn for when longing will spread its wings, there is no
existence so lonely that he is utterly alone if he can only see the
fixed bright star of a life goal shining overhead. But Niels Lyhne had
no star. He did not know what to do with himself and his gifts. It
was all very well to have talent if he could only have used it, but he
went about like a painter without hands. How he envied the people,
great and small, who always, whenever they reached out into life,
found a handle to lay hold of; for he could never find any handle. It
seemed as though he could do nothing but sing over again the old
romantic songs, and in truth he had so far done nothing else. His
talent was like something apart in him, a quiet Pompeii, or a harp
that had to be taken out of its corner. It was not all-pervading, did
not run down the street with him or tingle in his finger-tips—not in
the least. His talent had no grip on him. Sometimes it seemed to him
that he had been born half a century too late, sometimes that he
had come altogether too early. His talent was rooted in something of
the past; it could not draw nourishment from his opinions, his
convictions, and his sympathies, could not absorb them and give
them form. The two elements seemed always to be gliding apart like
water and oil, which can be shaken together, but can never mix,
never become one.
Gradually, as he began to realize this, he sank into a boundless
dejection and grew inclined to take an ironic, suspicious view of

himself and his whole past. There must be something wrong with
him, he told himself, something incurably wrong in the very marrow
of his being; for surely a man could fuse the varying elements in his
own nature—that he firmly believed.
This was the state of his mind when he settled down, in the
month of September, toward the end of the second year of his exile,
on the shores of Lake Garda, in the little town of Riva.
Not long afterward, the region was hedged about by difficulties
that put a stop to travelling and kept all strangers away. Cholera had
broken out round about Venice and down south in Descensano and
in the north by the Trentino. Under these circumstances, Riva was
not lively, for the hotels had been emptied at the first rumor, and
tourists bound for Italy took another route.
Naturally, the few people who remained drew all the more closely
together.
The most remarkable person among them was a famous opera
singer, whose real name was Madame Odéro. Her stage name was
far more celebrated. She and her companion, Niels, and a deaf
doctor from Vienna were the only guests at the Golden Sun, the
leading hotel in town.
Niels felt very much attracted to her, and she yielded to that
warmth of manner in him which is often a characteristic of people
who are at strife with themselves and therefore feel the need of
establishing their relations with others on a safe basis.
Madame Odéro had lived there for nearly seven months, trying to
recover, by complete rest, from the after effects of a throat trouble
that had threatened her voice. Her physician had told her to abstain
for a year from singing and, in order to avoid temptation, from all
music. Not until the year was over would he allow her to attempt to
sing, and then, if no weariness followed, she might consider herself
cured.
Niels acquired a kind of civilizing influence over Madame Odéro,
who was a fiery, passionate nature with no fine shades. It had been

a terrible sentence to her when she was condemned to live a whole
year without applause and adoration, and at first she had been in
despair, gazing horror-stricken at the twelve months stretching
before her as upon a deep, black grave into which she was being
thrust; but everybody seemed to think it was unavoidable, and one
fine morning she suddenly fled to Riva. It would have been quite
possible for her to have lived in a livelier and more frequented place,
but that was the very thing she sought to avoid. She felt ashamed,
as though she had been marked with an outward visible blemish,
imagining that people pitied her because of this infirmity, and that
they discussed her among themselves. Therefore she had shunned
all society in her new abode and had lived almost entirely in her
rooms, where she sometimes took revenge on the doors when her
voluntary confinement became unbearable. Now that everybody had
left, she appeared again and learned to know Niels Lyhne, for she
was not at all afraid of people individually.
No one needed to be long in Madame Odéro’s presence before
finding out whether she liked him or not, for she showed it with
sufficient plainness. What she gave Niels Lyhne to see was very
encouraging, and they had not been alone for many days in the
magnificent hotel garden with its pomegranates and myrtles, with its
arbors of blossoming nerias and its marvellous view, before they
were on very friendly terms.
They were not at all in love with each other, or if they were, it
was not very serious. It was one of the vague, pleasant intimacies
that will sometimes grow up between men and women who are past
the time of early youth when nature flames up and yearns toward an
unknown bliss. It is a kind of waning summer, in which people
promenade decorously side by side, gather themselves into graceful
nosegays, each caressing himself with the other’s hand and admiring
himself with the other’s eyes. They take out all their store of pretty
secrets, all the exquisite useless trifles people accumulate like bric-à-
brac of the soul, pass them from hand to hand, turn them round and
hold them up, seeking the most artistic light-effect, comparing and
analyzing.

It is, of course, only when life passes in a leisurely way that such
Sunday friendships are possible, and here by the quiet lake these
two had plenty of time. Niels had made a beginning by draping
Madame Odéro in a becoming robe of melancholy. At first, she was
several times on the point of tearing the whole thing off and
revealing herself as the barbarian she was, but when she found that
she could wear the drapery with patrician effect, she took her
melancholy as a rôle, and not only stopped slamming the doors, but
sought out the moods and emotions in herself that might suit her
new pose. It was astonishing how she came to realize that she had
actually known herself very little in the past. Her life had, in fact,
been too eventful and exciting to give her time for exploring herself,
and besides she was only now approaching the age when women
who have lived much in the world and seen much commence to
collect their memories, to look back at themselves and assemble a
past.
From this beginning, their intimacy developed quickly and
definitely until they had become quite indispensable to each other.
Each led only a half-hearted existence without the other.
Then it happened one morning, as Niels was starting out for a
sail, that he heard Madame Odéro singing in the garden. His first
impulse was to turn back and scold her, but before he could make up
his mind, the boat had carried him out of hearing; the wind tempted
him to a trip to Limone, and he meant to be back by midday. So he
sailed on.
Madame Odéro had descended into the garden earlier than
usual. The fresh fragrance that filled the air, the round waves rising
and sinking clear and bright as glass beneath the garden wall, and
all this glory of color everywhere—blue lake and sun-scorched
mountains, white sails flitting across the lake and red flowers arching
over her head—all this and with it a dream she could not forget,
which went on throbbing against her heart.... She could not be
silent, she had to be a part of all this life.
Therefore she sang.

Fuller and fuller rose the exultant notes of her voice. She was
intoxicated with its beauty, she trembled in a voluptuous sense of its
power; and she went on, she could not stop, for she was borne
blissfully along on wonderful dreams of coming triumphs.
No weariness followed. She could leave, leave at once, shake off
the nothingness of the past months, come out of her hiding and live!
By midday everything was ready for her departure.
Then, just as the carriages drove up to the door, she
remembered Niels Lyhne. She dived down into her pocket for a
paltry little note-book, and scribbled it full of farewells to Niels, for
the pages were so small that each could hold only three or four
words. This she enclosed in an envelope for him and departed.
When Niels came back in the late afternoon, after being detained
by the sanitary police in Limone, she had long since reached Mori
and taken the train.
He was not surprised, only sorry, and not at all angry. He could
even smile resignedly at this new hostile thrust of fate. But in the
evening, when he sat in the empty moonlit garden telling the
innkeeper’s little boy the story about the princess who found her
wings again and flew away from her lover back to the land of fairies,
he was seized with an intolerable longing for Lönborggaard. He
yearned to feel something closing around him like a home and
holding him fast, no matter how. He could not bear the indifference
of life any longer, could not endure being cast off and thrown back
on himself again and again. No home on earth, no God in heaven,
no goal out there in the future! He would at least have a home. He
would make it his own by loving everything there, big and little,
every rock, every tree, the animate and the inanimate; he would
portion out his heart to it all so that it could never cast him off any
more.

Chapter XIII
or about a year, Niels Lyhne had lived at Lönborggaard, managing
the farm as well as he knew how and as much as his old steward
would let him. He had taken down his shield, blotted out his
’scutcheon, and resigned. Humanity would have to get along without
him; he had learned to know the joy found in purely physical labor,
in seeing the pile growing under his hand, in being able to get
through with what he was doing so that he really was through, in
knowing that when he went away tired the strength that he had
used up lay behind him in his work, and the work would stand and
not be eaten up by doubt in the night or dispersed by the breath of
criticism on the morning after. There were no Sisyphus stones in
agriculture.
What a joy it was, too, when he had worked till he was tired, to
go to bed and gather strength in sleep and to spend it again, as
regularly as day and night follow one upon the other, never hindered
by the caprices of his brain, never having to handle himself gingerly
like a tuned guitar with loose pegs.
He was really happy in a quiet way, and often he would sit, as his
father had sat, on a stile or a boundary stone, staring out over the
golden wheat or the top-heavy oats, in a strange, vegetative trance.
As yet he had not begun to seek the society of the neighboring
families, except Councillor Skinnerup’s in Varde, whom he visited
quite frequently.
The Skinnerups had come to town while his father was still living,
and as the Councillor was an old university friend of Lyhne’s, the two
families had seen much of each other. Skinnerup, a mild, bald-
headed man with sharp features and kind eyes, was now a widower,
but his house was more than filled by his four daughters, the eldest
seventeen, the youngest twelve years old.

The Councillor had read much, and Niels enjoyed a chat with him
on various esthetic subjects, for though he had learned to use his
hands, that, of course, did not turn him into a country bumpkin all at
once. He was rather amused sometimes at the almost absurd care
he had to exercise whenever the conversation turned to a
comparison between Danish and foreign literature and, in fact,
whenever Denmark was measured against something not Danish.
Caution was absolutely necessary, however, for the mild-mannered
Councillor was one of the fierce patriots, occasionally met with in
those days, who might grudgingly admit that Denmark was not the
greatest of the world powers, but when so much was said would not
subscribe to a jot or a tittle more that might place his country or
anything pertaining to it anywhere but in the lead.
These conversations had another charm, which Niels felt at first
vaguely and without consciously thinking of it, in the look of
delighted admiration with which seventeen-year-old Gerda’s eyes
followed him as he spoke. She always managed to be present when
he came, and would listen so eagerly that he often saw her flushing
with rapture when he said something that seemed to her especially
beautiful.
The truth was, he had unwittingly become this young lady’s ideal,
at first chiefly because he often rode into town wearing a gray
mantle of a very foreign and romantic cut, then because he always
said Milano instead of Milan, and finally because he was alone in the
world and had rather a sad countenance. There were certainly a
great many ways in which he differed from the rest of the people in
Varde and in Ringkjöbing too.
On a hot summer day, Niels came through the narrow street behind
the Councillor’s garden. The sun was pouring down over the brick-
red little houses, and the ships lying out on the sound had mats
hung over their sides to prevent the tar from melting and oozing out
of the seams. Round about him everything was open to admit a

coolness which did not exist. Within the open doors, the children
were reading their lessons aloud, and the hum of their voices
mingled with that of the bees in the garden, while a flock of
sparrows hopped silently from tree to tree, all flying up together and
coming down together.
Niels entered a little house right behind the garden, and while
the woman went to bring her husband from the neighbor’s, he was
left alone in a spotless little room smelling of gillyflowers and freshly
ironed linen.
When he had examined the pictures on the walls, the two dogs
on the dresser, and the sea-shells on the lid of the work-box, he
stepped over to the open window, whence he heard the sound of
Gerda’s voice, and there were the four Skinnerup girls on the
Councillor’s bleaching-green only a few steps away.
The balsamines and other flowers in the window hid him, and he
prepared himself both to listen and to look.
It was clear that a quarrel was going on, and the three younger
sisters were making common cause against Gerda. All carried whips
of lemon-yellow withes. The youngest had formed three or four of
them into rings wound about with red bark, and had put them on
her head like a turban.
It was she who was speaking.
“She says he looks like Themistocles on the stove in the study,”
she remarked to her fellow conspirators, and turned up her eyes
with a rapt expression.
“Oh, pshaw,” said the middle one, a saucy little lady who had just
been confirmed that spring; “do you suppose Themistocles was
round-shouldered?” She imitated Niels Lyhne’s slight stoop.
“Themistocles! Not much!”
“There is something so manly in his look; he is a real man!”
quoted the twelve-year-old.

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Macroeconomics 19th Edition Paul Samuelson

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