[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

customers are being affected too. Assembly lines now rely on robots aided and
controlled by computers. Car repair shops with grease-stained floors have been
replaced by clean, quiet garages where computers diagnose a car’s problems. The
way we buy things is also changing. Whether an individual purchases a car, book,
or CD over the Web; books a hotel or plane reservation; or even applies to a college
through the Internet, the relationship between people and firms is evolving. New
technologies are changing the way courses are taught, too—textbooks like this one
have Web sites that provide students with help, with interactive exercises, and with
links to news, policy debates, and the latest economic information. The address of
the home page for this text is www.wwnorton.com/stiglitzwalsh4.
With such far-reaching changes, what insights and understanding does the study
of economics have to offer? After all, the field usually looks to Adam Smith, an
eighteenth-century Scottish professor of moral philosophy, as its founder. Smith
published his most famous book, The Wealth of Nations, in 1776, a time when today’s
industrial economies were still overwhelmingly agriculture-based. It might seem
unlikely that a theory developed to understand the factors that determine the price
of wheat would have much to say about today’s modern economy.
But, in fact, study of economics continues to provide a critical understanding of
today’s global economy. As Carl Shapiro and Hal Varian of the University of California,
Berkeley, put it, “Technology changes. Economic laws do not.” 1 The way we produce
things, what we produce, and how goods are exchanged have altered tremendously
since Smith wrote. Yet the same fundamental laws of economics that explained agricultural
prices in the eighteenth century can help us understand how economies
function in the twenty-first century The foundation laid by Adam Smith and built
upon by generations of economists has yielded insights that will continue to offer
guidance to anyone wishing to make sense of the modern economy.
Over the past two hundred years, economists have refined and expanded our
understanding of economic behavior. By incorporating the role of information and
technological change, they are now able to explain much more than was possible
just twenty years ago, offering new insights into topics that range from why car dealers
build fancy showrooms to how the factors important for encouraging the production
of new ideas differ from those that encourage the production of new cars.
But what are these insights? What do economists study? And what can we learn
from looking at things from the perspective of economics? How can economics help
us understand why we need to worry about the extinction of salmon but not of sheep,
why auto manufacturers advertise but wheat farmers don’t, why countries that rely
on uncoordinated markets have done better than countries that rely on government
planners, and why letting a single firm dominate an industry is bad?
The headlines from some recent news stories involving the computer industry
and the Internet illustrate some of the key issues that a study of economics can help
illuminate.
• “Bill to Curb Online Piracy Is Challenged as Too Broad,” New York Times,
June 24, 2004. A bill recently introduced in the U.S. Senate aims to restrict
1
Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard
Business School Press, 1999), p. 2.
4 ∂ CHAPTER 1 MODERN ECONOMICS