James Gwartney
Fall, 1993
Department of Economics

Scope of the Course

This course is an introduction to the operation and institutions of market economies. It focuses on broad themes and related issues, rather than formal theory which is dealt with in other classes. Of course, some theory will be utilized in order to enhance your understanding of both markets and legal institutions. The course will analyze the role of markets in the determination of what, how, and for whom goods are produced. It will also present an overview of the role of government in a market economy and consider the circumstances under which public sector action is most likely to enhance the creation of wealth.

The readings are of varying difficulty. The primary source for the readings will be Steven Landsburg, Price Theory and Applications. Rather than focusing on the formal theory of this text, we will concentrate on the sections of the book that deal with the operation and institutions of market economies. Several readings on rather specific topics have also been chosen from the Fortune Encyclopedia of Economics (New York, Warner Books, 1993) edited by David Henderson. Copies of the readings (other than the Landsburg text) will be provided to the student.

The readings are intended to both supplement the lectures and provide stimulating background material. Students are encouraged to ask questions and make comments during class. Students will be evaluated on the basis of their performance on mid-term and final examinations. Classroom participation may also exert a marginal (small) impact. Your instructor is also available for assistance and discussions during regular office hours (Tuesdays and Thursdays, afternoons and Wednesdays, morning).

Introduction to Market Economies

I. Foundations of a Market Economy
A. Private Property

I) Arrnen A. Alchian, "Property Rights" Fortune Encyclopedia of Economics, pp. 69-73.
2) Alan Ryan, "Property" The New Palgrove: The Invisible Hand, pp. 227-231.
3) James Gwartney, "Private Property, Freedom, and the West," Intercollegiate Review (Spring/Summer 1985).

B. Exchange and Transaction Costs

1) James Gwarntey, "Exchange, Property Rights, and the Creation of Wealth," Chapter 2 of Introduction to Economics: The Wealth and Poverty of Nations.
2) Steven Landsburg, "Price, Costs, and Gains from Trade," in Price Theory and Applications, chap. 3.

II. The Organization of Business Firms
A. Contracting vs. Team Production
B. Principal-Agent Relationships
C. Different Types of Business Firms
D. Importance of Residual Income Claimants

1) Armen Alchian and Harold Demsetz, "Production, Information Costs, and Economic Organization," American Economic Review, (December 1972).
2) Robert Hessen, "Corporations," Fortune Encyclopedia of Economics, pp. 558-563.
3) Steven Landsburg, "Principal-Agent Problems," pp. 324-328.

III. Market Allocation, Competition, and the Invisible Hand Principle
A. How Markets Determine What Will Be Produced
B. The Function of Competition
C. Role of Entrepreneurship
D. Knowledge and Information

1) James Gwartney and Richard Stroup, "The Invisible Hand Principle," Economics: Private and Public Choice, pp. 74-78.
2) Steven Landsburg, "Competition" (Chapter 7 of text).
3) Jack High, "Competition," Fortune Encyclopedia of Economics, pp. 622-626.
4) Mark Casson, "Entrepreneurship," Fortune Encyclopedia of Economics, pp. 631-635.
5) Steven Landsburg, "Welfare Economics and Gains from Trade," (Chapter 8 of text, pp. 233-270 particularly).
6) Steven Landsburg, "Knowledge and Information," (Chapter 9 of text).
7) Joseph E. Stiglitz, "Information," Fortune Encyclopedia of Economics, pp. 16-21.

IV. Capital Markets
A. Interest Rates and Allocation of Goods Over Time
B. Capital Formation and Future Output
C. Valuation of Assets
D. Market for Corporate Control

1) Gwartney/Stroup, "Investment, Capital Formation, and the Wealth of Nations," Introduction to Economics: The Wealth and Poverty of Nations, (chapter 10).
2) Steven Landsburg, "Allocating Goods Over Time," (chapter 16 of text).
3) Steven L. Jones and Jeffery M. Netter, "Efficient Capital Markets," Fortune Encyclopedia of Economics, pp. 569-573.
4) Jeremy Siegel, "Stock Prices," Fortune Encyclopedia of Economics, pp. 602-604.
5) Gregg A. Jarrell, "Takeovers and Leveraged Buyouts," Fortune Encyclopedia of Economics, pp. 605-610.
6) Gregg A. Jarrell, James A. Brickley, and Jeffery M. Nettler, The Market for Corporate Control: the Empirical Evidence Since 1980.

V. The Role of Government in a Market Economy
1) Landsburg, "External Costs and Benefits," (Chapter 12 of text).
2) Landsburg, "Common Property and Public Goods," (Chapter 13 of text).
3) Gwartney/Stroup, "Economic Progress and the Role of Government," (chapter 20, Wealth and Poverty of Nations).
4) Tyler Cowen, "Public Goods and Externalities," Fortune Encyclopedia of Economics, pp. 75-77.
5) Richard L. Stroup, "Political Behavior," Fortune Encyclopedia of Economics, pp. 45-50.

CRC-Curriculum Resource Center
CEU Budapest, Hungary
Modified: May, 1996


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