The Region

The Fortune Encyclopedia of Economics

Book Review

David Fettig | Editor

Published December 1, 1993  | December 1993 issue

Edited by David R. Henderson, Ph.D.
Warner Books,
896 pages, indexed

When the economist David Henderson was asked to edit The Fortune Encyclopedia of Economics for Warner Books, it didn't take him long to answer yes. What did take time, though, was the consideration of three important questions: Which topics to include, who should write about them and how to keep the articles short and readable.

Three years later, Henderson, an associate professor of economics at the Naval Postgraduate School in Monterey, Calif., unveiled an 896-page tome that includes 157 essays written by 141 of the country's top economists. Rather than alphabetize the entries, as in a typical encyclopedia, Henderson uses 14 chapters to divide the essays into such categories as "Economic Systems and Schools of Economic Thought,'' ''Money and Banking, "Taxes," "Discrimination and Labor Issues," "Environmental Regulation" and "International Topics." In addition to the essays, the book also offers biographies of 75 of the world's leading economists, along with selected bibliographies of their work.

"I'm one of the last generalists in economics, so it wasn't hard for me to come up with the topics and the authors," says Henderson, who says he received a lot of advice from colleagues. Henderson admits that he was initially nervous about the project-at least until his outline was approved by Warner and he started receiving responses from authors.

Unlike most encyclopedias, which encourage contributors to eschew bias for balance, Henderson allowed his writers to sprinkle their articles with opinion. "The reason for my passion on economics is that you can reach conclusions," he says. "I wanted them to go for truth."

Essays range from such general topics as "Profits," "Business Cycles," "Demand" and "Federal Debt," to more specific issues like "Deposit Insurance," "Phillips Curve," "Junk Bonds" and "Agricultural Price Supports," to less traditional topics as "Recycling," "Telecommunications" and "Sportometrics."

By including a wide array of topics, Henderson wants to show "how general and inclusive economics is," and he hopes the encyclopedia will appeal to economics mavens and novices alike.

First published in August, the book is in its second printing and Henderson hopes that, eventually, Warner will publish a second edition. If so, he says he's ready.

Excerpts from
The Fortune Encyclopedia of Economics.

Rational ExpectationsThomas J. Sargent
The concept of rational expectations asserts that outcomes do not differ systematically (i.e. regularly or predictably) from what people expected them to be. The concept is motivated by the same thinking that led Abraham Lincoln to assert, "You can fool some of the people all of the time, and all of the people some of the time." From the viewpoint of the rational expectations doctrine, Lincoln's statement gets things right. It does not deny that people often make forecasting errors, but it does suggest that errors will not persistently occur on one side or the other.

Economists who believe in rational expectations base their belief on the standard economic assumption that people behave in ways that maximize their utility (their enjoyment of life) or profits.

Federal Debt—Robert Eisner
Everyone talks about the federal debt, but few, literally, know what they are talking about. That is all the more true for the federal deficit, which year after year adds to the total debt outstanding.

Perhaps the first thing to know about the federal debt, some $4 trillion at then end of 1992, is that $1 trillion of it is held by government trust funds such as those for Social Security. Excluding that amount leaves the more relevant figure of "gross federal debt held by the public" at $3 trillion.

Even that number is somewhat misleading on two counts..

Human Capital—Gary S. Becker
..The economics of human capital have brought about a particularly dramatic change in the incentives for women to invest in college education in recent decades. Prior to the sixties American women were more likely than men to graduate from high school but less likely to continue on to college. ?Because relatively few women continued to work for pay, they rationally chose an education that helped in "household production"—and no doubt also in the marriage market—by improving their social skills and cultural interests.

All this has changed radically?

Bank Runs—George G. Kaufman
..The danger of bank runs has been overstated. For tone thins, a bank run is unlikely to cause insolvency. Suppose that depositors, worried about their bank's solvency, start a run and switch their deposits to other banks. If their concerns are unjustified, other banks in the same market area would generally gain from recycling funds they receive back to the bank experiencing the run?Thus, a run is highly unlikely to make a solvent bank unsolvent.

Of course, if the depositors' fears are justified and the bank is economically insolvent, other banks would be unlikely to throw good money after bad by recycling their fund to the insolvent bank. ?But the run would not have caused the insolvency; the insolvency had already incurred, but not fully recognized..

Federal Reserve System—Manuel H. Johnson
?The Great Depression of the thirties shifted the Fed toward more central management of monetary affairs. Working with Marriner Eccles, a Utah banker, President Franklin Roosevelt fashioned the Banking Act of 1935, which concentrated the authority over monetary policy in Washington with the independent seven-member board of governors, and excluded the secretary of the Treasury, and the comptroller of the currency. Eccles was appointed the first chairman of this new board and a separate building was erected for its use on Constitution Avenue. Benjamin Strong's informal open-market group became a restructured, permanent Federal Open Market Committee in a provision of the banking act?

Sportometrics—Robert D. Tollison
?[Sportometrics] is the application of economic theories to the behavior of athletes in the real world to see if we can explain what they do, and to see if what they do can help us explain the behavior of people in other professions?

In other words, sportometricians view sports as an economic environment in which athletes behave according to incentives and constraints. Economists have, for example, shown how incentives and costs can explain how much effort runners exert in a footrace. Using data from sprint events of the modern Olympics from 1896 to 1980, the cited study found that running times were faster when there were fewer contestants in the race. This makes sense...