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Introduction to Macroeconomics (Chapter 2)

Introduction to Macroeconomics (Chapter 2) - CHAPTER The...

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25 C H A P T E R 2 Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. Adam Smith The Wealth of Nations (1776) The Modern Mixed Economy Think for a moment about some of the goods and services that you consumed over the last few days. Perhaps you took an airline flight to school or bought some gasoline for the family car. You surely had some home-cooked food bought in a grocery store or a meal purchased at a restaurant. You might have bought a book (such as this textbook) or some pharmaceutical drugs. Now consider some of the many steps that pre- ceded your purchases. The airplane flight will illus- trate the point very well. You may have purchased an airline ticket on the Internet. This simple-sounding purchase involves much tangible capital such as your computer, intellectual property (in software and designs), and sophisticated fiber-optic transmission lines, as well as complicated airline reservation sys- tems and pricing models. The airlines do all this to make profits (although profits have been very mod- est in that sector). At the same time, government plays an important role in air travel. It regulates airline safety, owns many airports, manages the traffic-control system, produces the public good of weather data and forecasting, and provides information on flight delays. And this list could go on into the public and private support of aircraft manufacturing, international agreements on airline competition, energy policy on fuels, and other areas. The same point would apply—in different degrees depending upon the sector—to your purchases of clothing or gasoline or pharmaceuticals or just about any item. The economy of every country in the world is a mixed economy —a combination of private enter- prise working through the marketplace and gov- ernment regulation, taxation, and programs. What exactly is a market economy, and what makes it such a powerful engine of growth? What is the “capital” in “capitalism”? What government controls are needed sam11290_ch02.indd 25 sam11290_ch02.indd 25 2/24/09 1:42:59 PM 2/24/09 1:42:59 PM
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26 CHAPTER 2 THE MODERN MIXED ECONOMY suitable amounts, gets transported to the right place, and arrives in a palatable form at the dinner table. But a close look at New York or other economies is convincing proof that a market system is neither chaos nor miracle. It is a system with its own internal logic. And it works.
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