Preface xiii

Acknowledgments xvii

Introduction 1

Rationale 1

Organization 2

Method 3

Reader Outcomes 3

Themes 4

Relevance and Applicability 5

References 6

Notes 6

1 Production 8

1.1 The Production Function 9

1.2 The “Law” of Variable Proportions 11

1.3 Substitution 13

1.4 Measuring Substitution 15

1.5 Specific “Functional Forms” for Production Functions 16

1.6 Attributing Products to Inputs: Distributing Income from Production 17

1.7 Efficiency and the Choice of How to Produce 18

1.8 Predictions of Production Theory 1: Input Price Changes 20

1.9 Predictions of Production Theory 2: Technological Changes 21

1.10 Stocks and Flows 22

1.11 The Distribution of Income 23

1.12 Production Functions in Achaemenid Babylonia 25

References 26

Suggested Readings 27

Notes 27

2 Cost and Supply 29

2.1 The Cost Function 31

2.2 Short Run and Long Run 32

2.3 The Relationship between Cost and Production 33

2.4 Producers’ Objectives 34

2.5 Supply Curves 35

2.6 Demands for Factors of Production 40

2.7 Factor Costs in General:Wages and Rents 41

2.8 Allocation of Factors across Activities 43

2.9 Organizing Production:The Firm 43

2.10 A More General Treatment of Cost Functions 46

2.11 The Economics of Mycenaean Vases, I: Supply and Cost 47

2.12 Accounting for Apparent Cost Changes in Minoan Pottery 49

2.13 Production in an Entire Economy: The Production Possibilities Frontier 50

References 52

Suggested Readings 53

Notes 53

3 Consumption 55

3.1 Rationality of the Consumer 57

3.2 The Budget 57

3.3 Utility and Indifference Curves 58

3.4 Demand 60

3.5 Demand Elasticities 63

3.6 Aggregate Demand 65

3.7 Evaluating Changes inWellbeing 66

3.8 Price and Consumption Indexes 70

3.9 Intertemporal Choice 73

3.10 Durable Goods and Discrete Choice 75

3.11 Variety and Differentiated Goods 79

3.12 Value of Time and Household Production 82

3.13 Risk, Risk Aversion, and Expected Utility 86

3.14 Irrational Behavior 88

3.15 Fixed Prices 90

3.16 Applying Demand Concepts: Relationships between Housing Consumption, Housing Prices, and Incomes in Pompeii 93

3.17 The Economics of Mycenaean Vases, II: Demand 96

References 99

Suggested Readings 99

Notes 100

4 Industry Structure and the Types of Competition 103

4.1 Perfect Competition 104

4.2 Competitive Equilibrium 106

4.3 Monopoly 108

4.4 Oligopoly 110

4.5 Monopolistic Competition 111

4.6 Contestable Markets 112

4.7 Buyer’s Power: Monopsony 113

4.8 The Economics of Mycenaean Vases, III: Industry Structure 114

4.9 Ancient Monopoly and Oligopoly: Religion and Foreign Trade 115

References 117

Suggested Readings 118

Notes 118

5 General Equilibrium 120

5.1 General Equilibrium as a Fact and as a Model 120

5.1.1 The facts 121

5.1.2 The models 121

5.1.3 The questions 123

5.2 TheWalrasian Model 124

5.3 Exchange 127

5.4 The Two-Sector Model 128

5.4.1 The basics with the Lerner–Pearce diagram 128

5.4.2 Growth in factor supplies 130

5.4.3 Technical change 132

5.5 Existence and Uniqueness of Equilibrium 133

5.6 Computable General Equilibrium Models 134

References 136

Suggested Readings 137

Notes 137

6 Public Economics 139

6.1 Government in the Economy: Scope of Activities, Modern and Ancient 139

6.2 Private Goods, Public Goods, and Externalities 141

6.2.1 Private goods 141

6.2.2 Public goods 142

6.2.3 Externalities 143

6.3 Raising Revenue 149

6.3.1 Taxation 1: rationales and instruments 149

6.3.2 Taxation 2: effects of taxes 154

6.3.3 Taxation 3: tax incidence (who really pays?) 165

6.3.4 Taxation 4: optimal tax systems 169

6.3.5 Other revenue sources 173

6.4 TheTheory of Second Best 174

6.5 Government Productive Activities 175

6.5.1 Public production and pricing 175

6.5.2 The supply of public goods and social choice mechanisms 181

6.5.3 Public investment and cost–benefit analysis 186

6.6 Regulation of Private Economic Activities 191

6.6.1 Rent seeking 192

6.6.2 The costs of regulation: the Averch–Johnson effect 193

6.7 The Behavior of Government and Government Agencies 194

6.7.1 Theories of government 194

6.7.2 Theories of bureaucracy 195

6.7.3 Levels of government 196

6.8 Suggestions for Using the Material of this Chapter 196

References 197

Suggested Readings 199

Notes 199

7 The Economics of Information and Risk 202

7.1 Risk 202

7.1.1 The ubiquity of risky decisions 203

7.1.2 Concepts and measurement 205

7.1.3 Risk and behavior: expected utility 209

7.1.4 Risk versus uncertainty: the substance of probabilities 215

7.2 Information and Learning 217

7.2.1 The structure of information 217

7.2.2 Learning as Bayesian updating 218

7.2.3 Experts and groups 223

7.3 Dealing with Nature’s Uncertainty 225

7.3.1 Contingent markets 225

7.3.2 Portfolios and diversification 230

7.4 Behavioral Uncertainty 235

7.4.1 Asymmetric information: problems and solutions 236

7.4.2 Strategic behavior 242

7.5 Expectations 246

7.5.1 The role of expectations in resource-allocation decisions 247

7.5.2 Adaptive models of expectations 247

7.5.3 The rational expectations hypothesis 249

7.6 Competitive Behavior under Uncertainty 252

7.6.1 Production behavior 252

7.6.2 Search problems 253

7.7 Suggestions for Using the Material of this Chapter 253

References 254

Suggested Readings 255

Notes 255

8 Capital 258

8.1 The Substance and Concepts of Capital 258

8.1.1 Capital as stuff 259

8.1.2 Capital in the production function 262

8.1.3 Stocks, flows, and accumulation 263

8.1.4 Prices and values 264

8.1.5 Temporal aspects of capital 265

8.1.6 Measuring capital 268

8.1.7 The labor theory of value 269

8.2 Quasi-Rents 270

8.3 Interest Rates 272

8.4 TheTheory of Capital 276

8.4.1 Present and future consumption, investment, and capital accumulation 276

8.4.2 Demand for and supply of capital: flows and stocks 279

8.4.3 Capital richness and interest rates 283

8.5 Use of Capital by Firms 284

8.5.1 Investment 284

8.5.2 Maintenance 287

8.5.3 Scrapping and replacement 289

8.6 Consumption and Saving 290

8.6.1 Intertemporal utility maximization 290

8.6.2 Hypotheses about consumption 291

8.6.3 Individual and aggregate savings 294

8.7 Capital Formation 294

8.8 Suggestions for Using the Material of this Chapter 296

References 297

Suggested Readings 298

Notes 298

9 Money and Banking 301

9.1 The Services of Money 302

9.1.1 Money as a medium of exchange 302

9.1.2 Money as a store of value 302

9.1.3 Money as a unit of account 303

9.1.4 Stability of value 303

9.1.5 Monetization prior to currency 303

9.2 The Types of Money 304

9.2.1 Commodity money 304

9.2.2 Credit money 304

9.2.3 One special case of credit money: bank money 305

9.3 Some Preliminary Concepts 305

9.3.1 The price level 305

9.3.2 Inflation 306

9.3.3 “Nominal” versus “real” distinctions 307

9.3.4 What people in antiquity knew 309

9.4 The Demand for Money 309

9.4.1 Measuring money 310

9.4.2 The distinctiveness of the demand for money 311

9.4.3 Monetary theory and macroeconomics for ancient economies?! 312

9.4.4 The neoclassical quantity theory 313

9.4.5 Keynesian monetary theory 315

9.4.6 The contemporary synthesis 317

9.5 The Supply of Money 318

9.5.1 Supply of a commodity money 320

9.5.2 Creation of money by banks 323

9.5.3 The banking firm 328

9.5.4 Financial intermediation 332

9.5.5 Exogeneity / endogeneity of money supply and foreign exchange 335

9.5.6 Seigniorage: making money by issuing money 336

9.5.7 Bimetallism 337

9.6 Inflation 337

9.6.1 Causes of inflation 338

9.6.2 Mechanisms of inflation 339

9.6.3 Consequences of inflation 340

9.7 Monetary Policy 342

9.7.1 The players and their motives 342

9.7.2 Choice of monetary standard 343

9.7.3 Influencing the supply of money 343

9.7.4 Influencing the demand for money 345

9.7.5 International monetary policies 345

9.8 Suggestions for Using the Material of this Chapter 345

References 345

Suggested Readings 347

Notes 347

10 Labor 350

10.1 Applying Contemporary Labor Models to Ancient Behavior and Institutions 350

10.2 Human Capital 353

10.2.1 Investment in human capital 354

10.2.2 Health 356

10.2.3 Guilds, occupational licensing, and entry restriction 356

10.3 Labor Supply 357

10.3.1 Utility analysis of individual and family labor supply 357

10.3.2 Lifecycle / dynamic labor supply 364

10.3.3 Supply of labor to activities 368

10.3.4 Household production 369

10.4 Labor Demand 375

10.4.1 The productive enterprise’s demand for labor 376

10.4.2 Derived demand 379

10.5 Labor Contracts 384

10.5.1 Information problems and incentives 384

10.5.2 The basis of pay 385

10.5.3 Sequencing of pay 387

10.5.4 Compensating differentials in wages 387

10.6 Migration 391

10.6.1 Economic incentives for migration 392

10.6.2 Consequences of migration 394

10.6.3 Refugee migration 396

10.6.4 Equilibrating migration flows when the wage rate doesn’t adjust 396

10.7 Families 398

10.7.1 Marriage 398

10.7.2 Intrafamily resource allocation 405

10.7.3 Children and the economics of fertility and child mortality 412

10.8 Labor and the Family Enterprise 414

10.8.1 The farm family household and the separability of production decisions from consumption decisions 415

10.8.2 Effects of missing markets on labor allocation 418

10.8.3 Restrictions on household activities 420

10.8.4 Implications of the family farm model 422

10.9 Slavery 423

10.9.1 The supply of slaves 424

10.9.2 The demand for slaves 426

10.9.3 Investment in slaves 427

10.9.4 Market consequences of slaves 427

10.9.5 Slaves’ incentives 427

10.10 Suggestions for Using the Material of this Chapter 428

References 429

Suggested Readings 432

Notes 433

11 Land and Location 440

11.1 The Special Characteristics of Land 440

11.2 Land as a Factor of Production 441

11.2.1 Supply 441

11.2.2 Demand 441

11.3 The Location of Land Uses 442

11.3.1 TheThünen model 442

11.3.2 The bid-rent function 447

11.3.3 Equilibrium in a region 450

11.3.4 Modifying the social context 451

11.4 The Location of Production Facilities 452

11.4.1 Individual facilities 452

11.4.2 Industries 455

11.5 Consumption and the Location of Marketing 457

11.5.1 The structure of transportation costs 457

11.5.2 The shopping tradeoff: frequency versus storage 458

11.5.3 Aggregate demand in a spatial market 460

11.5.4 Hierarchies of marketplaces: central place theory 461

11.5.5 Periodic markets 462

11.6 Transportation 463

11.6.1 Infrastructure 463

11.6.2 Equipment 465

11.6.3 Pricing of transportation services 465

11.7 Suggestions for Using the Material of this Chapter 467

References 468

Suggested Readings 469

Notes 470

12 Cities 472

12.1 Cities and their Analysis, Modern and Ancient 472

12.1.1 Classifying cities 472

12.1.2 Characteristics of cities 473

12.1.3 What goes on in cities 473

12.1.4 Ancient observations and contemporary analytical emphases 474

12.2 Economies of Cities 475

12.2.1 Scale economies in production 475

12.2.2 Externalities 477

12.2.3 Types of production 477

12.3 Housing 479

12.3.1 The Special Characteristics of Housing 479

12.3.2 Housing supply 480

12.3.3 Housing demand 481

12.4 Urban Spatial Structure 482

12.4.1 The monocentric city model 483

12.4.2 Multiple categories of residents 488

12.4.3 Working at home 489

12.4.4 Endogenous centers 490

12.4.5 Density gradients and the ancient city 491

12.4.6 Wage differentials across cities 491

12.5 Systems of Cities 492

12.5.1 Production and consumption within any city 493

12.5.2 Different types of cities 497

12.5.3 The city size distribution and its responses to various changes 499

12.6 Urban Finance 503

12.6.1 Local public goods 504

12.6.2 What to supply and how much 505

12.6.3 Raising revenue 506

12.7 Suggestions for Using the Material of this Chapter 507

References 508

Suggested Readings 510

Notes 511

13 Natural Resources 516

13.1 Exhaustible Resources 517

13.1.1 The theory of optimal depletion 517

13.1.2 Different deposits 520

13.1.3 Uncertainty 521

13.1.4 Exploration 521

13.1.5 Monopoly 523

13.2 Renewable Resources 524

13.2.1 Biological growth 524

13.2.2 Harvesting 525

13.2.3 The theory of optimal use 527

13.2.4 Open access and the fishery 528

13.3 Resource Scarcity 531

13.4 The Ancient Mining-Forestry Complex 531

13.5 Suggestions for Using the Material of this Chapter 532

References 533

Suggested Readings 533

Notes 533

14 Growth 535

14.1 Introduction 535

14.1.1 Economic growth: delimiting the scope 535

14.1.2 Growth in antiquity: is there anything to explain? 536

14.2 Essential Concepts 536

14.2.1 Production functions again 536

14.2.2 Technical change 537

14.2.3 Growth versus development 537

14.3 Neoclassical GrowthTheory 538

14.3.1 The Solow model 538

14.3.2 Technology and growth in the Solow model 541

14.3.3 Endogenizing technical change 543

14.3.4 Extent of the market, division of labor, and productivity 545

14.4 Structural Change 546

14.4.1 Sectoral concepts as organizing devices 546

14.4.2 A two-sector model of an economy 548

14.4.3 Some stylized facts 549

14.5 Institutions 551

14.5.1 Property rights 552

14.5.2 Governments 552

14.5.3 Stability and change 553

14.6 Studying Economic Growth in Antiquity 553

14.6.1 What there is to explain 554

14.6.2 Organizing inquiry about economic growth with the help of growth theory 554

14.6.3 Studying episodes of growth following declines: beyond growth theory 557

14.6.4 Summary 559

14.7 Suggestions for Using the Material of this Chapter 559

14.7.1 Evidence of growth 559

14.7.2 Sectoral structure 561

References 561

Suggested Readings 564

Notes 564

Index 569

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