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 Is Facebook free? Is college worth it? Second Edition
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 Dedication

With love for Annika, Aras, Arda, Eli,

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who inspire us every day.

A01_ACEM2063_02_SE_FM_ppi-xliii.indd 5 6/9/17 7:59 PM

 About the Authors

Daron Acemoglu is the Elizabeth and James Killian Professor of Economics in the Depart-
ment of Economics at the Massachusetts Institute of Technology. He has received a B.A.
in economics from the University of York, 1989; an M.Sc. in mathematical economics and
econometrics from the London School of Economics, 1990; and a Ph.D. in economics from
the London School of Economics in 1992.
He is an elected fellow of the National Academy of Sciences, the American Academy of
Arts and Sciences, the Econometric Society, the European Economic Association, and the
Society of Labor Economists. He has received numerous awards and fellowships, including
the inaugural T. W. Schultz Prize from the University of Chicago in 2004, the inaugural
Sherwin Rosen Award for outstanding contribution to labor economics in 2004, the Distin-
guished Science Award from the Turkish Sciences Association in 2006, and the John von
Neumann Award, Rajk College, Budapest, in 2007.
He was also the recipient of the John Bates Clark Medal in 2005, awarded every two
years to the best economist in the United States under the age of 40 by the American Eco-
nomic Association, and the Erwin Plein Nemmers Prize, awarded every two years for work
of lasting significance in economics. He holds honorary doctorates from the University of
Utrecht and Bosporus University.
His research interests include political economy, economic development and growth,
human capital theory, growth theory, innovation, search theory, network economics, and
learning.
His books include Economic Origins of Dictatorship and Democracy ( jointly with
James A. Robinson), which was awarded the Woodrow Wilson and the William Riker
prizes, Introduction to Modern Economic Growth, and Why Nations Fail: The Origins of
Power, Prosperity, and Poverty ( jointly with James A. Robinson), which has become a New
York Times bestseller.

David Laibson is the Chair of the Harvard Economics Department and the Robert I.
Goldman Professor of Economics at Harvard University. He is also a member of the Na-
tional Bureau of Economic Research, where he is Research Associate in the Asset Pricing,
Economic Fluctuations, and Aging Working Groups. His research focuses on the topics
of behavioral economics, intertemporal choice, macroeconomics, and household finance,
and he leads Harvard University’s Foundations of Human Behavior Initiative. He serves
on several editorial boards, as well as the Pension Research Council (Wharton), Harvard’s
Pension Investment Committee, and the Board of the Russell Sage Foundation. He has
previously served on the boards of the Health and Retirement Study (National Institutes of
Health) and the Academic Research Council of the Consumer Financial Protection Bureau.
He is a recipient of a Marshall Scholarship and a Fellow of the Econometric Society and
the American Academy of Arts and Sciences. He is also a recipient of the T. W. Schultz
Prize from the University of Chicago and the TIAA-CREF Paul A. Samuelson Award for
Outstanding Scholarly Writing on Lifelong Financial Security. Laibson holds degrees
from Harvard University (A.B. in economics), the London School of Economics (M.Sc. in
econometrics and mathematical economics), and the Massachusetts Institute of Technol-
ogy (Ph.D. in economics). He received his Ph.D. in 1994 and has taught at Harvard since
then. In recognition of his teaching excellence, he has been awarded Harvard’s Phi Beta
Kappa Prize and a Harvard College Professorship.

vi

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 John A. List is the Kenneth C. Griffin Distinguished Service Professor in Economics at
the University of Chicago, and Chairman of the Department of Economics. He received
his B.S. in economics from the University of Wisconsin–Stevens Point and his Ph.D. in
economics from the University of Wyoming. Before joining the University of Chicago in
2005, he was a professor at the University of Central Florida, University of Arizona, and
University of Maryland. He also served in the White House on the Council of Economic
Advisers from 2002–2003, and is a Research Associate at the NBER.
List was elected a Member of the American Academy of Arts and Sciences in 2011, and
a Fellow of the Econometric Society in 2015. He also received the Arrow Prize for Senior
Economists in 2008, the Kenneth Galbraith Award in 2010, the Yrjo Jahnsson Lecture Prize
in 2012, and the Klein Lecture Prize in 2016. He received an honorary doctorate from
Tilburg University in 2014 and from the University of Ottawa in 2017. In addition, List
was named a Top 50 Innovator in the Non-Profit Times for 2015 and 2016 for his work on
charitable giving.
His research focuses on questions in microeconomics, with a particular emphasis on
using field experiments to address both positive and normative issues. For decades his field
experimental research has focused on issues related to the inner workings of markets, the
effects of various incentive schemes on market equilibria and allocations, and how behav-
ioral economics can augment the standard economic model. This includes research into
why inner city schools fail, why people discriminate, why people give to charity, why firms
fail, why women make less money than men in labor markets, and why people generally
do what they do.
His research includes over 200 peer-reviewed journal articles and several published
books, including the 2013 international best-seller, The Why Axis: Hidden Motives and the
Undiscovered Economics of Everyday Life (with Uri Gneezy).

About the Authors vii

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This page intentionally left blank
 Brief Contents

PART I Introduction to Economics 2

Chapter 1 The Principles and Practice of Economics 2
Chapter 2 Economic Methods and Economic Questions 20
Chapter 3 Optimization: Doing the Best You Can 42
Chapter 4 Demand, Supply, and Equilibrium 58

PART II Foundations of Microeconomics 86

Chapter 5 Consumers and Incentives 86
Chapter 6 Sellers and Incentives 114
Chapter 7 Perfect Competition and the Invisible Hand 144
Chapter 8 Trade 172
Chapter 9 Externalities and Public Goods 200
Chapter 10 The Government in the Economy: Taxation and
Regulation 230
Chapter 11 Markets for Factors of Production 260

PART III Market Structure 284

Chapter 12 Monopoly 284
Chapter 13 Game Theory and Strategic Play 310
Chapter 14 Oligopoly and Monopolistic Competition 334

PART IV Extending the Microeconomic Toolbox 360

Chapter 15 Trade-offs Involving Time and Risk 360
Chapter 16 The Economics of Information 378
Chapter 17 Auctions and Bargaining 396
Chapter 18 Social Economics 416

PART V Introduction to Macroeconomics 438

Chapter 19 The Wealth of Nations: Defining and Measuring
Macroeconomic Aggregates 438
Chapter 20 Aggregate Incomes 468

PART VI Long-Run Growth and Development 492

Chapter 21 Economic Growth 492
Chapter 22 Why Isn’t the Whole World Developed? 528

 ix

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 PART VII Equilibrium in the Macroeconomy 554
Chapter 23 Employment and Unemployment 554
Chapter 24 Credit Markets 580
Chapter 25 The Monetary System 604

PART VIII Short-Run Fluctuations and Macroeconomic

Policy 632
Chapter 26 Short-Run Fluctuations 632
Chapter 27 Countercyclical Macroeconomic Policy 660

PART IX Macroeconomics in a Global Economy 688

Chapter 28 Macroeconomics and International Trade 688
Chapter 29 Open Economy Macroeconomics 712

Chapters on the Web

Web chapters are available on MyEconLab.

WEB Chapter 1 Financial Decision Making

WEB Chapter 2 Economics of Life, Health, and the Environment
WEB Chapter 3 Political Economy

x Brief Contents

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 Contents

PART I Introduction to Economics 2 Evidence-Based Economics: How much do

wages increase when mandatory schooling laws
force people to get an extra year of schooling? 30
Chapter 1: The Principles and Practice 2.3 Economic Questions and Answers 31
of Economics 2 Summary 32
Key Terms 33
1.1 The Scope of Economics 3
Questions 33
Economic Agents and Economic Resources 3
Problems 33
Definition of Economics 4
Appendix: Constructing and Interpreting
Positive Economics and Normative Economics 5
Charts and Graphs 35
Microeconomics and Macroeconomics 6
A Study about Incentives 35
1.2 Three Principles of Economics 6 Experimental Design 35
1.3 The First Principle of Economics: Describing Variables 36
Optimization 7
Cause and Effect 38
Trade-offs and Budget Constraints  8
Appendix Key Terms 41
Opportunity Cost  9
Appendix Problems 41
Cost-Benefit Analysis  10
Evidence-Based Economics: Is Facebook
free?  11
Chapter 3: Optimization: Doing
1.4 The Second Principle of Economics:
the Best You Can 42
Equilibrium  13
3.1 Optimization: Choosing the Best Feasible
The Free-Rider Problem  14 Option 43
1.5 The Third Principle of Economics: Empiricism 15 Choice & Consequence: Do People Really
1.6 Is Economics Good for You?  16 Optimize? 44
Summary  17 3.2 Optimization Application: Renting the
Key Terms  17 Optimal Apartment 44
Questions  17 Before and After Comparisons 47
Problems  18 3.3 Optimization Using Marginal Analysis 48
Marginal Cost 49
Chapter 2: Economic Methods and Evidence-Based Economics: How does
Economic Questions 20 location affect the rental cost of housing? 52
Summary 55
2.1 The Scientific Method 21 Key Terms 56
Models and Data 21 Questions 56
An Economic Model 23 Problems 56
Evidence-Based Economics: How much more
do workers with a college education earn?  24 Chapter 4: Demand, Supply, and
Means and Medians 25 Equilibrium 58
Argument by Anecdote 25
2.2 Causation and Correlation 26 4.1 Markets 59
The Red Ad Blues 26 Competitive Markets 60
Causation versus Correlation 26 4.2 How Do Buyers Behave? 61
Choice & Consequence: Spend Now and Pay Demand Curves 62
Later? 29 Willingness to Pay 62
Experimental Economics and Natural Experiments 29

xi


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 From Individual Demand Curves to Aggregated The Income Elasticity of Demand 106
Demand Curves 63 Letting the Data Speak: Should McDonald’s
Building the Market Demand Curve 64 Be Interested in Elasticities? 107
Shifting the Demand Curve 65 Summary 107
Evidence-Based Economics: How much more Key Terms 108
gasoline would people buy if its price were lower? 67 Questions 108
4.3 How Do Sellers Behave? 69 Problems 109
Supply Curves 69 Appendix: Representing Preferences
Willingness to Accept 69 with Indifference Curves: Another Use
From the Individual Supply Curve to the of the Budget Constraint 111
Market Supply Curve 70 Appendix Questions 113
Shifting the Supply Curve 71 Appendix Key Terms 113
4.4 Supply and Demand in Equilibrium 73
Curve Shifting in Competitive Equilibrium 75 Chapter 6: Sellers and Incentives 114
Letting the Data Speak: Technological
Breakthroughs Drive Down the Equilibrium 6.1 Sellers in a Perfectly Competitive Market 115
Price of Oil 76 6.2 The Seller’s Problem 115
4.5 What Would Happen If the Government Making the Goods: How Inputs Are Turned into
Tried to Dictate the Price of Gasoline? 78 Outputs 116
Choice & Consequence: The Unintended The Cost of Doing Business: Introducing Cost Curves 118
Consequences of Fixing Market Prices 80 The Rewards of Doing Business: Introducing
Summary 81 Revenue Curves 120
Key Terms 82 Putting It All Together: Using the Three
Questions 82 Components to Do the Best You Can 121
Problems 83 Choice & Consequence: Maximizing Total
Profit, Not Per-Unit Profit 123
6.3 From the Seller’s Problem to the
PART II Foundations of Supply Curve 124
Microeconomics 86 Price Elasticity of Supply 124
Shutdown 125
Choice & Consequence: Marginal Decision
Chapter 5: Consumers and Incentives 86 Makers Ignore Sunk Costs 127
5.1 The Buyer’s Problem 87 6.4 Producer Surplus 127
What You Like 87 6.5 From the Short Run to the Long Run 129
Prices of Goods and Services 88 Long-Run Supply Curve 130
Choice & Consequence: Absolutes Versus Choice & Consequence: Visiting a Car
Percentages 88 Manufacturing Plant 130
How Much Money You Have to Spend 89 6.6 From the Firm to the Market: Long-Run
5.2 Putting It All Together 90 Competitive Equilibrium 131
Price Changes 92 Firm Entry 131
Income Changes 93 Firm Exit 133
Zero Profits in the Long Run 133
5.3 From the Buyer’s Problem to the Demand
Curve 94 Economic Profit Versus Accounting Profit 134
5.4 Consumer Surplus 95 Evidence-Based Economics: How would an
ethanol subsidy affect ethanol producers? 135
An Empty Feeling: Loss in Consumer Surplus When
Price Increases 96 Summary 138
Evidence-Based Economics: Would a smoker Key Terms 139
quit the habit for $100 per month? 97 Questions 139
5.5 Demand Elasticities 100 Problems 140
The Price Elasticity of Demand 100 Appendix: When Firms Have Different Cost
The Cross-Price Elasticity of Demand 105 Structures 142

xii Contents

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 Chapter 7: Perfect Competition Determinants of a Country’s Comparative Advantage 190
and the Invisible Hand 144 8.5 Arguments Against Free Trade 190
National Security Concerns 190
7.1 Perfect Competition and Efficiency 145 Fear of Globalization 191
Social Surplus 146 Environmental and Resource Concerns 191
Pareto Efficiency 147 Infant Industry Arguments 191
7.2 Extending the Reach of the Invisible Hand: The Effects of Tariffs 191
From the Individual to the Firm 148 Choice & Consequence: Tariffs Affect Trade
7.3 Extending the Reach of the Invisible Hand: Between Firms 193
Allocation of Resources Across Industries 152 Evidence-Based Economics: Will free trade
7.4 Prices Guide the Invisible Hand 154 cause you to lose your job? 194
Deadweight Loss 156 Summary 196
Evidence-Based Economics: Do companies Key Terms 196
like Uber make use of the invisible hand? 157 Questions 196
The Command Economy 161 Problems 197
Choice & Consequence: FEMA and
Walmart After Katrina 161 Chapter 9: Externalities and
The Central Planner 163 Public Goods  200
Choice & Consequence: Command
and Control at Kmart 164 9.1 Externalities  201
7.5 Equity and Efficiency 164 A “Broken” Invisible Hand: Negative Externalities 202
Evidence-Based Economics: Can markets A “Broken” Invisible Hand: Positive Externalities 204
composed of only self-interested people Pecuniary Externalities 206
maximize the overall well-being of society? 165
Choice & Consequence: Positive Externalities
Summary 169 in Spots You Never Imagined 206
Key Terms 169 9.2 Private Solutions to Externalities 207
Questions 169 Private Solution: Bargaining 208
Problems 170 The Coase Theorem 208
Private Solution: Doing the Right Thing 209
Chapter 8: Trade 172 9.3 Government Solutions to Externalities 210
Government Regulation:
8.1 The Production Possibilities Curve 173
Command-and-Control Policies 210
Calculating Opportunity Cost 175
Evidence-Based Economics: What can the
8.2 The Basis for Trade: Comparative government do to lower the number of
Advantage 176 earthquakes in Oklahoma? 211
Specialization 177 Government Regulation: Market-Based Approaches 213
Absolute Advantage 177 Corrective Taxes 213
Choice & Consequence: An Experiment Corrective Subsidies 214
on Comparative Advantage 178
Letting the Data Speak: How to Value
The Price of the Trade 179 Externalities 215
8.3 Trade Between States 180 Letting the Data Speak: Pay as You Throw:
Choice & Consequence: Should LeBron James Consumers Create Negative Externalities Too! 216
Paint His Own House? 181 9.4 Public Goods 216
Economy-Wide PPC 182 Government Provision of Public Goods 218
Comparative Advantage and Specialization Choice & Consequence: The Free-Rider’s
Among States 183 Dilemma 218
8.4 Trade Between Countries 184 Private Provision of Public Goods 220
Determinants of Trade Between Countries 186 9.5 Common Pool Resource Goods 222
Letting the Data Speak: Fair Trade Products 187 Choice & Consequence: Tragedy of
Exporting Nations: Winners and Losers 187 the Commons 223
Importing Nations: Winners and Losers 188 Choice & Consequence: The Race to Fish 224
Where Do World Prices Come From? 189

xiii
Contents

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 Evidence-Based Economics: How can the Choice & Consequence: Producing Web
Queen of England lower her commute time to Sites and Computer Programs 266
Wembley Stadium? 225 Labor Market Equilibrium: Supply Meets Demand 266
Summary 226 Letting the Data Speak: “Get Your Hot
Key Terms 227 Dogs Here!” 266
Questions 227 Labor Demand Shifters 267
Problems 227 Factors That Shift Labor Supply 268
Letting the Data Speak: Do Wages Really
Chapter 10: The Government in the Go Down If Labor Supply Increases? 269
Economy: Taxation and Regulation 230 11.3 Wage Inequality 269
Differences in Human Capital 270
10.1 Taxation and Government Spending Choice & Consequence: Paying for Worker
in the United States 231 Training 271
Where Does the Money Come From? 232 Differences in Compensating Wage Differentials 271
Why Does the Government Tax and Spend? 234 Discrimination in the Job Market 271
Choice & Consequence: The Government Choice & Consequence: Compensating
Budget Constraint 235 Wage Differentials 273
Letting the Data Speak: Understanding Changes in Wage Inequality over Time 274
Federal Income Tax Brackets 236 Letting the Data Speak: Broadband
Letting the Data Speak: Reducing and Inequality 275
Inequality the Scandinavian Way 239 11.4 The Market for Other Factors
Taxation: Tax Incidence and Deadweight Losses 240 of Production: Physical Capital and Land 275
Choice & Consequence: The Deadweight Letting the Data Speak: The Top 1 Percent
Loss Depends on the Tax 243 Share and Capital Income 277
10.2 Regulation 245 Evidence-Based Economics: Is there
Direct Regulation 245 discrimination in the labor market? 278
10.3 Government Failures 248 Summary 280
The Direct Costs of Bureaucracies 249 Key Terms 280
Corruption  249 Questions 281
Underground Economy 250 Problems 281
10.4 Equity Versus Efficiency 250
10.5 Consumer Sovereignty and Paternalism 252 PART III Market Structure 284
The Debate 252
Evidence-Based Economics: What is the
optimal size of government? 253 Chapter 12: Monopoly  284
Letting the Data Speak: The Efficiency of
Government Versus Privately Run Expeditions 255 12.1 Introducing a New Market Structure 285
Choice & Consequence: Taxation 12.2 Sources of Market Power 285
and Innovation 255 Legal Market Power 286
Summary 256 Natural Market Power 287
Key Terms 256 Control of Key Resources 287
Questions 256 Choice & Consequence: Barriers to
Problems 257 Entry Lurk Everywhere 287
Economies of Scale 288
Chapter 11: Markets for Factors 12.3 The Monopolist’s Problem 289
Revenue Curves 290
of Production 260
Price, Marginal Revenue, and Total Revenue 292
11.1 The Competitive Labor Market 261 12.4 Choosing the Optimal Quantity and Price 294
The Demand for Labor 261 Producing the Optimal Quantity 294
11.2 The Supply of Labor: Your Setting the Optimal Price 294
Labor-Leisure Trade-off 264

xiv Contents

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 How a Monopolist Calculates Profits 296 Chapter 14: Oligopoly and
Does a Monopoly Have a Supply Curve? 296 Monopolistic Competition 334
12.5 The “Broken” Invisible Hand: The Cost
of Monopoly 297 14.1 Two More Market Structures 335
12.6 Restoring Efficiency 298 14.2 Oligopoly 336
Three Degrees of Price Discrimination 299 The Oligopolist’s Problem 337
Letting the Data Speak: Third-Degree Oligopoly Model with Homogeneous Products 337
Price Discrimination in Action 301 Doing the Best You Can: How Should You
12.7 Government Policy Toward Monopoly 302 Price to Maximize Profits? 338
The Microsoft Case 302 Oligopoly Model with Differentiated Products 339
Price Regulation 303 Letting the Data Speak: Airline Price Wars 341
Evidence-Based Economics: Can a Collusion: Another Way to Keep Prices High 341
monopoly ever be good for society? 304 Letting the Data Speak: Apple versus
Summary 306 Samsung 342
Key Terms 306 Letting the Data Speak: To Cheat or
Questions 307 Not to Cheat: That Is the Question 344
Problems 307 Choice & Consequence: Collusion in Practice 346
14.3 Monopolistic Competition 346
Chapter 13: Game Theory and The Monopolistic Competitor’s Problem 346
Strategic Play 310 Doing the Best You Can: How a
Monopolistic Competitor Maximizes Profits 347
13.1 Simultaneous-Move Games 311 Letting the Data Speak: Why Do Some
Best Responses and the Prisoners’ Dilemma 312 Firms Advertise and Some Don’t? 348
Dominant Strategies and Dominant How a Monopolistic Competitor Calculates Profits 348
Strategy Equilibrium 313 Long-Run Equilibrium in a Monopolistically
Games without Dominant Strategies 313 Competitive Industry 349
13.2 Nash Equilibrium 315 14.4 The “Broken” Invisible Hand 351
Finding a Nash Equilibrium 316 Regulating Market Power 352
Choice & Consequence: Work or Surf? 317 14.5 Summing Up: Four Market Structures 353
13.3 Applications of Nash Equilibria 317 Evidence-Based Economics: How many firms
are necessary to make a market competitive? 354
Tragedy of the Commons Revisited 318
Summary 356
Zero-Sum Games 318
Key Terms 357
13.4 How Do People Actually
Play Such Games? 320 Questions 357
Game Theory in Penalty Kicks 320 Problems 357
Evidence-Based Economics: Is there value in
putting yourself in someone else’s shoes? 321
PART IV Extending the
13.5 Extensive-Form Games 323
Microeconomic Toolbox 360
Backward Induction 324
First-Mover Advantage, Commitment, and Vengeance 325
Evidence-Based Economics: Is there value Chapter 15: Trade-offs Involving
in putting yourself in someone else’s shoes Time and Risk 360
in extensive-form games? 326
Choice & Consequence: There Is More to Life 15.1 Modeling Time and Risk 361
Than Money 329 15.2 The Time Value of Money 362
Summary 330 Future Value and the Compounding of Interest 362
Key Terms 330 Borrowing Versus Lending 364
Questions 330 Present Value and Discounting 365
Problems 331

xv
Contents

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 15.3 Time Preferences 367 Letting the Data Speak: Moral Hazard
Time Discounting 367 Among Job Seekers 392
Preference Reversals 368 Crime and Punishment as a Principal–Agent
Choice & Consequence: Failing to Problem 392
Anticipate Preference Reversals 369 Summary 393
Evidence-Based Economics: Do people exhibit Key Terms 393
a preference for immediate gratification? 369 Questions 393
15.4 Probability and Risk 370 Problems 393
Roulette Wheels and Probabilities 370
Independence and the Gambler’s Fallacy 371 Chapter 17: Auctions and Bargaining  396
Letting the Data Speak: Roulette
Wheels and Elections 371 17.1 Auctions 398
Expected Value 372 Types of Auctions 399
Extended Warranties 373 Open Outcry: English Auctions 400
Choice & Consequence: Is Gambling Letting the Data Speak: To Snipe or
Worthwhile? 373 Not to Snipe? 401
15.5 Risk Preferences 374 Open Outcry: Dutch Auctions 401
Summary 375 Sealed Bid: First-Price Auctions 403
Key Terms 376 Sealed Bid: Second-Price Auctions 403
Questions 376 The Revenue Equivalence Theorem 405
Problems 376 Evidence-Based Economics: How should
you bid in an eBay auction? 406
17.2 Bargaining 407
Chapter 16: The Economics of
What Determines Bargaining Outcomes? 407
Information  378
Bargaining in Action: The Ultimatum Game 408
16.1 Asymmetric Information 379 Bargaining and the Coase Theorem 410
Hidden Characteristics: Adverse Selection Evidence-Based Economics: Who determines
in the Used Car Market 380 how the household spends its money? 411
Hidden Characteristics: Adverse Letting the Data Speak: Sex Ratios Change
Selection in the Health Insurance Market 381 Bargaining Power Too 413
Market Solutions to Adverse Selection: Signaling 382 Summary 413
Choice & Consequence: Are You Key Terms 413
Sending a Signal Right Now? 383 Questions 413
Evidence-Based Economics: Why do Problems 414
new cars lose considerable value the
minute they are driven off the lot? 383 Chapter 18: Social Economics 416
Choice & Consequence: A Tale of a Tail 385
16.2 Hidden Actions: Markets with 18.1 The Economics of Charity and Fairness 417
Moral Hazard 385 The Economics of Charity 417
Letting the Data Speak: Moral Hazard Letting the Data Speak: Do People
on Your Bike 386 Donate Less When It’s Costlier to Give? 419
Market Solutions to Moral Hazard in the Labor Letting the Data Speak: Why Do People
Market: Efficiency Wages 386 Give to Charity? 420
Market Solutions to Moral Hazard in the The Economics of Fairness 421
Insurance Market: “Putting Your Skin in the Game” 387 Letting the Data Speak: Dictators in the Lab 424
Letting the Data Speak: Designing Evidence-Based Economics: Do people
Incentives for Teachers 388 care about fairness? 424
Evidence-Based Economics: Why is 18.2 The Economics of Trust and Revenge 426
private health insurance so expensive? 389
The Economics of Trust 426
16.3 Government Policy in a The Economics of Revenge 428
World of Asymmetric Information 390
Choice & Consequence: Does Revenge
Government Intervention and Moral Hazard 391
Have an Evolutionary Logic? 429
The Equity-Efficiency Trade-off 391

xvi Contents

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 18.3 How Others Influence Our Decisions 430 The Consumer Price Index 461
Where Do Our Preferences Come From? 430 Inflation 462
The Economics of Peer Effects 430 Adjusting Nominal Variables 462
Letting the Data Speak: Is Economics Summary 463
Bad for You? 431 Key Terms 464
Following the Crowd: Herding 432 Questions 464
Letting the Data Speak: Your Peers Problems 464
Affect Your Waistline 433
Choice & Consequence: Are You
an Internet Explorer? 434 Chapter 20: Aggregate Incomes 468
Summary 434
20.1 Inequality Around the World 469
Key Terms 434
Measuring Differences in GDP per Capita 469
Questions 435
Letting the Data Speak: The
Problems 435 Big Mac Index 471
Inequality in GDP per Capita 471
PART V Introduction to GDP per Worker 471
Macroeconomics 438 Productivity 472
GDP and the Standard of Living 473
Chapter 19: The Wealth of Nations: Choice & Consequence: Dangers of
Just Focusing on GDP per Capita 475
Defining and Measuring
20.2 Productivity and the Aggregate
Macroeconomic Aggregates 438 Production Function 477
Productivity Differences 477
19.1 Macroeconomic Questions 439
The Aggregate Production Function 477
19.2 National Income Accounts: Production =
Expenditure = Income 441 Labor 478
Production 441 Physical Capital and Land 478
Expenditure 442 Technology 478
Income 442 Representing the Aggregate Production Function 479
Circular Flows 443 20.3 The Role and Determinants
of Technology 480
National Income Accounts: Production 444
Technology 480
National Income Accounts: Expenditure 446
Dimensions of Technology 480
Evidence-Based Economics: In the
United States, what is the total market value Letting the Data Speak: Moore’s Law 482
of annual economic production? 448 Choice & Consequence: Academic
Letting the Data Speak: Saving versus Misallocation in Nazi Germany 483
Investment 450 Letting the Data Speak: Efficiency of
National Income Accounting: Income 451 Production and Productivity at the Company Level 483
19.3 What Isn’t Measured by GDP? 451 Entrepreneurship 484
Physical Capital Depreciation 452 Letting the Data Speak: Monopoly
and GDP 484
Home Production 452
Evidence-Based Economics: Why
The Underground Economy 453
is the average American so much richer
Negative Externalities 454 than the average Indian? 485
Gross Domestic Product versus Gross Summary 487
National Product 454
Key Terms 487
The Increase in Income Inequality 455
Questions 487
Leisure 456
Problems 488
Does GDP Buy Happiness? 456
Appendix: The Mathematics of Aggregate
19.4 Real versus Nominal 457 Production Functions 490
The GDP Deflator 459

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 PART VI Long-Run Growth and Calculating Average (Compound) Growth Rates 526
Appendix Key Terms 527
Development 492
Appendix Problems 527

Chapter 21: Economic Growth 492 Chapter 22: Why Isn’t the Whole
21.1 The Power of Economic Growth 493 World Developed? 528
A First Look at U.S. Growth 493
22.1 Proximate Versus Fundamental
Exponential Growth 494 Causes of Prosperity 529
Choice & Consequence: The Power Geography 530
of Exponential Growth 496
Culture 531
Patterns of Growth 497
Institutions 531
Letting the Data Speak: Levels
A Natural Experiment of History 532
versus Growth 500
21.2 How Does a Nation’s Economy Grow? 502
22.2 Institutions and Economic Development 534
Inclusive and Extractive Economic Institutions 534
Optimization: The Choice Between Saving and
Consumption 502 How Economic Institutions Affect
Economic Outcomes 535
What Brings Sustained Growth? 503
Letting the Data Speak: Democracy
Choice & Consequence: Is Increasing
and Growth 536
the Saving Rate Always a Good Idea? 504
Letting the Data Speak: Divergence
Knowledge, Technological Change, and Growth 504
and Convergence in Eastern Europe 538
Letting the Data Speak: Technology
The Logic of Extractive Economic Institutions 541
and Life Expectancy 506
Inclusive Economic Institutions and the
Letting the Data Speak: The Great
Industrial Revolution 541
Productivity Puzzle 507
Letting the Data Speak: Blocking
Evidence-Based Economics: Why are you
the Railways 542
so much more prosperous than your great-
great-grandparents were? 508 Evidence-Based Economics: Are
tropical and semitropical areas condemned
21.3 The History of Growth and Technology 510
to poverty by their geographies? 543
Growth Before Modern Times 510
22.3 Is Foreign Aid the Solution to
Malthusian Limits to Growth 511 World Poverty? 548
The Industrial Revolution 512 Choice & Consequence: Foreign Aid
Growth and Technology Since the Industrial and Corruption 549
Revolution 512 Summary 550
21.4 Growth, Inequality, and Poverty 512 Key Terms 551
Growth and Inequality 512 Questions 551
Letting the Data Speak: Income Problems 551
Inequality in the United States 513
Choice & Consequence: Inequality
versus Poverty 514 PART VII Equilibrium in the
Growth and Poverty 514 Macroeconomy 554
How Can We Reduce Poverty? 515
Summary 516
Key Terms 516
Chapter 23: Employment and
Questions 517 Unemployment 554
Problems 517
23.1 Measuring Employment and
Appendix: The Solow Growth Model 519 Unemployment 555
The Three Building Blocks of the Solow Model 519 Classifying Potential Workers 555
Steady-State Equilibrium in the Solow Model 520 Calculating the Unemployment Rate 556
Determinants of GDP 521 Trends in the Unemployment Rate 557
Dynamic Equilibrium in the Solow Model 523 23.2 Equilibrium in the Labor Market 558
Sources of Growth in the Solow Model 524 The Demand for Labor 558

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 Shifts in the Labor Demand Curve 560 Bank Regulation and Bank Solvency 596
The Supply of Labor 561 Evidence-Based Economics: How
Shifts in the Labor Supply Curve 562 often do banks fail? 597
Letting the Data Speak: Who Is Choice & Consequence: Too Big to Fail 599
Unemployed? 563 Choice & Consequence: Asset Price
Equilibrium in a Competitive Labor Market 564 Fluctuations and Bank Failures 600
23.3 Why Is There Unemployment? 565 Summary 600
Voluntary Unemployment 565 Key Terms 601
Job Search and Frictional Unemployment 565 Questions 601
23.4 Wage Rigidity and Structural Problems 602
Unemployment 566
Minimum Wage Laws 566 Chapter 25: The Monetary System 604
Choice & Consequence: Luddites and Robots 567
Labor Unions and Collective Bargaining 569 25.1 Money 605
The Functions of Money 605
Efficiency Wages 569
Types of Money 606
Choice & Consequence: Minimum Wage
Laws and Employment 570 The Money Supply 606
Downward Wage Rigidity 571 Choice & Consequence: Non-Convertible
Currencies in U.S. History 607
23.5 Cyclical Unemployment and the
Natural Rate of Unemployment 572 25.2 Money, Prices, and GDP 608
Evidence-Based Economics: What Nominal GDP, Real GDP, and Inflation 608
happens to employment and unemployment The Quantity Theory of Money 609
if local employers go out of business? 574 25.3 Inflation 610
Summary 576 What Causes Inflation? 610
Key Terms 577 The Consequences of Inflation 610
Questions 577 The Social Costs of Inflation 612
Problems 577 The Social Benefits of Inflation 613
Evidence-Based Economics: What
Chapter 24: Credit Markets 580 caused the German hyperinflation
of 1922–1923? 614
24.1 What Is the Credit Market? 581 25.4 The Federal Reserve 615
Borrowers and the Demand for Loans 581 The Central Bank and the Objectives of
Real and Nominal Interest Rates 582 Monetary Policy 615
The Credit Demand Curve 583 What Does the Central Bank Do? 616
Saving Decisions 585 25.5 Bank Reserves and the Plumbing of
The Credit Supply Curve 585 the Monetary System 617
Choice & Consequence: Why Do Bank Reserves and Liquidity 618
People Save? 586 The Demand Side of the Federal Funds Market 619
Equilibrium in the Credit Market 588 The Supply Side of the Federal Funds Market and
Credit Markets and the Efficient Allocation Equilibrium in the Federal Funds Market 620
of Resources 589 Choice & Consequence: Obtaining
24.2 Banks and Financial Intermediation: Reserves Outside the Federal Funds Market 624
Putting Supply and Demand Together 589 The Fed’s Influence on the Money Supply
Letting the Data Speak: Financing and the Inflation Rate 624
Start-Ups 591 The Relationship Between the Federal Funds
Assets and Liabilities on the Balance Rate and the Long-Term Real Interest Rate 625
Sheet of a Bank 591 Choice & Consequence: Two Models
24.3 What Banks Do 593 of Inflation Expectations 626
Identifying Profitable Lending Opportunities 593 Summary 629
Maturity Transformation 593 Key Terms 629
Management of Risk 594 Questions 630
Bank Runs 595 Problems 630

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 PART VIII Short-Run Fluctuations Fiscal Policies That Directly Target the
Labor Market 678
and Macroeconomic Letting the Data Speak: A Different
Policy 632 Type of Fiscal Policy 679
Policy Waste and Policy Lags 680
Chapter 26: Short-Run Fluctuations 632 Evidence-Based Economics: How
much does government expenditure
26.1 Economic Fluctuations and stimulate GDP? 681
Business Cycles 633 Choice & Consequence: The New
Patterns of Economic Fluctuations 635 Administration’s Fiscal Policies 683
The Great Depression 637 Summary 683
Key Terms 684
26.2 Macroeconomic Equilibrium and
Economic Fluctuations 639 Questions 684
Labor Demand and Fluctuations 639 Problems 685
Sources of Fluctuations 641
Letting the Data Speak: Unemployment PART IX Macroeconomics in a
and the Growth Rate of Real GDP: Okun’s Law 642
Multipliers and Economic Fluctuations 646
Global Economy 688
Equilibrium in the Medium Run: Partial
Recovery and Full Recovery 647 Chapter 28: Macroeconomics and
26.3 Modeling Expansions 651 International Trade 688
Evidence-Based Economics: What
caused the recession of 2007–2009? 652 28.1 Why and How We Trade 689
Summary 656 Absolute Advantage and Comparative
Key Terms 658 Advantage 689
Questions 658 Comparative Advantage and International
Problems 658 Trade 692
Efficiency and Winners and Losers from
Trade 693
Chapter 27: Countercyclical How We Trade 695
Macroeconomic Policy 660 Letting the Data Speak: Living in
an Interconnected World 696
27.1 The Role of Countercyclical Policies in Trade Barriers: Tariffs 696
Economic Fluctuations 661
Choice & Consequence: Trade
27.2 Countercyclical Monetary Policy 662 Policy and Politics 697
Controlling the Federal Funds Rate 663 28.2 The Current Account and the
Other Tools of the Fed 666 Financial Account 698
Expectations, Inflation, and Monetary Policy 667 Trade Surpluses and Trade Deficits 699
Contractionary Monetary Policy: Control International Financial Flows 699
of Inflation 667 The Workings of the Current Account
Letting the Data Speak: Managing and the Financial Account 700
Expectations 668
28.3 International Trade, Technology
Zero Lower Bound 670 Transfer, and Economic Growth 704
Choice & Consequence: Policy Mistakes 671 Letting the Data Speak: From IBM
Policy Trade-offs 672 to Lenovo 705
27.3 Countercyclical Fiscal Policy 673 Evidence-Based Economics: Are
Fiscal Policy Over the Business Cycle: Automatic companies like Nike harming workers
and Discretionary Components 673 in Vietnam? 706
Analysis of Expenditure-Based Fiscal Policy 674 Summary 709
Analysis of Taxation-Based Fiscal Policy 676 Key Terms 709
Letting the Data Speak: The Response Questions 709
of Consumption to Tax Cuts 678 Problems 710

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 Chapter 29: Open Economy Interest Rates, Exchange Rates, and
Net Exports 729
Macroeconomics 712
Letting the Data Speak: The
29.1 Exchange Rates 713 Costs of Fixed Exchange Rates 731
Nominal Exchange Rates 713 Summary 732
Flexible, Managed, and Fixed Exchange Rates 715 Key Terms 732
29.2 The Foreign Exchange Market 716 Questions 733
How Do Governments Intervene in the Problems 733
Foreign Exchange Market? 718
Defending an Overvalued Exchange Rate 719 Endnotes  737
Choice & Consequence: Fixed Exchange Glossary  745
Rates and Corruption 721 Credits  757
Evidence-Based Economics: How Index  759
did George Soros make $1 billion? 722
29.3 The Real Exchange Rate and Exports 724
From the Nominal to the Real Exchange Rate 724 CHAPTERS ON THE WEB
Co-Movement Between the Nominal and the Web chapters are available on MyEconLab.
Real Exchange Rates 725
WEB Chapter 1 Financial Decision Making
The Real Exchange Rate and Net Exports 726
Letting the Data Speak: Why Did the WEB Chapter 2 Economics of Life, Health, and
Chinese Authorities Keep the Yuan Undervalued? 727 the Environment
29.4 GDP in the Open Economy 728 WEB Chapter 3 Political Economy
Revisiting Black Wednesday 729

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This page intentionally left blank
Another random document with
no related content on Scribd:
 The Faithless Lover 182
Elegy 182
The Farewell 183
Sing, O sing again, lovely lark of mine 184
Wedding Gear 185
The Sale of the Braid 185
Marriage Song 186
Beggars’ Song 186
An Orphan’s Wailing 187
Conjuration of a Mother 188
Fairy Tales 189
Frost 190
The Cat, the Goat and the Ram 195
The Fox and the Peasant 198
Proverbs 199
The Eighteenth Century 203
Pososhkóv (1670-1726) 205
On Merchants 205
On the Peasantry 209
Prokopóvich (1681-1763) 211
The Spiritual Reglement 212
Funeral Sermon on Peter the Great 214
Tatíshchev (1686-1750) 218
From the “Russian History” 219
Kantemír (1708-1744) 223
To my Mind 224
Tredyakóvski (1703-1769) 230
Ode on the Surrender of Dantzig 230
Princess Dolgorúki (1714-1771) 233
From her “Memoirs” 234
Lomonósov (1711-1765) 241
Letters to I. I. Shuválov 242
Ode on the Capture of Khotín 246
Morning Meditations 252
Evening Meditations 253
Sumarókov (1718-1777) 254
The False Demetrius 255
Instruction to a Son 257
To the Corrupters of Language 260
The Helpful Gnat 260
Four Answers 261
Vasíli Máykov (1728-1778) 263
The Battle of the Zimogórans and Valdáyans 263
The Cook and the Tailor 267
Danílov (1722-1790) 269
From his “Memoirs” 269
Catherine the Great (1729-1796) 272
O Tempora 272
Prince Khlor 276
Shcherbátov (1733-1790) 287
On the Corruption of Manners in Russia 287
Petróv (1736-1799) 291
On the Victory of the Russian over the Turkish Fleet 291
Kheráskov (1733-1807) 298
The Rossiad 298
Metropolitan Platón (1737-1812) 300
 What are Idolaters? 300
Address upon the Accession of Alexander I. 304
Khémnitser (1745-1784) 306
The Lion’s Council of State 306
The Metaphysician 307
Knyazhnín (1742-1791) 308
Vadím of Nóvgorod 309
Odd People 311
Princess Dáshkov (1743-1810) 316
The Establishment of a Russian Academy 316
Poroshín (1741-1769) 321
From his “Diary” 321
The Satirical Journals (1769-1774), and Nóvikov (1744- 326
1818)
From All Kinds of Things 328
Sound Reasoning Adorns a Man 329
From the Drone 332
Recipe for His Excellency Mr. Lacksense 332
The Laughing Democritos 333
From Hell’s Post 335
From the Painter 337
Fon-Vízin (1744-1792) 341
The Minor 342
An Open-Hearted Confession 351
Letters to Count Pánin 355
Kostróv (1750-1796) 358
Letter to the Creator of the Ode in Praise of Felítsa 359
Radíshchev (1749-1802) 361
 Journey from St. Petersburg to Moscow 362
Ablesímov (1742-1783) 370
The Miller 370
Bogdanóvich (1743-1803) 374
Psyche. From Book I. 374
” ” ” II. 375
Derzhávin (1743-1816) 377
Ode to the Deity 379
Monody on Prince Meshchérski 382
Felítsa 385
The Waterfall 390
The Storm 391
The Stream of Time 392
Neledínski-Melétski (1752-1829) 392
To the Streamlet I’ll Repair 392
He whose Soul from Sorrow Dreary 394
Muravév (1757-1807) 395
To the Goddess of the Nevá 395
Kapníst (1757-1824) 397
The Pettifoggery 398
Obúkhovka 402
On Julia’s Death 404
Gribóvski (1766-1833) 405
From his “Memoirs” 405
Kámenev (1772-1803) 411
Gromvál 412
Ózerov (1770-1816) 418
Dimítri Donskóy 419
 Prince Dolgorúki (1764-1823) 422
The Legacy 422
My Moscow Fireplace 425
Dmítriev (1760-1837) 428
The Little Dove 429
During a Thunder-Storm 430
Ermák 431
What Others Say 436
Index 441
A SKETCH OF RUSSIAN LITERATURE

I.—THE OLDEST PERIOD

Of the many Slavic nations and tribes that at one time occupied
the east of Europe from the Elbe and the headwaters of the Danube
to Siberia, and from the Ionic Sea to the Baltic and White Seas,
some have entirely disappeared in the ruthless struggle with a
superior German civilisation; others, like the Bulgarians and
Servians, have paled into insignificance under the lethargic influence
of the Crescent, to be fanned to life again within the memory of the
present generation by a breath of national consciousness, which is
the result of the Romantic Movement in European literature; others
again like the Bohemians and Poles, rent asunder by fraternal
discord and anarchy, have forfeited their national existence and are
engaged in an unequal battle to regain it. Of all the Slavs, Russia
alone has steadily gathered in the lands of the feudal lords, to shine
at last as a power of the first magnitude among the sisterhood of
states, and to scintillate hope to its racial brothers as the “Northern
Star.”
The unity of the Russian land was ever present to the minds of the
writers in the earliest days of the appanages. The bard of the Word
of Ígor’s Armament and Daniel the Palmer made appeals to the
whole country and prayed for all the princes in the twelfth century,
and for upwards of four centuries Moscow has been the centre
towards which the outlying districts have been gravitating. Yet, in
spite of so continuous and well-defined a political tendency, Russia
is the last of the Slavic nations to have evolved a literature worthy of
the name. Bohemia had a brilliant literature of the Western stamp as
early as the thirteenth century; Bulgaria had made a splendid start
three centuries before, under the impulse of the newly introduced
religion; the Servian city of Ragusa, receiving its intellectual leaven
from its Italian vicinage, invested Petrarch and Dante with Servian
citizenship in the fifteenth century, and, shortly after, gloried in an
epic of a Gundulić, and in a whole galaxy of writers; Poland
borrowed its theology from Bohemia, took an active part in the
medieval Latin literature, and boasted a golden age for its native
language in the sixteenth century. Russia produced an accessible
literature only in the second half of the eighteenth century, became
known to Western Europe not earlier than the second quarter of the
next, and had not gained universal recognition until within the last
twenty-five years.
In the case of the Western and Southern Slavs, a community of
interests, whether religious or social, has led to an intellectual
intercourse with their neighbours, from whom they have received
their models for imitation or adaptation. Without a favourable
geographical position, or some common bond with the external
world, no nation can have a healthy development, especially in the
incipient stage of its political existence. Blatant Slavophiles of fifty
years ago heaped reproach on the reforms of Peter the Great, on the
ground that they were fashioned upon Western ideals, and that he
had retarded the evolution of Russia according to its inherent Slavic
idea. There still survive men of that persuasion, though a
comparative study of Russian literature long ago demonstrated that
every step in advance has been made by conscious or unconscious
borrowings from abroad. If there was a Russian literature previous to
the introduction of Christianity, it certainly stood in some kind of
relation to the literatures of the neighbours. The few extant treaties
with the Greeks for that period show unmistakable Byzantine
influences, and the Russian Code of Yarosláv, with its purely Norse
laws, dates from a time when the Varyágs had not yet disappeared
in the mass of the Slavic majority.
With the introduction of Christianity, Russia, instead of entering
into closer communion with the rest of the world, was separated from
it even more securely than before, and soon after, an intellectual
stagnation began that lasted very nearly to the end of the
seventeenth century. Various causes combined to produce this
singular effect. Chief of these was its geographical position. Living in
the vast eastern plain of Europe, which in itself would have been
productive of a larger life, the Russian tribes had civilised neighbours
on one side only. On the north they were separated from the Swedes
by rude Finnish tribes; on the south, they had for centuries to
contend against all the nomads, Pechenyégs, Cumanians, Khazars,
who slowly proceeded from Asia to central Europe to become lost in
the nations to the south of the Carpathians and in the Balkan
peninsula; in the east the Finns of the north met the Tartars of the
south, and behind them lay unprofitable Asia. On the north-west, it is
true, was the civilised Teutonic Order, but the inveterate hatred
between these Germans and the Slavs prevented any
intercommunication from that quarter. There was left Poland, through
which Russia might issue into Europe; but savage Lithuania was
wedged in between the two, so as to reduce still more the line of
contact with the West. When Lithuania became civilised, and a part
of Poland, the latter had grown suspicious of the youthful Ilyá of
Múrom who “had sat thirty years upon the oven,” and enunciated a
political maxim that either Russia would have to become Polish, or
else Poland Russian. Knowing that there was no other exit for
Russia, Poland permitted no light to reach it from the West. When
England began to communicate with Russia in the sixteenth century,
King Sigismund made an earnest appeal to Queen Elizabeth to stop
sending skilled mechanics, lest the Colossus should awaken and
become a danger to Europe.
These external causes of Russia’s aloofness were still more
intensified by a systematic determination of Russia to keep out the
Catholic contamination that would come from intercourse with
Europe. This was a direct outgrowth of its adoption of Christianity
from Byzantium, instead of Rome. Cyril and Methodius, the apostles
to the Slavs, were themselves Bulgarians from Macedonia. When
they first carried the new religion to Moravia and later to Bulgaria,
they, no doubt, preached and wrote in the dialect with which they
were most familiar. This innovation of preaching the gospel in
another than one of the three sacred languages was a necessary
departure, in order to win over the troublesome Slavs to the north of
Byzantium. Though at the end of the ninth century the various
dialects were already sufficiently dissimilar to constitute separate
languages, yet they were not so distant from each other as to be a
hindrance to a free intercommunication. When, a century later,
Christianity was introduced into Russia from Constantinople,
Bulgarian priests and bookmen were the natural intermediaries, and
the Bulgarian language at once became the literary medium, to the
exclusion of the native tongue. Soon after, the Eastern Church
separated from Rome, and the Greek-Catholic clergy inculcated
upon their neophytes an undying hatred of the Latins, as the
Romanists were called. In Moscow, the slightest deviation from the
orthodox faith was sufficient cause for suspecting a Romanist
heresy, and anathemas against Roman-Catholics were frequent, but
at Kíev, where the contact with Poland was inevitable, the disputes
with the Latins form a prominent part of ecclesiastical literature. To
guard the country against any possible contagion, the punishment of
Russians who crossed the border, in order to visit foreign parts, was
so severe, that few ever ventured out of the country. The seclusion
of Russia was complete.
Even under these difficulties, literature and the arts might have
flourished, if Constantinople had been able to give to the new
converts even its degraded Byzantine culture, or if there had not
been other powerful causes that militated against a development
from within. In the west of Europe the Latin language of the Church
did not interfere with an early national literature. Latin was the
language of the learned, whether clerical or lay, and mediated an
intellectual intercourse between the most distant members of the
universal faith. At the same time, the native dialects had received an
impulse before the introduction of Christianity, often under the
influence of Rome, and they were left to shift for themselves and to
find their votaries. The case was quite different in Russia. The
Bulgarian language, which was brought in with the gospel, at once
usurped on the native Russian to the great disadvantage of the
latter. Being closely related to the spoken Russian, Bulgarian was
easily acquired by the clergy, but it was not close enough to become
the literary language of the people. On the one hand, this new
gospel language could at best connect Russia with Byzantium by
way of Bulgaria; on the other, Russian was looked down upon as a
rude dialect and was discouraged, together with every symptom of
the popular creation which was looked upon as intimately connected
with ancient paganism.
This Bulgarian language was not long preserved in its purity.
Detached from its native home, it was immediately transformed in
pronunciation, so as to conform to the spoken Russian; thus, for
example, it at once lost its nasals, which were not familiar to the
Russian ear. In the course of time, words and constructions of the
people’s language found their way into the Church-Slavic, as the
Bulgarian was then more properly called. Naturally, many words,
referring to abstract ideas and the Church, passed from the
Bulgarian into the spoken tongue. Thus, the two dialects, one the
arbitrary literary language, the other, the language of every-day life,
approached each other more and more. At the present time, the
Russian of literature contains a large proportion of these Church-
Slavic words; the language of the Bible and the liturgy is the Church-
Slavic of the sixteenth century, which differs so much from the
original Bulgarian that, though a Russian reads with comparative
ease this Church-Slavic, he has to study Bulgarian as a German
would study Old German. This Church-Slavic of the Russian
redaction has also been, and still is, in part, the ecclesiastical
language of the other Greek-Catholic countries of the Slavs.
Some time passed before Russia could furnish its own clergy. All
the leading places in the Church were at first filled with Bulgarians
and Greeks who were steeped in Byzantine religious lore. The
Church at Constantinople stood in direct opposition to the classical
traditions of Greece. These were not separated from the old
heathenism, and to the luxury and voluptuousness of medieval
Greece, which was ascribed to classical influences, the Church
opposed asceticism and self-abnegation. Monasticism was preached
as the ideal of the religious life, and arts and sciences had no place
in the scheme of the Church. Theology and rhetoric were the only
sciences which the hermit practised in his cell, in the moments that
were free from prayer and self-castigation. And it is only the
Church’s sciences that ancient Russia inherited from Byzantium. The
civil intercourse between the two countries was very slight, and the
few Russian ecclesiastics who visited Mount Athos and the Holy
Land brought back with them at best a few legends and apocryphal
writings. The Byzantine influence at home showed itself in a verbal
adherence to the Bible and the Church Fathers, and an occasional
attempt at pulpit oratory in the bombastic diction of contemporary
Greece.
Not a science penetrated into ancient Russia. Historically the rest
of the world did not exist for it, and geographically it was only of
interest in so far as it came into contact with Russia: Russia knew
more of Tartars and Cumanians than of Germany or France.
Arithmetic, not to speak of mathematics, and physics, medicine and
engineering, were unknown before the sixteenth century, and then
only when a few foreigners practised these arts in the capital and at
the Court. The only literature that reached Russia was the legendary
lore of the South and West, through Bulgaria and Poland, generally
at a time when it had long been forgotten elsewhere: thus, the
Lucidarius and Physiologus were accepted as genuine bits of
zoölogical and botanical science, long after sober knowledge had
taken possession of the universities of the world. The literature of
Russia before Peter the Great is by no means meagre or
uninteresting, but it lacks an important element of historical
continuity; in fact, it is devoid of every trace of chronology. What was
written in the twelfth century might with equal propriety be the
product of the sixteenth, and vice versa, and the productions of the
earliest time were copied out as late as the seventeenth century, and
relished as if they had just been written. Where a certain literary
document has come down to us in a later copy, it is not possible to
date it back, unless it contains some accidental indication of
antiquity. In short, there was no progress in Russia for a period of six
or seven centuries, from the tenth century to the seventeenth.
In this achronism of literary history, there may, however, be
discerned two periods that are separated from each other by the first
invasion of the Tartars. Previous to that momentous event, Kíev
formed the chief intellectual and political centre of the Russian
principalities. Here the Norse traditions, which had been brought by
the Varyág warriors, had not entirely faded away in the century
following the introduction of Christianity, and the Court maintained
certain relations with the rest of the world, as in the case of Yarosláv,
who was related, by the marriage of his children, to the Courts of
Norway, France, Germany and Hungary. On the other hand,
Vladímir’s heroes were celebrated abroad, and Ilyá of Múrom is not
unknown to German tradition and the Northern saga. Not only its
favourable geographical position, but its climate as well, inspired the
inhabitants of Kíev with a greater alacrity, even as the Little-Russians
of to-day have developed less sombre characteristics than the
Great-Russians of the sterner north. It is sufficient to compare the
laconic instructions of Luká Zhidyáta in the commercial Nóvgorod
with the flowery style of Serapión’s sermon, or the dry narrative of
the northern chronicles with the elaborate adornment of the stories in
the chronicles of Néstor and Sylvester, to become aware of the
fundamental difference between the two sections of Russia. The
twelfth century, rich in many aspects of literature, including that
beautiful prose poem of popular origin, the Word of Ígor’s Armament,
gave ample promise of better things to come. Similarly, the bylínas of
the Vladímir cycle, the best and most numerous of all that are
preserved, point to an old poetic tradition that proceeded from Kíev.
The fact that these bylínas have been lately discovered in the
extreme north-east, in the Government of Olónetsk, while not a trace
of them has been found in their original home, has divided the
scholars of Russia into two camps. Some assert that all the
Russians of Kíev belonged to the Great-Russian division, and that
the Tartar invasion destroyed most of them, and caused the rest to
migrate to the north, whither they carried their poetry. The Little-
Russians that now occupy the south of Russia are supposed by
these scholars to have come from Galicia to repeople the
abandoned places. The Little-Russians themselves claim, with
pardonable pride, to be the direct descendants of the race that gave
Russia its Néstor and the bard of the Word of Ígor’s Armament.
There are weighty arguments on both sides, and both the Great-
Russians, with whom we are at present concerned, and the Little-
Russians, or Ruthenians, who have developed a literature in their
own dialect, claim that old literature as their own.
 The terrible affliction of the Mongol invasion marks, on the one
hand, the beginning of the concentration of Russia around Moscow,
and, on the other, accentuates more strongly the barren activities of
the Russian mind for the next few centuries. Historians have been
wont to dwell on the Tartar domination as the chief cause of Russian
stagnation, but the calmer judgment of unbiassed science must
reject that verdict. It is true, the Tartars carried ruin to all the Russian
land, but after every successful raid, they withdrew to their distant
camps, ruling the conquered land merely by exacting tribute and
homage from its princes. The Tartars in no way interfered with the
intellectual and religious life of the people; on the contrary, they
mingled freely with the subject nation, and intermarriages were
common. It has already been pointed out that the germ of
unprogressiveness was older than the invasion, that the Byzantine
religious culture was the real cause of it. That Moscow was even
less progressive than Kíev is only natural. All its energies were bent
on political aggrandisement, on throwing off the hated Tartar yoke,
and it was farther removed from Europe than the more fortunate
southern metropolis. All these conditions were unfavourable to the
practice of the gentler arts.
The religious lore of ancient Russia was derived from the gospel,
which was hardly ever accessible in continuous form, but only as an
aprakos, i. e., as a manual in which it was arranged according to the
weekly readings. This was supplemented by two peculiar versions of
the Old Testament, the palæas, in which passages of the Bible were
intermingled with much apocryphal matter, and which originally had
served as controversial literature against the Jews, and to prove the
coming of Christ; there was no translation of the whole Old
Testament, and as late as the eighteenth century a priest referred to
the palæa as to Holy Writ. Prayers to saints, lives and legends of
saints, with moral instructions, complete the list of the religious
equipment that Russia received from Byzantium. One of the oldest
Russian manuscripts, the Collection of Svyatosláv, made for
Svyatosláv of Chernígov in 1073, is a copy of a similar production,
translated from the Greek for Simeón of Bulgaria. It is an
encyclopedia of ecclesiastic and moral themes, culled from the
Church Fathers, among whom John Chrysostom is most prominent.
Later, there were many similar collections, known under the names
of The Golden Beam, Emerald, Golden Chain, and so forth.
By the aid of this literature and such Greek models as were
accessible to the priests, were produced the sermons that have
come down to us in a large number, and a few of which, like those of
Cyril of Túrov and Serapión, do not lack literary polish, and are not
inferior to Western pulpit oratory of the same period. Whenever the
preachers turned to praise the princes, as in the case of Ilarión who
eulogised Vladímir, they had in mind only their orthodox Christianity,
for religion was the all-absorbing question. Similarly, when Vladímir
Monomákh wrote his Instruction to his children, he composed it
according to the model given in Svyatosláv’s Collection. Sermons
and Instructions, from the introduction of Christianity to the middle of
the eighteenth century, form one of the most important ingredients of
Collections, and served as models for Spiritual Testaments even in
the eighteenth century. Sylvester’s Domostróy belongs to the same
type, though what in Vladímir was the enthusiasm and earnestness
of the new faith, has in this later document become a series of
external observances. Formalism and adherence to the dead letter
characterise the whole period of Russian unprogressiveness, and
remained the characteristic of the Church at a much later time, in
spite of the enlightened labours of a Feofán or Platón; and it was the
same formalism that caused the schism of the raskólniks, who saw
in Nikón’s orthographical corrections of the corrupt Bible text an
assault upon the orthodox religion.
Only a small proportion of the literature of ancient Russia was
produced outside the ranks of the clergy. There were few literate
persons who were not priests or monks; for there hardly existed any
schools during this whole period, and even princes could not sign
their names. The influence of the lettered priest was paramount, and
if he was at all equal to the task of composing readable sermons,
these were eagerly sought for by all who could read them. When, in
the sixteenth, and still more in the seventeenth century, rays of light
began to penetrate into Moscow, the chief and most dangerous task
of instruction fell to the share of those preachers who had come in
contact with Polish learning at Kíev; in the days of Peter the Great,
Feofán Prokopóvich was an important factor in the civilisation of
Russia, and in the beginning of the nineteenth century the sermons
of Platón still form an integral part of literature.
To the student of comparative literature the semi-religious lore,
which finds its expression in the apocrypha, is of vastly greater
interest. The poetical creative activity of the people, combining with
the knowledge of religious lore, has ever been active in producing
spurious legendary accounts of matters biblical. The book of Enoch
and the Talmud disseminated such legends in regard to the Old
Testament long before the birth of Christianity. The Russian
apocryphal literature is rich in legendary accounts of the creation of
the world, the confession of Eve, the lives of Adam, Melchisedec,
Abraham, Lot, Moses, Balaam, the twelve patriarchs, David, and
particularly Solomon. Much more extensive is the store of legends
from the New Testament. The birth of the Holy Virgin is dilated upon
in the gospel of Jacob, the childhood of Christ is told in the gospel of
Thomas, while a fuller story of Pilate’s judgment of Christ and of
Christ’s descent into Hell is given in the old gospel of Nicodemus.
Lazarus, Judas, and the twelve apostles have all their group of
legends, but the Assumption of the Virgin Mary and the Judgment-
day were the most popular. The list is far from being exhausted, and
only a small part of the material has been scientifically investigated
and located. Most of these stories travelled by the customary road
over Bulgaria from Byzantium. As they have also reached the west
of Europe, the investigator of their Western forms has to look into
Byzantine sources; but as many of the legends have been preserved
in the Slavic form, and when they have disappeared from the Greek,
or as fuller redactions are to be met with in the North, he cannot well
afford to overlook the Slavic sources. The index librorum
prohibitorum of Russia, fashioned after the Greek, includes all such
apocrypha as were current at the time of the composition of the first
index. The clergy were continually preaching against them, yet their
efforts were useless, especially since they themselves were at the
same time drawing extensively on the apocryphal accounts of the
palæas, lives of saints, etc.
 There is this vast difference in the literature of this kind as it was
current in Russia and in the West. Elsewhere the legends were early
seized upon by the fancy of the poets, were clothed in the
conventional garb of verse, remodelled, combined, beautified, until
they became the stock in trade of literature, while the memory of the
unadorned story had entirely faded from the popular consciousness.
Dante’s Divine Comedy is an illustration of how transformed the
legends had become at a very early date. In Russia nothing of the
kind has taken place. With the usual achronism of its literature,
legends of the eleventh and eighteenth centuries live side by side, or
mingle in the same version, and they have undergone no other
change than corruption of misunderstood passages, transposition of
motives, modernisation of language. The religious songs that a
mendicant may be heard singing at the present time in front of a
church are nothing but these old legends, almost in their primitive
form.
Nearly allied to the apocryphal stories are the profane legends that
form the subject-matter of so much of European medieval literature.
The stories of Alexander the Great, the Trojan War, Digenis Akritas,
Barlaam and Josaphat, Calilah-wa-Dimnah, are as common in
Russian literature as in that of France or Germany. Byzantium is the
immediate source of most of these legends both for the East and the
West, but there are also many motives in the Russian stories that
were derived from the West through Servia and Bulgaria. It is not yet
quite clear how these stories came to travel in a direction opposite to
the customary route of popular tales; no doubt the crusades did
much to bring about an interchange of the oral literature of the
nations. In the West, these stories have furnished the most beautiful
subjects for medieval poetry, but as before, the Russian stories have
not found their way into polite literature. They have either remained
unchanged in their original form, or, being of a more popular
character than the religious legends, have adapted themselves to
the style of folktales, as which they have been preserved.
It is not unlikely that many of these tales were brought back from
Palestine, the common camping-ground of the Christian nations
during the crusades. Pilgrimages to the Holy Land began soon after
the introduction of Christianity into Russia, and in the twelfth century
we have the first account of such a journey, from the pen of the
abbot Daniel. None of the later accounts of Palestine and
Constantinople compare in interest with the simple narrative of
Daniel the Palmer, after whose Pilgrimage they are fashioned and
whose very words they often incorporated in their Travels. The
purpose of all these was to serve as incitements to religious
contemplation. There is but one account of a journey to the west of
Europe. It was undertaken by the metropolitan Isidor who, in 1437,
attended the Council of Florence. A few years later Afanási Nikítin
described his journey to India, which was one of the earliest
undertaken by Westerners in the same century; but while Vasco de
Gama and Columbus were revolutionising the knowledge of
geography, and were making the discovery of a route to India the
object of mercantile development, Nikítin’s report, important though it
was, had absolutely no effect upon dormant Russia.
As there existed no external geography, so there was no external
history. But fortunately for Russia, a long series of chronicles have
saved historical events from oblivion. The earliest chronicle, that of
Néstor, was the model for all that followed. Excepting the history of
Kúrbski, who had come into contact with Western science through
the Polish, and Krizhánich, who was not a Russian, there was no
progress made in the chronological arrangement of historical facts
from Néstor to Tatíshchev, while in style and dramatic diction there is
a decided retrogression. The promise held out by the historian of the
twelfth century was not made good for six hundred years. Néstor and
Sylvester, the continuator, were of the clerical profession, and
naturally the religious element, richly decked out with legend, folktale
and reports of eye-witnesses, is the prevailing tone throughout the
whole production. The Bible and the Byzantines, Hamartolos and
John Malalas, serve as models for the fluent style of this production,
but the vivid, dramatic narrative bears witness to considerable talent
in the author. At first only the cities of Kíev, Nóvgorod and Súzdal,
and Volhynia seem to have possessed such chronicles; but those
that are preserved show traces of being composed of shorter
accounts of other individual places. In the following centuries, most
of the larger cities and monasteries kept chronological records of
important events, and with the centralisation of Russia about
Moscow there also appeared a species of Court chroniclers whose
dry narration is often coloured in favour of the tsarate.
All this mass of literature is essentially ecclesiastic, and hardly any
other could raise its head against the constant anathemas of the
Church. No prohibition of the priests was strong enough to obliterate
the craving for a popular literature, for no school, no science, was
opposed to the superstition of the people, which therefore had full
sway. The best the Church was able to do for the masses was to
foster a “double faith,” in which Christianity and paganism lived side
by side. We shall see later how this state of affairs has been
favourable to the preservation of an oral tradition up to the present
time. Yet, but for the Word of Ígor’s Armament, and its imitation, the
Zadónshchina, no one could have suspected that the elements of a
natural, unecclesiastic literature were present in ancient Russia.
This Word of Ígor’s Armament is unique. It was composed at a
time when Russia was already well Christianised, yet the references
to Christianity are only sporadic, whereas the ancient pagan
divinities and popular conceptions come in for a goodly share of
attention. There are some who are inclined to see in this production
a forgery, such as Hanka concocted for Bohemian literature, or
Macpherson for Celtic, for the absence of any later works of the kind
seems to be inexplicable. But this absence need not surprise us, for
no such work could have been written at a later time outside the
Church, which alone was in possession of a modicum of learning. It
must be assumed that the bard of the Word represents the last of a
bygone civilisation that had its firm footing in the people, but stood in
a literary relation to the singers of the Norsemen; for there is much in
the Word that reminds one of the Northern sagas. The tradition of
the bard came to an end with this last production, but his manner,
corrupted and twisted by a wrongly understood Christianity, lived on
in the folksong of the people; hence the remarkable resemblance
between the two.
But for the inertia of the Russian Church and people, it would not
have been necessary to wait until a Peter the Great violently shook
the country into activity, for long before his time glimpses of
European civilisation reached Moscow. In the fifteenth century, we
have found metropolitan Isidor travelling to the Council of Florence,
to cast his vote in favour of a union of the Churches under Rome. In
the same century foreigners began to arrive in Moscow to practise
medicine or architecture, or to serve in the Russian army; in the time
of Iván the Terrible there was already a considerable foreign colony
in Moscow, and its influences upon individual Russians were not
rare. Iván the Terrible himself made several attempts to get skilled
mechanics from the West, but his efforts were generally frustrated by
Poland and the Germans of the Baltic provinces.
The most important points of contact with the West were in the
Church itself, through Kíev and Western Russia. These outlying
parts of Russia had early come into relation with Poland, and their
unyielding orthodoxy had been mellowed by the prevailing
scholasticism of the Polish theology. In the academy of Kíev, Greek
and Latin grammar, theology and rhetoric were taught, while these
sciences—especially grammar, even though it were Slavic grammar
—were looked upon at Moscow as certain expressions of heresy.
The correction of the corrupt church books, which in itself was
advocated by priests who had imbibed the Kíev culture, made the
presence of learned men—that is, of such as knew grammar enough
to discover orthographical mistakes—an absolute necessity. In the
reign of Alexis Mikháylovich, Kíev monks were called out for the
purpose of establishing a school, and only in 1649 was the first of
the kind opened. This innovation divided the churchmen into two
camps,—those who advocated the Greek grammar, and those who
advocated the Latin,—that is, those who would hear of nothing that
distantly might remind them of the Latins, and those who were for a
Western culture, even though it was to be only the scholastic
learning already abandoned in the rest of Europe. The battle
between the two was fought to the death. Those who were in favour
of the Latin were generally worsted, and some of the most promising
of them were imprisoned and even capitally punished; but men like
Medvyédev, and later Simeón Pólotski, laid the foundation for an
advancement, however gradual, which culminated in the reforms of
Peter the Great.
 Where a few individuals gained some semblance of Western
culture, they could not write freely at home, and had to develop their
activities abroad. Kúrbski, who for a long time stands alone as an
historian, wrote his History in Poland, and it remained without any
influence whatsoever at home; its very existence was not known
before our own times. The same thing happened with Kotoshíkhin,
whose description of Russia was known to the learned of Sweden,
but the original of which was unknown until its accidental discovery
by a Russian scholar of the nineteenth century. So, while the ferment
of reform began much earlier than the eighteenth century, it would
have been indefinitely delayed, causing many a bloody battle, if the
Gordian knot had not been cut by Peter the Great in favour of the
West.