The prisoners were dying of scurvy, typhoid fever, and smallpox, but nothing was killing them more than bad incentives.

That is the opening from Chapter 1 of Modern Principles: Macroeconomics, and only an economist could write such a sentence. Only an economist could see that incentives are operating just about everywhere, shaping every aspect of our lives, whether it be how good a job you get, how much wealth an economy produces, and, yes, how a jail is run and how well the prisoners end up being treated. We are excited about this universal and powerful applicability of economics, and we have written this book to get you excited too.

In the first two editions, we wanted to accomplish several things. We wanted to show the power of economics for understanding our world. We wanted to create a book full of vivid writing and powerful stories. We wanted to present modern economics, not the musty doctrines or repetitive examples of a generation ago. We wanted to show—again and again—that incentives matter, whether discussing the tragedy of the commons, political economy, or what economics has to say about wise investing. Most generally, we wanted to make the invisible hand visible, namely to show there is a hidden order behind the world and that order can be illuminated by economics.

One of the most remarkable discoveries of economic science is that under the right conditions the pursuit of self-interest can promote the social good. Nobel laureate Vernon Smith put it this way:

At the heart of economics is a scientific mystery . . . a scientific mystery as deep, fundamental and inspiring as that of the expanding universe or the forces that bind matter. . . . How is order produced from freedom of choice?

We want students to be inspired by this mystery and by how economists have begun to solve it. Thus, we will explain how markets generate cooperation from people across the world, how prices act as signals and coordinate appropriate responses to changes in economic conditions, and how profit maximization leads to the minimization of industry costs (even though no one intends such an end).

We strive to make the invisible hand visible, and we do so with the core idea of supply and demand as the organizing principle of economics. Thus, we start with supply and demand, including producer and consumer surplus and the two ways of reading the curves, and then we build equilibrium in its own chapter. All of this material is based on supply and demand so that students are continually gaining experience using the same tools to solve more and deeper problems as they proceed. The interaction of supply and demand generates market prices and quantities, which in turn lies behind the spread of information from one part of a market economy to another. Thus, we show how the invisible hand works through the price system.

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Our second goal in writing Modern Principles: Macroeconomics is to show—again and again—that incentives matter. In fact, incentives are the theme throughout Modern Principles, whether discussing the supply of oil, the effects of price controls, or the gains from international trade.

“Modern” is our third goal in writing Modern Principles.

We knew that to reflect modern macroeconomics, we had to cover the So-low model and the economics of ideas, real business cycles, and New Keynesian economics. While most textbooks now cover the rudiments of economic growth, the importance of ideas as a driving factor is rarely even mentioned. Other textbooks do not offer a balanced treatment of real business cycle theory and New Keynesian theory, instead favoring one theory and relegating the other to a few pages that are poorly integrated with the overall macro model. In contrast, we believe that adequately explaining business fluctuations, unemployment, and both the potential and limits of monetary and fiscal policy requires a balanced but unified treatment that draws on ideas from both models.

We also knew that financial crises and bubbles are very real, and that fluctuations in output and employment are a social and economic issue around the world. In fact, we included substantial material on banking panics, bubbles, wealth shocks, and the importance of financial intermediation in the very first draft of Modern Principles. Our book incorporates these topics from the ground floor rather than attempting to squeeze such material into hastily added boxes or appended paragraphs. In the third edition, we include more material on the shadow banking system and on the importance of housing and other sources of collateral shocks.

Modern Principles offers the following features and benefits: