How Reliable Are Michigan High School Economics Textbooks?

  A strong knowledge of sound economic principles is not only important in the twenty-first century global marketplace, it is essential for the maintenance of a free society. Are Michigan high school students being taught what they need to know in order to succeed and prosper?
  This review of 16 of the most commonly used economics textbooks in Michigan high schools uses 12 criteria-including issues of trade, taxation, and the role of government-to evaluate which texts are and are not effective at presenting students with a balanced and accurate perspective on the modern market economy. Each text is graded, from A to F, on its ability to clearly instruct students in the "economic way of thinking."
  An abridged 27-page written copy of the report may be ordered normally, or the full reviews of each textbook may be downloaded at no charge via www.mackinac.org.

Executive Summary

"If a nation guarantees absolute freedom to pursue individual gain, it will ensure misery for those who are least able to succeed." -Mary H. McCarty, Dollars and Sense: An Introduction to Economics

"Price controls are adopted because the price system is unable to reach equilibrium on its own." -David E. O'Connor, Economics—Free Enterprise in Action

"The allocation of resources in capitalism is efficient because resources tend to be attracted to the most profitable firms." -Sanford D. Gordon and Alan Stafford, Applying Economic Principles

"The public sector can redistribute income more efficiently than the private sector." -J. Holt Wilson and J. R. Clark, Economics

Any economist who keeps abreast of developments in his field will find it difficult to believe that the sweeping, confused statements cited above could find their way into any economics textbook. Yet, such ignorance is typical of much that one encounters in most textbooks used by Michigan high school students.

Given the findings of this study of 16 economics textbooks used in Michigan high schools, it is highly doubtful that most of Michigan's teenagers are obtaining a basic understanding of the principles of economics from the textbooks they use in class. While a few of the textbooks did instill "an economic way of thinking" about problems, most of the texts were partly and sometimes almost completely deficient. We often found dismal understanding or outright bias on the part of the text authors.

We examined the textbooks on the basis of 12 criteria that form the basis for the sound study of economics: 1) the price system and production; 2) competition and monopoly; 3) comparative economic systems; 4) the distribution of income and poverty; 5) the role of government; 6) the role of the entrepreneur; 7) public choice; 8) taxation; 9) the business cycle; 10) wages and unions; 11) trade and tariffs; and 12) money and banking.

We graded each textbook according to these criteria. The results: Of the 16 textbooks we examined, three received A's and three others earned B's. However, three received C's, five textbooks received a D, and we handed out two F's. A concise listing of titles and their respective grades begins on page 18 of this report.

Michigan students sometimes read in their textbooks that competition is dangerous and causes economic problems; that Americans are undertaxed; that government spending creates wealth; and that politicians are better at economic planning than entrepreneurs. If such notions were contrasted with other views, they might be acceptable in a textbook. But this is almost never the case.

Some authors are consistently critical of free enterprise and private property, yet present government intervention with little or no scrutiny. "As societies become more complex," one text assures us, "the need for government power tends to increase." Another author tells students: "Despite fears by some Americans that governmental tampering with the free-enterprise system would be harmful, most governmental policies have met with success." Yet a third text warns students that under a balanced budget, the government would "not be able to do things that many people think it should do, like building roads and providing for the needy. . . ." In other words, in many cases, students are not studying facts; they are digesting political opinions.

Most texts do a decent job of describing trade, the failure of communism, and the impact of entrepreneurs. However, most are deficient in three areas: competition and monopoly, the economics of taxation, and the lesson of the Great Depression.

How do discredited ideas find their way into textbooks? For one thing, many of the older authors learned their economics from the Keynesians of the 1930s, who believed strongly that government could fine tune and direct economic activity.

In response to our inquiries, however, several textbook authors suggested their publishers pointed them in a statist direction. One author, whose text received a low grade, responded: "I have in the past made suggestions to the publisher for changes along the lines of that in your review . . . the publisher wants a more liberal view presented in the text, and so that is what is in there. They especially want government intervention treated with favor in several chapters of the text."

Many of these problems will take a long time to resolve. Our concern here is to increase the level of economic understanding in Michigan high schools. We want students to be taught sound economics and the economic way of thinking.

We recommend that

• Schools that do not now offer economics to their students do so;
   

• Schools use one of the highly graded texts noted in this report;
   

• School boards in districts where economics is offered check to see what economics text they are using;
   

• Schools using a text that received a poor grade switch to a better learning tool. There are several good texts on the market and we recommend that Michigan high schools adopt one of the highly graded texts.
   

Introduction: Misleading High School Students into the Twenty-First Century

"Economic ignorance is the breeding ground of totalitarianism."
-John Jewkes, British Economist

As we embark upon the twenty-first century, it is natural for us to gaze at our children and wonder what kind of future they will build.

A global techno/economic revolution of unprecedented proportions swirls about their heads, weaving the world into ever-more-complex configurations. Will they be able to sort the wheat from the chaff? Will they be able to find their way through the jungle of possibilities? Will they uncover the vast realms of hope and opportunity that will become available?

Or will they be swamped by the sheer multiplicity of details, miss the best opportunities, and lose their way—and their hope—for want of a clearly marked roadmap?

Unfortunately for Michigan teenagers, the latter outcome is a distinct possibility if they rely on what they learn in their economics textbooks.

As this report reveals, it is highly doubtful that most of Michigan's high-school students are obtaining a basic understanding of the principles of economics from the textbooks they use in class.

Indeed, despite a surging U.S. economy, economic turmoil in Southeast Asia, dynamic new technologies, an overhaul of U.S. farm and welfare policies, wild swings in exchange rates, changes in monetary policy, roller-coaster stock markets, capitalism in Russia,vast loan restructuring and bailouts, and the potential for an international financial crisis at any moment - many Michigan students are being taught no economics at all.Those who are required to take classes in economics learn—with few exceptions—from textbooks whose authors show a serious lack of understanding of the economic lessons of this century.

Yet, such an understanding is more vital today than ever before in our history. As George Reisman, professor of economics at Pepperdine University has written, without basic knowledge of the economy, our young people are like "a crowd wandering among banks of computers or other highly complex machinery, with no understanding of the functioning or maintenance or safety requirements of the equipment, and randomly pushing buttons and pulling levers. This is no exaggeration."

Dr. Reisman continues: "In the absence of a knowledge of economics, our civilization is perfectly capable of destroying itself, and, in the view of some observers, is actually in the process of doing so."

Given such warnings, it is understandable that concern over what Americans know about economics is becoming widespread. As Arthur Levitt, former chairman of the New York Stock Exchange once wrote, "the American economy is the eighth wonder of the world; the ninth is the economic ignorance of the American people." And a late 1980's survey of high school students revealed that

• only 30 percent know that low income results from the lack of marketable skills;
   

• 48 percent think that high wages are a result of minimum wage laws, government actions or socially responsible business leaders;
   

• only 34 percent can identify profits as revenues minus costs; and
   

• 45 percent realize that government deficits result when spending exceeds

  revenues.
   
  (Source: Calvin K. Kazanjian Economics Foundation, Inc., www.kazanjian.org.)

In this study we have systematically examined sixteen economics texts used in Michigan high schools. We have graded them on the basis of twelve criteria that form the basis for the sound study of economics: 1) the price system and production; 2) competition and monopoly; 3) comparative economic systems; 4) the distribution of income and poverty; 5)the role of government; 6) the role of the entrepreneur; 7) public choice theory; 8)taxation; 9) the business cycle; 10) wages and unions; 11) trade and tariffs; and 12)money and banking. All good economics texts need to give students a basic understanding of these issues.

As we read these texts, we discovered that while some used strong evidence from recent research and instilled "an economic way of thinking" about problems, most of the texts were partly and sometimes almost completely deficient. We often found a dismal level of understanding or outright bias on the part of the text authors.

In fact, opinion is often expressed as fact. Michigan students read, for example, that competition is dangerous and causes many economic problems, that Americans are undertaxed,that government spending creates new wealth, and that politicians are better long-term planners than private entrepreneurs. Some authors are consistently critical of free enterprise and private property, yet present government intervention with little or no scrutiny. "As societies become more complex," one text assures us, "the need for government power tends to increase." Another author tells students:"Despite fears by some Americans that governmental tampering with the free-enterprise system would be harmful, most governmental policies have met with success." Yet a third text warns students that under a balanced budget, the government would "not be able to do things that many people think it should do, like building roads and providing for the needy. . . . The poor have been hurt by spending cuts." In other words, in these and many other cases, students are not studying facts or learning economics; instead they are digesting the political opinions of authors with hidden and not-so-hidden agendas.

We are not so naïve as to assume that political or ideological agendas finding their way into school textbooks is anything new. The problem is that we are living at a time when economic issues—from Social Security to the national debt—are more important than ever in shaping our nation's future. We can no longer afford to send out to the world armies of students inculcated in politically biased economics teaching. Michigan's students need to be told the unvarnished truth. Anything else is a disservice and a travesty.

Sound economics, stripped of ideological bias, teaches us that everything of value has a cost that somebody must pay. It informs us that a higher standard of living, if it is not to come at someone's expense, can only come about through greater production. It tells us that nations become wealthy not by printing money or spending it, but through capital accumulation and the creation of goods and services.

Sound economics reminds us to think of the long-term effects of what we do, not just the short-term or the flash-in-the pan effects. It tells us a great deal about the critical role of incentives in shaping human behavior. In short, sound economics is a blueprint for a sound economy, which is indispensable to satisfying human wants and needs.

We have written lengthy evaluations of each of the sixteen texts and analyzed how well each met our twelve criteria of sound economics. As a shorthand device, we have summarized each evaluation with a grade for the text. The results: On the positive side, three texts received A's and three others earned B's. However, three received C's, there were five textbooks only worth a D, and we handed out two F's.

In this brief report, we have included only a short summary of each text that explains something about its contents and why it received its grade. The unabridged report, which includes the detailed reviews of the texts, is available from the Mackinac Center for Public Policy Website at www.mackinac.org, or by calling (989) 631-0900.

One piece of good news is that the newer texts tend to be better than the older ones. Written by younger authors, the newer texts are less wedded to Keynesian ideas that have been discredited in the last thirty years. John Maynard Keynes was a British economist of the 1930s who argued that massive government spending could promote a prosperous economy.These younger textbook authors, many of whom have seen and studied failed government policy, seem to be more open to market-based solutions to public problems.

Another piece of good news is that most texts scored well in describing trade, the failure of communism, and the impact of entrepreneurs. In describing the economics of trade, for example, most texts noted that free trade is the natural state of human action; tariffs result when special interests lobby for favors. And when tariffs pass, retaliatory tariffs often follow.

On the negative side, most of these texts are deficient in three important areas: competition and monopoly, the economics of taxation, and the lessons of the Great Depression.

For example, most texts argue that antitrust laws improve competition. But they fail to expose students to the view—increasingly prevalent among economists—that monopolies are usually the result of government protective action that makes it difficult for competitors to enter the market. The historical evidence suggests that in truly free markets, monopolies are difficult to start, harder to maintain, and tend to wither away over time.

Second, most texts fail to see the economic response to taxation as a dynamic process. Raising tax rates does not necessarily increase revenue for the government. Lowering tax rates does not necessarily reduce revenue to the government and it often stimulates investment—which increases wealth and taxable income. The tax cuts under Democratic and Republican administrations of the 1920s, 1960s, and 1980s all had the effect of stimulating private investment and sharply raising revenue for the government.

Third, the best historical and economic evidence indicates that government interference helped trigger the Great Depression—and further government intervention tended to perpetuate it. Recent scholarship, for example, suggests that the New Deal programs did not promote economic growth. They merely transferred money from taxpayers to special interests (e.g. farmers, silver miners, and veterans).

How do ideas contrary to an economic way of thinking find their way into textbooks? As we mentioned earlier, many of the older authors learned their economics from the Keynesians of the 1930s. The idea that government could fine tune and direct economic activity was widely believed during the Great Depression. But younger economists, authors of the newer texts, have sifted through the evidence and come up with different conclusions.

Second, the influence of publishers sometimes leads to the production of flawed texts for the classroom. Publishers believe that arguments for government intervention sell textbooks. We asked all of the authors of texts used in this study to respond to our reviews. More than half of them responded and several of them suggested that their publishers pointed them in a statist direction. For example, one author, whose text received a low grade, responded:

"I agree with your review of my economics textbook. In fact, I have in the past made suggestions to the publisher for changes along the lines of that in your review. The problem is that I'm not in control of what is going into the text. The publisher dictates the final result of what will be in the text. The publisher has full and complete veto power over the contents of our text. And the publisher wants a more liberal view presented in the text, and so that is what is in there. They especially want government intervention treated with favor in several chapters of the text."

Why wouldn't publishers prefer to see the strongest economic ideas presented? Why would they want to bias the results toward a certain point of view? This author clarified that issue when he said the following:

"The publishers looked at the problem as one of satisfying constituencies, not necessarily teaching sound economics. When I made the case for a free-market approach, they were sometimes bemused. They would say that if I appreciated free markets then I should appreciate their need to reach school markets and that I should want to write a text that would appeal to many teachers even if it did not say what I thought a text should say.

"One remarkable example of our discussion occurred when I suggested that my text ought to include a segment on school choice—the idea that parents should be allowed to use tax credits (or vouchers) to send their child to the school of their choice. The publisher responded as though I had advocated including Satanism in the text. `Do you know what the teacher unions would do if we put that school choice stuff in there? They would boycott this text and we would never go into another edition.' I was told to absolutely avoid anything such as school choice that would upset the teacher unions.

Another textbook author confirmed the notion that at least some publishers strongly shape the contents of the text to appeal to teacher unions. "The road to the free market sometimes requires little steps," he said, "particularly when your audience consists of teachers paid by the state." "I'll use your review for the next edition," he said, "but I'll never be able to sell a text" that presents too much evidence for free enterprise.

Many of these problems will take a long time to resolve. Our concern here is to increase the level of economic understanding in Michigan high schools. We want students to be taught sound economics and the economic way of thinking.

We recommend that

• Schools that do not now offer economics to their students do so;
   

• Schools use one of the highly graded texts noted in this report;
   

• School boards in districts where economics is offered check to see what economics text they are using;
   

• Schools using a text that received a poor grade switch to a better learning tool. There are several good texts on the market and we recommend that Michigan high schools adopt one of the highly graded texts.
   

 

Methodology: Getting a Grip on the Problem

Our study of economics textbooks used in Michigan had many obstacles to overcome. First, there is no textbook committee or centralizing force in Michigan that mandates which textbooks should be used. This gives each school district the freedom to choose its own books. This is fine, and in keeping with Michigan’s tradition of local control. But it also makes it difficult, if not impossible, to find out which schools are using which books. Bert Okma, former president of Michigan’s Association of Economics Educators, said there is no research he has ever heard of that lists which high schools use which texts.

Second, different schools have different attitudes with regard to teaching economics. The Mackinac Center conducted a survey in 1993 of the almost 650 high schools in Michigan. On the basis of the number of schools responding to the survey, we estimated that almost half of Michigan schools taught economics. Okma makes a similar estimate. In 1998, we asked about 50 schools that taught an economics course what text they used. Of those, many use a "consumer economics" text that stresses such things as grocery shopping and balancing checkbooks. Those skills are important, of course, but learning them is different from studying an introduction to basic economics. Of those schools that teach an introduction to economics, some do not use a text; others use texts now out of print; and still others are in transition from one text to another.

Okma predicts that more high schools in Michigan will teach economics in the future because an economics component has been added to the state proficiency test, the MEAP (Michigan Education Assessment Program) test, which high school students must take. Okma was on the state committee that put together the new economics component for high school students.

The starting point for doing a study of economics textbooks used in Michigan is the Instructional Materials Center in Ronan Hall at Central Michigan University (CMU) in Mt. Pleasant. The Instructional Materials Center, headed by Cynthia Whitaker, is the official repository for the State Department of Education’s Textbook Collection. Publishers who want to have their texts used in Michigan are strongly urged to submit them to the Instructional Materials Center. Cynthia Whitaker and her staff work with the publishers to promote the CMU collection and to remind them to send their new texts.

When we went to this central repository, we discovered over 50 economics books on the shelf. Some of these books, however, were on consumer economics, not basic economics. Using the titles, authors, and publishers of only those texts on basic economics, we contacted the publishers. We discovered that many of these titles are now out of print. Several publishers, however, told us they had a new text in economics, which they intended to submit to the library at Central Michigan because they were anxious to see that new text adopted in Michigan.

For our study, then, we examined, first, those texts at the CMU library that were still in print and in use. Second, we included those new texts promoted by the publishers that appeared headed for adoption in Michigan. Before we would include a selection in our study, the book had to strongly indicate to us that its readability and content made it a likely choice for adoption at some schools. Third, in one case we included an older text that was not in the CMU library, because we heard from the author’s wife (the author is deceased) and the publisher, who assured us this book was being used in Michigan.

Working with the CMU library, the publishers, and our own sample of Michigan high schools, we identified a total of sixteen texts that were in print and probably in use or soon to be in use in Michigan. There are certain to be other texts now in use that we have missed—some publishers no doubt have texts used in Michigan, but neglected to send their copies to CMU. Other schools are using texts so long out of print that the CMU library no longer carries them. We hope to update this study and would welcome reports from any Michigan high school that uses an economics text not included in this study.

On the basis of our own sample of Michigan high schools, as well as our discussions with publishers and with textbook authors, we believe that the two most widely used economics texts in Michigan are Roger Miller’s Economics: Today & Tomorrow (which received a grade of "C" in our survey) and Junior Achievement’s Economics Study Guide (a "B+" in the survey), which was used by 20,902 students in Michigan in 1997, according to Ann Fillmore, a Junior Achievement representative.

Evaluation Criteria: Objectivity or Ideology?

Overview: The purpose of this study is to help interested school board members, administrators, teachers, and parents make better choices in the books they choose to educate students about economics. Textbooks can and do vary widely, but, to do a good job of teaching the fundamentals of economics, they must do certain things and do them well.

The role of the price system, competition, capitalism, incentives, government regulation, private property, taxation, labor unions, trade, money and banking are among the key issues that should be explored in economics textbooks. In the course of the discussion of any point, the book should teach students the economic way of thinking—that is, equip them with the "mental toolkit" of the economist so they will be able to do their own thinking about economic questions in the future.

For a text to receive a high rating in this report, it was not necessary for it to expound an explicitly "market-oriented" or "free market" message. But it could not ignore the preponderance of evidence that strongly suggests that markets perform many functions well, including the production and allocation of goods and services. A text needs improvement if it avoids discussing failures of central planning, ignores successes of market economies, fails to provide the student with modern scholarship, judges market performance according to results while judging government performance according to intentions, uses class warfare rhetoric, or repeats discredited myths about economic history.

In economics, there are many settled propositions. Some examples: people seek maximum value for minimum cost; people differ in their evaluations of the same product, service or other good; changes in prices lead to changes in consumer and producer behavior; scarce goods must somehow be rationed. There are many others. A good economics text will show the student how to apply these propositions—the laws of economics—to any issue or controversy. There are many issues and controversies in economics, and a good text will analyze them by using the economic way of thinking. Good textbooks do not propound particular philosophies, but concentrate on teaching students how to think.

The following section describes the twelve criteria selected for the evaluation of high school economics textbooks. These are certainly not the only topics that an economics text should address. But if they are not handled well, the book will fail to give students the basic understanding they need.

Criterion 1: Costs and Prices-How Production is Determined

We live in a world of scarcity. There isn’t enough of most things to allow people to have as much as they want. This fact is economic bedrock. From it follows the necessity of making choices in order to obtain the most satisfaction possible from our limited resources. Economics is the study of the trade-offs human beings make when they choose among scarce goods.

An economics textbook should clearly and thoroughly explain that economics is the study of human action in the face of scarcity, working through the basic concepts of cost (including opportunity cost), value, prices, incentives, trade-offs and efficiency. The student needs to understand early on that "the economy" is an interconnected web of rational decisions, and that the purpose of a course in economics is to explain why and how people make the decisions they do, and the impact those decisions have on the whole.

For example, it is essential to explain how the price system allocates resources. Even if the phrase "spontaneous order" is never used, the text must convey the meaning of this term to the student—that a free price system serves to direct people in deciding what to produce and how to produce it so as to make the most efficient use of scarce resources. The meaning and importance of profits and losses needs to be explained, as well as the concepts of equilibrium price, shortage, and surplus.

Criterion 2: Competition and Monopoly

Any economics textbook worthy of the name should explain the role of competition in promoting efficiency and spurring the search for improved products and technologies. It should also explore the implications of the absence of competition, i.e., monopoly. The student should understand how the incentives and behavior of a monopolist differ from that of a competitive firm.

A text that relies on the discredited model of "pure" or "perfect" competition—sadly, a common error in spite of decades of withering criticism of the concept—is seriously flawed. This model assumes that a competitive market is one in which information is perfect and universal and every producer is too tiny to have an impact on price. By this definition, every market will be found deficient no matter how intense the competition between rival firms. Most economists today understand that the pure or perfect competition model is a fantasy; an unfair yardstick against which to judge the real-world marketplace.

Another pitfall to avoid is reinforcing the common notion that monopolies are easy to create and maintain in a market with open entry. What history actually shows is that it is risky and costly to try to monopolize a market with unrestricted entry. This is why those who want to collude tend to use politics to stifle competition. The key to long-lasting monopoly has always been protective government action.

The question of whether the government needs to regulate competition through the Antitrust Division of the Federal Trade Commission should be critically examined, not taken for granted. The student should understand that laws and regulations aimed at protecting competition can be used to protect competitors against competition.

Criterion 3: Comparative Economic Systems

Some economies rely mainly on the market process to make economic decisions. Others rely on central economic planning. To some degree, we find central planning in every economy. And a centrally planned economy cannot avoid or escape the laws of economics. A good economics text will explain to students that free markets deliver vastly different outcomes than central planning. The reason: Government officials have different information and incentives than decision-makers in a free marketplace.

Economics texts should deal with the impact of central planning vs. free markets upon the general standard of living—income levels, quality and availability of goods and services, innovation, range of individual freedom of choice, and so on. The student needs to understand that the laws of economics remain in play no matter what the intentions of planning advocates may be, and usually deliver results very different from those desired.

For example, industrial policy—whereby government tries to guide and direct the economy by restricting trade and picking winners and losers through subsidies and discriminatory tax policies—is a confirmed loser. (See MEGA Industrial Policy: An Analysis of the Proposed Michigan Economic Growth Authority.) Texts that attempt to champion Japanese industrial policy, for example, mislead the student and, in light of the collapse of Asian economies that employed such practices, are hopelessly outdated.

Finally, in discussing comparative systems, a text should explore the problems of the former Soviet-bloc nations in making the transition from central planning to more market-based economies.

Criterion 4: The Distribution of Income and Poverty

People vary greatly in age, skills, imagination, goals, preferences, willingness to take risks, and much more. From these differences, it follows that they will also differ in what they earn. People who are very good at providing goods or services that others want to pay for will have high earnings; people who cannot or choose not to do so will have low earnings. Income inequalities should neither be praised nor condemned, but explained. Economic textbooks should avoid presenting data on income inequalities without including a discussion of income mobility—movement up and down the economic scale over time.

The subject of government welfare programs should be considered, and a good treatment will analyze not only the benefits to recipients, but also the ways these programs alter the incentives of recipients and taxpayers. If an economics text presents government programs as helpful and positive simply on the basis of good intentions—without taking into account the programs’ actual results—that text will be found wanting.

In this report, texts are given a lower rating if they employ shopworn, class-warfare cliches that pit rich against poor and call for coercive redistribution schemes. This picture of the world has been disproved by a wealth of research, which is one of the reasons Congress and President Clinton ended the federal entitlement to welfare in 1996.

The Social Security system is very important topic in a discussion of distribution of income. A solid analysis will include prospects for the program’s future, its economic impact on work, saving, capital accumulation and political action, plus suggested alternatives for reform. (See Saving Retirement in Michigan: Responsible Alternatives to Social Security.)

Criterion 5: The Role of Government

Why and how the government intervenes in economic affairs—and the impact of such intervention—is a very important subject for any economics text. A good treatment will describe the common arguments for and against government action.

Public Goods. A public good is a product that, when it is produced, gives automatic benefits to many. National defense and interstate highways, for example, are usually considered public goods. Once they are in place, everyone can benefit from them whether or not they paid for them. But a textbook should not make the error of assuming that everything the government provides is a public good.

Externalities. The market does not function well when the actions of one person or group negatively impact others, particularly where unwanted or undeserved costs are incurred—pollution is one example. A text should explore the advantages and disadvantages of different options for dealing with externalities.

Economic Stability. The economy will not maximize prosperity if it suffers from inflation, high unemployment, or both. Whether economic instability is an inherent feature of a market economy, or is induced by government policy, is a question on which there is much expert disagreement; at the least, the student should be made aware of the debate. From there, the text should discuss the kinds of government policies contending experts recommend.

Regulation. The question of whether government regulation benefits or harms the welfare of citizens is an important subject for any economics textbook. The pitfall to avoid is assuming that regulations a) yield results that are in line with the intentions of their framers, or b) are necessarily aimed at the public good. Regulations often are promoted (and even drawn) by those who would be regulated. It is often easier to co-opt the regulators and get them to write the rules in your favor than it is to win victory on the battlefield of a truly competitive marketplace.

Criterion 6: Public Choice

Governments are not benevolent philosopher kings. Like everyone else, the people employed in government have incentives that may incline them to pursue policies that benefit themselves, but reduce economic efficiency and lower the overall standard of living.

The study of the economics of political decision-making is known as public choice theory. To provide the student with a realistic analysis of the economic impact of government action, some discussion of public choice is essential. Whether it is done in a separate chapter, or touched upon at various points when the subject of government arises, a good text will remind the student that the interests of politicians and bureaucrats is not necessarily the same as the "public interest."

A good treatment of public choice will include an explanation of voter incentives to acquire information, special interest group legislation, "rent seeking," and the reason regulatory agencies are often "captured" by the industries they regulate.

Texts that judge the marketplace according to rigorous standards must not easily approve government intervention merely because they believe it is motivated by good intentions.

Criterion 7: The Role of the Entrepreneur

Entrepreneurs are men and women who search for and exploit new business opportunities. Because such opportunities are untried, entrepreneurs must take risks. Successful entrepreneurs direct resources into ventures that turn out to satisfy consumers, generating benefits that exceed costs.

A good economics text will explain the role of the entrepreneur in economic progress. It also will explain that entrepreneurship cannot be taken for granted. Government policies can reduce or eliminate it through taxes and regulations. The advantages and disadvantages of trade-offs between government action and entrepreneurship should be fully explored in economics texts.

Ideally, a textbook will present case studies of successful entrepreneurs to show that the pursuit of individual gain most often leads to greater benefits for consumers.

Criterion 8: Taxation

Taxation transfers resources from the private sector, where they are used in accordance with individual preferences, to the government, where they are used in accordance with political preferences. A good text will make this point clear, and proceed to discuss three important issues in the economics of taxation.

The incidence of taxation. Taxes are frequently levied on an entity that will not bear the ultimate burden of the taxes. "Who really pays this tax?" is an important question, one that also helps the student to "think like an economist."

Tax incentives and disincentives. Taxes alter the payoff for taking or not taking certain actions. Many times taxation can make activities that are profitable—and beneficial—no longer profitable. The student should learn to consider the long-term impact of tax changes after individuals and businesses have adjusted to them.

The cost of taxation. Taxes do not collect themselves. And tax avoidance costs billions of dollars each year. Economic texts should explain to students that the economic resources devoted to tax collection—as well as those devoted to tax avoidance—are substantial, and not available for other purposes.

Criterion 9: The Business Cycle

The economies of the world have gone through many cycles of prosperity and recession. Even the United States, which has had a steady increase of prosperity over two centuries, has had deep depressions between times of economic growth. A good treatment of this subject will try to explain why we have these ups and downs.

Here, some history is needed. The Great Depression and the events preceding it should be discussed, but a longer view is best, looking for common threads in earlier recessions and depressions. Economic phenomena don’t "just happen" and a good text will explore the work of experts to find plausible explanations. The views of the Keynesians, the Monetarists, and the Austrians should be presented and explained in some depth.

Many texts have something to say about the Great Depression. Several uncritically repeat the myths that President Hoover was a laissez faire president, that the depression was caused by free markets, and that President Franklin Roosevelt’s interventionist policies produced prosperity. These assertions have been revealed by subsequent scholarship to be little more than propaganda.

The truth is that government intervention may have caused the Depression, and almost certainly prolonged it. The 1920s and 1930s saw huge fluctuations in the nation’s money supply, fostered by Federal Reserve policy. There was a huge hike in tariffs in 1930 and a doubling of income-tax rates in 1932. Massive government intervention in the economy throughout the New Deal period failed to revive the economy. Running for president in 1932, the Democratic ticket of Roosevelt/Garner assailed the Hoover administration for "leading the country down the path to socialism" and promised a 25 percent reduction in federal spending, which it never subsequently delivered. All of these factors are believed to have contributed to the disaster, and should be presented to students and contrasted with the prevailing myth. (See Great Myths of the Great Depression.)

Economics texts should never present only Keynesian economic theories regarding the business cycle. Neither should they uncritically accept Keynes’ idea that spending determines national income.

Increasingly, it is apparent that the business cycle is not a mysterious phenomenon that befalls a hapless free economy, but is instead the direct consequence of unwise and often politicized manipulations of money and credit by monetary authorities. Students should be exposed to the emerging evidence supporting this theory.

Criterion 10: Wages, Unions, and Unemployment

Wages are prices, and are subject to the same forces that affect all prices. An economics textbook should explain that supply and demand determine equilibrium prices for labor just as they do for the price of apples. Trying to repeal the laws of economics in labor markets doesn’t work any better than trying to do so anywhere else. This is why increases in the minimum wage always cause unemployment among the least skilled workers—precisely those whom the increase is supposed to help.

Economics texts also should point out that in a competitive market, wages cannot long outpace the equilibrium price of worker productivity without causing serious economic disruptions. Laws that favor labor unions by permitting compulsory unionism and mandatory collective bargaining allow union employees’ wages to be higher than they would be if public policy were neutral toward unions. (See Michigan Labor Law: What Every Citizen Should Know.) A good text will discuss when and how this becomes possible, and the effects it has on other workers, consumers and investors, both in the short and long-term. The effect of uneconomical union activity on efficiency and investment also should be considered.

A good text also will describe various types of unemployment and explain why some unemployment is inevitable in a market economy. Government policies toward unemployment such as "unemployment insurance" and government job-training programs, should be discussed, with results as well as intentions in mind.

Criterion 11: Trade

In trying to make themselves better off, people naturally produce that which they can make efficiently. Then they trade their output for the many things they want but could not produce efficiently themselves. Because others are doing the same thing, voluntary exchanges make both buyer and seller better off. A good economics textbook will explain that production and trade are naturally driven by this "law of comparative advantage."

Government measures to tax trade through tariffs or restrict it with quotas or other prohibitions, hinder the flow of trade and divert resources from their most efficient uses. An exploration of the effects of trade restrictions on economic well being and growth is vital to the understanding of economics students.

An economics text should also explore the reasons governments enact trade restrictions. For example, students should be told about the role of special interest groups in seeking protective trade laws and they should be exposed to a critical appraisal of the justifications frequently given for imposing tariffs and quotas.

One of the enduring fallacies of trade concerns the so-called "trade deficit." In one sense, every individual has a "trade deficit" with the corner grocery store: Each of us buys more from that store than the owners buy from us. But as with all voluntary transactions, both sides benefit or they would not have chosen to trade in the first place.

In international trade, the same principle applies. If foreigners who earn dollars by selling to Americans do not buy American goods in return, they will purchase monetary instruments such as Treasury bills, invest in American stocks, bonds and real estate, or sell the dollars and buy other currencies. Sooner or later, those dollars come back as a "claim" on American goods or services. This "balance of payments"—a far more complete picture than the balance of trade in merchandise, since it looks at all international transactions—always balances by definition. An economics text that bemoans the balance of trade while ignoring the balance of payments is deficient in this important area.

Criterion 12: Money and Banking

Money facilitates trade. If we have a generally accepted medium of payment, we avoid having to barter our goods. Money, therefore, is a natural market phenomenon resulting from man's search for maximum gain at minimum cost. Banking is also a market phenomenon. People use financial intermediaries to safeguard funds and more efficiently make loans. An economics text should clearly explain the role of money and financial institutions, including the meaning and function of "interest."

Government activity in the monetary and banking systems must be addressed, including

• fiat money (paper dollars) versus commodity-backed money (gold and silver);
    

• the Federal Reserve System and how it regulates the monetary system;
   

• inflation;
   

• deposit insurance; and
   

• government allocation of credit.

A discussion of the 1980s savings and loan bailout ought to be included, explaining the background of this crisis in some detail. In 1980, the federal government raised the amount of deposits it would insure from $40,000 to $100,000 and granted S & L officials greater freedom to make a variety of investments. At the same time, it continued the harmful policy of charging well-managed institutions the same insurance premiums that it charged poorly managed ones. This was a prescription for disaster. An economics text that explains the S & L crisis as purely the fault of the marketplace needs to examine the facts in a more balanced manner.

The Evaluations: What's Right and What's Wrong with Michigan High School Economics Textbooks

Economics in Our Times

The focus of Arnold’s book is clear—teaching students to "think like an economist," and it succeeds very well in that task. The book’s treatment of supply, demand, and the price system is excellent. Arnold capably explains the dynamics of the free market and the crucial point that prices serve as the means for allocating scarce goods and resources. A point that the author makes strongly is that monopolies rarely thrive in the absence of governmental protection against new entrants. The book is exceptionally good at explaining the inherent inefficiency in central economic planning that arises from the absence of a price system and profit motive. Arnold tells the reader that an entrepreneur is someone who has a special talent for searching out and taking advantage of new business opportunities and developing new products and ways of doing things. He explains further that the entrepreneur is interested in his own gain, but if he is to be successful, he has to please large numbers of people. The only major disappointment is that in most chapters, the book wastes space on merely descriptive material that could instead have been used for more wide-ranging and thorough economic analysis.

A more detailed critique is available.

Economics by Design

This book is an excellent teaching tool. On almost every page, it illustrates the economic way of thinking and trains students to look below the surface to perceive economic effects they would otherwise miss. The authors show that economics is not just about production and trade, but extends to all purposeful human action. For example, they even discuss the economics of crime and explain the phenomenon of black markets and their role as a safety valve when the government suppresses the activity of the market. The authors show that the choice between "the chaos of the market" and "the rationality of central planning" (as it is so often phrased) is a false choice. For example, they cite the Nigerian government’s foolish purchase of far more cement than could be unloaded at port, which eventually hardened in the holds of ships. The writing is engaging and clear. The only drawback to the book is that it is aimed at advanced high school students or college students.

A more detailed critique is available.

Economics: Work and Prosperity

The late Russell Kirk was a historian, not an economist, but this book is an excellent introduction to the principles of economics. It is readable and short, and it gives students a clear grasp of prices, costs, and the roles of entrepreneurs and governments. The book is especially useful for its many illustrations of economic ideas from history and literature. Kirk is a storyteller and high school students will appreciate learning economics through stories rather than graphs. Kirk lists the strengths of market economies and emphasizes the creative results that occur when millions of people compete to provide the best and cheapest goods and services for others. He characterizes the command economy, on the other hand, as having inherent inefficiencies that result when people are not free to own property and accumulate wealth. He uses Alexander Solzhenitsyn’s experiences recorded in The Gulag Archipelago to show the problems with bureaucracies, black markets, and lack of consumer support in Russia’s command economy of the 1950s. Kirk’s book has not been revised since its release in 1989. The mixed rating of A-/B reflects the need for updating the book to include the fall of communism and other developments of the 1990s.

A more detailed critique is available.

Junior Achievement: Economics Student Text

The Junior Achievement (JA) text is a generally excellent introduction to economics for high school students. JA chooses good examples of economics in action that will appeal to students and show clearly how different economic principles operate. It is very strong on entrepreneurship and classifies entrepreneurs—along with private property, the price system, and competition—as being "essential to the success of any market economy." The text is sprinkled with examples of entrepreneurs and how their inventions have changed markets and consumer tastes. The chapter entitled "A World of Exchange" is an excellent and balanced introduction to the subject of trade. A student will also see that a tax on corporations often translates to higher prices for consumers. The student will also learn about progressive taxes, flat taxes, and regressive taxes in this book. However, the Junior Achievement text does not have a section on the distribution of income, and is weak on issues such as monopoly laws and the role of government.

A more detailed critique is available.

Economics (Worth Publishers)

Tregarthen’s book is mainly a college textbook. In high schools, it should be assigned to honor students; for other high school students the instructor will need to eliminate a lot of material. Otherwise, it is solid; students who master this book are well on their way in the study of economics. The author discusses issues in a way that compels the student to consider opportunity costs, unintended consequences, incentive changes, and so forth. For example, when discussing shifts in the level of income inequality, Tregarthen writes, "While some people conclude that this increase in inequality suggests that the latter period was unfair, others want to know why the distribution changed." This is precisely the way an economist should approach questions—seeking explanations rather than dispensing judgments. Another good example: The extreme pollution problems of much of eastern Europe and Russia are laid at the foot of Marx’s labor theory of value. "Since natural resources aren’t produced by labor, the value assigned to them was zero," Tregarthen observes. "Soviet plant managers thus had no incentive to limit their exploitation of environmental resources, and terrible environmental tragedies were common." However, other things are missing. For example, the very important observation that discrimination tends to impose costs on firms that practice it—and that it creates opportunities for those that don’t – is missing. The treatment of entrepreneurship in the book is disappointingly slight. He gives no profiles of successful entrepreneurs.

A more detailed critique is available.

Economics: An Integrated Approach

This textbook is for the most part good at teaching students how to think economically. The author concentrates on substance and the writing is engaging and often witty. But the coverage of the main topics is uneven—sometimes enlightening, but in other places very shallow. His explanations of the laws of supply and demand, equilibrium prices, shortages and surpluses and other fundamental concepts are very clear. His discussion of the impact of price controls—using agricultural price supports and rent controls as examples—put to work the student’s ability to think economically, and simultaneously demonstrate that good intentions can still yield bad results. Davis seldom tries to smuggle in normative conclusions under the guise of positive economics, but he is not entirely free of that vice. One example: He repeats the oft-quoted statistic that women earn only 70 percent as much as men do for equal work as proof of discrimination despite persuasive evidence that these differences are due to different family roles. Thomas Sowell and other economists have long pointed out that statistical differences do not constitute proof of discrimination.

A more detailed critique is available.

Principles of Economics

This book develops the student’s ability to employ economic thinking, but is not balanced on disputed policy issues. Entrepreneurship is almost ignored in the book. It is defined and briefly discussed on one page, but hardly ever comes up again. There are no features on successful entrepreneurs and no discussion on the link between risk and reward. The book is weak is on the costs of tax enforcement, compliance, and the opportunity costs of transferring resources from the private to the public sector. On the business cycle, it uncritically recites Keynesianism even though economists have debated for decades whether government spending really "stimulates" the economy. In addition, Case and Fair have written their book with a heavy emphasis on mathematics, resulting in a book not very accessible to high school students.

A more detailed critique is available.

Economics Today & Tomorrow

Miller spends too much time on "how to" instruction such as how to shop for clothing, how to buy or rent housing, and so on. While there’s nothing wrong with giving students this information, it’s not economics, it’s personal finance. Miller’s book turns into a hodge-podge of personal finance and economic theory, in which the latter plays second fiddle. The book’s discussion of scarcity, resources, and cost is very good. The key concept of opportunity cost is brought out very well. So are private property, competition, and the profit motive. The book’s superficiality manifests itself early, however. For example, the differences between capitalism and command and control economic systems is correctly explained, but without much depth. Miller correctly observes that "all economies are planned in one way or another," but does not explore the inherent drawbacks of central planning—the problems of quality, indifference to consumer preferences, and especially the impossibility of rational allocation of resources in the absence of a price system. The book doesn’t do nearly enough to help the student develop the "mental toolkit" of the economist.

A more detailed critique is available.

Economics (South-Western)

The chief drawback of this book is that it gives too much space to description and too little to analysis to show students how economists think. For example, the book includes biographies on people as diverse as Alan Greenspan, Arnold Schwarzenegger and Donna Shalala. Interesting as these may be, the information does nothing to help the student develop the ability to think like an economist. While the book often gives the student "both sides" where there is minor disagreement on issues, on some major issues, balance is missing. For example, the authors state that "the public sector can redistribute income more efficiently than the private sector." One would be hard pressed to come up with a more disputed notion among economists—yet the statement is stated as truth in this textbook for students. Government redistribution programs are riddled with unintended consequences—and students ought to think about results more than intentions.

A more detailed critique is available.

Introduction to Economics

Billings inculcates in students the unchallenged assumption that massive government intervention is needed to make an economy run smoothly. In fact, he argues that without government intervention, wild swings will occur in economic development. He adopts the outdated and discredited Keynesian prescriptions developed in the 1930s and 1940s, and avoids recent research on the unintended consequences of government action. Billings argues that the average worker is much better off today than 100 years ago, in part, because of reforms brought about by the influence of socialism. Sweden is used as an example of socialism at its best. Yet, any economist acquainted with Sweden’s economic malaise and today’s overwhelming consensus that the Swedish socialist model has failed would find Billings’s presentation very weak.

A more detailed critique is available.

The Study of Economics: Principles, Concepts & Applications

The fifth edition of The Study of Economics introduces economic concepts through examples from current issues, such as the fall of communism, the information superhighway, NAFTA, deforestation, and health-care reform. But while its examples are up to date, its research is not. Mings fails to incorporate much economic research of the last two decades on monopoly, taxation, regulatory agencies, and business cycles. Students come away with a benign view of government and a perception that market failure is rampant. Mings’s examples are often those used by Keynesians in the 1940s, not those used by most economists today. The text ignores the problems of government regulation and the adverse effects it has on economic growth and entrepreneurial activity. Mings’s analysis of poverty is very weak. He fails to include recent research in public choice theory, and scarcely a paragraph is devoted to a discussion of the entrepreneur. While his treatment of topics such as wages, labor, and trade are generally good, his overall treatment of economics is misleading.

A more detailed critique is available.

Economics: Institutions and Analysis

This book is clearly written and does well with the basics. Unfortunately, on many controversial policy issues, the authors stop being even-handed and provide their own conclusions as unchallenged truth. For example, the economics of competition and monopoly is a hotly debated field, but one would scarcely know it from this book. The authors seem confused and unaware how history affects their arguments. Both the premise that labor market discrimination is "a major cause of poverty" and the conclusion that affirmative action is the solution are highly contested points in economics literature. But the student hears only one side of the issue. Perhaps the worst of all the major sections of the book is its treatment of the business cycle. The students are presented with the discredited Keynesian view with almost no hint of skepticism. They never learn any of the devastating criticism to which it has been subjected for more than fifty years.

A more detailed critique is available.

Dollars and Sense: An Introduction to Economics

Too often, this book labors to inculcate government solutions rather than instruct the student in the economic way of thinking. The author fails to give the student a true understanding of the market’s ability to coordinate economic activity. Moreover, she accepts the outdated idea that if the free market is to work, "there must be perfect competition in the marketplace." That idea was popular fifty years ago, but few economists accept it today. On the subject of poverty, McCarty seeks to pin the blame on discrimination, a theory many economists reject. But instead of a penetrating analysis of the economics of discrimination, the student gets only a blanket conclusion of doubtful accuracy. McCarty presents Keynesian theory in much detail, with no critical analysis, giving no alternative explanations for the business cycle. The book leaves the student with the belief that market economies are inherently unstable and that government must solve that problem in some way. Students never learn that many economists regard this conclusion as erroneous. Not only does McCarty fail to teach economic analysis, she propounds as unchallenged truth ideas that have been vigorously attacked for decades.

A more detailed critique is available.

Economics-Free Enterprise in Action

This book is very weak in training the student how to think like an economist. The author rarely works through economic issues in ways that get the student to think about results rather than intentions, to weigh all costs and benefits, to consider changes in incentives and other secondary consequences. The book often contradicts its subtitle, "Free Enterprise in Action." For example, O’Connor shamelessly misleads students with the assertion that "Price controls are adopted because the price system is unable to reach equilibrium on its own," a statement that would embarrass today’s most orthodox statist economic planner. Markets tend toward equilibrium by definition; equilibrium is lost when government interferes with the market on behalf of people who don’t like the market’s results. The book’s section on taxation is all description and no analysis. The discussion of supply-side theory is misleading. Keynesian theory on the business cycle is recited, yet its most serious drawback in the minds of many economists—that government spending and borrowing merely crowd out private spending and borrowing—never appears. And O’Connor makes central economic planning seem entirely beneficial and non-controversial.

A more detailed critique is available.

Economics (Addison-Wesley)

This book utterly fails to help develop the student’s ability to think like an economist. Too much of the material is descriptive, not analytical. The student is simply told about many things without being shown how economists apply their method of analysis to understand costs and benefits. Moreover, the book leaves many doubtful if not clearly mistaken impressions by giving only one view of important policy issues. For example, the authors describe several government programs that are intended to alleviate poverty, but they fail to analyze them for their actual effects. Social Security has well-known perverse economic effects on rich and poor alike, but these are not mentioned. The text also repeats the mistaken notion that the employer pays half of the Social Security tax. Other programs—public assistance, unemployment insurance, job training—are treated the same way: description, but no analysis. Students are led to believe that if a program has good intentions, that is enough; it doesn’t matter whether they generate poor or counterproductive results.

A more detailed critique is available.

Applying Economic Principles

This is a visually attractive book that teaches little about economics. It devotes so much space to photos, "personal narratives," and current issue "boxes" that what is left is a very threadbare treatment of economic principles. Consider this example of circular reasoning: "The allocation of resources in capitalism is efficient because resources tend to be attracted to the most profitable firms." Unfortunately, the authors never explain the process by which the price system channels resources away from the production of goods that don’t pass the test of the market. At most important points, the authors provide the student with nothing but government solutions to policy issues. Its conclusions have sometimes been outdated for over two generations (Keynes’ theories), and in one case for over two centuries (mercantilist trade restrictions). In another case, the student reads that Lenin’s Soviet economic system "worked reasonably well," even though the almost comical inefficiency of the Soviet economy has been exhaustively documented. Here again, dubious conclusions take the place of serious analysis. The book utterly fails to teach the student how to think like an economist.

A more detailed critique is available.

Report Card: How Well Do Michigan High School Textbooks Present Economics?

Following is a summary list of the 16 Michigan high school economics textbooks reviewed in this study along with the authors’ names and grades received:

Michigan High School Economics Textbook Report Card
Textbook Title	Author(s)	Grade
Economics in Our Time	Roger A. Arnold	A
Economics by Design	Robert A. Collinge and Ronald M. Ayers	A-
Economics: Work and Prosperity	Russell Kirk	A-/B
Economics Student Text	Junior Achievement	B+
Economics	Timothy Tregarthen	B+
Economics: An Integrated Approach	Benjamin Davis	B-
Principles of Economics	Karl Case and Ray Fair	C+
Economics: Today and Tomorrow	Roger LeRoy Miller	C
Economics	J. Holt Wilson and J. R. Clark	C
Introduction to Economics	Henry F. Billings	D+
The Study of Economics	Turley Mings	D+
Economics: Institutions and Analysis	Gerson Antell and Walter Harris	D
Dollars and Sense	Marilu Hurt McCarty	D
Economics—Free Enterprise in Action	David E. O’Connor	D
Economics	Richard M. Hodgetts and Terry L. Smart	F
Applying Economic Principles	Sanford D. Gordon and Alan Stafford	F

Complete Evaluations

Economics in Our Times

Economics in Our Times
by Roger A. Arnold
(St. Paul, West Publishing Co., 1995), 539 pp.

Rating: A-

General Comments: This is an attractive hardbound book. It is colorful, but does not devote an excessive amount of space to photographs and other fillers. The focus of Arnold’s book is clear—teaching students to "think like an economist," and it succeeds very well in that task. It is peppered with "Thinking Like an Economist" boxes and question-answer segments that show how economists think. As the author writes, "What is different about economics is not so much what is studied, but how it is studied. Through your study of economics, you will acquire new tools, concepts, and ways of thinking" (p. 4). The writing is good, the explanations clear, and the illustrations engaging. The only major disappointment is that in most chapters, the book wastes space on merely descriptive material that could instead have been used for more wide-ranging and through economic analysis.

Criterion 1: Costs and Prices—How Production is Determined

Arnold’s book is excellent on the fundamentals of economic analysis. His definition of economics is broad: "Economics is the science that studies the choices of people trying to satisfy their wants in a world of scarcity" (p. 16). Almost immediately, he starts to encourage the economic way of thinking with good discussions of opportunity costs and unintended results, two of the most important components of the economist’s mental toolkit.

The book’s presentation and its chief implication (the need to make choices) is very clear. Arnold shows very nicely the connection between scarcity, choice, and opportunity cost.

Similarly, the book’s treatment of supply, demand, and the price system is excellent. He capably explains the dynamics of the free market and the crucial point that prices serve as the means for allocating scarce goods and resources. For the benefit of those who might be inclined to question the morality of price, Arnold analyzes possible alternative rationing mechanisms, including "need," and notes the serious drawbacks each would entail. In the accompanying "Thinking Like an Economist" box, he writes, "An economist is not content to sit and listen to a person say that he or she dislikes price as a rationing device. The economist quickly thinks, ‘If not price as a rationing device, then what?’" (p. 100).

The price system coordinates consumer and producer behavior, Arnold notes, and profits are essential for guiding production to the most highly desired uses. The profile of Adam Smith is good not only for its introduction of Smith’s views on free trade and limited government, but also for making the point that to be pro-free enterprise is not the same thing as being pro-business.

Criterion 2: Competition and Monopoly

Arnold clearly explains the four models of market structure, but unfortunately does not spend enough time in the analysis of the decision-making implications of doing business under each. For example, how would a monopolist decide upon the profit-maximizing price? More analysis here would have been useful.

A point that the author makes strongly is that monopolies rarely thrive in the absence of governmental protection against new entrants. In an "Analyzing Primary Sources" feature, he quotes from a work on Robert Fulton, saying "it is very difficult to establish or sustain a monopoly without government patents, licensing, tariffs, or regulations to keep out competition" (p. 156). Fulton’s story makes the point nicely, but more analysis would have strengthened it. Except for Fulton’s efforts to secure government protection against competition, the book lacks references to Standard Oil, Alcoa, IBM, and other key historical cases.

A weakness in the book is its brief, descriptive treatment of antitrust law and enforcement. Arnold describes the Sherman Act, but spends little time analyzing its effects. The student does read that "Many economists believe that, rather than preserving and strengthening competition, the Robinson-Patman Act limited it" (p. 202). Quite true, but many scholars have made the same point about antitrust law generally. The book would have been improved by incorporating a discussion of the way that antitrust laws (and many other laws) have unintended consequences that run contrary to their stated objectives.

Criterion 3: Comparative Economic Systems

Arnold provides an excellent analysis of the consequences of adopting different economic systems. Besides covering the customary points on key differences in the ways an economy can be organized to answer the basic economic needs, he includes an analysis of how different mindsets incline a person toward a preference for capitalism or socialism, following Thomas Sowell’s work.

As to the production of wealth and innovation, Arnold observes that most of the material goods that make life easier and more enjoyable are products of free-enterprise economies. The student who reads between the lines will see the reasons why command economies necessarily stifle innovation, but this point ought to have been made very explicit.

The book is exceptionally good at explaining the inherent inefficiency in central economic planning that arises from the absence of a price system and profit motive—one of the great consensus truths of our time and one that fully illuminates the vast disparities in living standards between free and unfree economies. Arnold also explores the difficulties involved in making the transition from socialism to capitalism.

Another valuable section of the book is the debate over "industrial policy." Arnold takes the student through an economist’s questioning of the popular notion that some government planning (as in the case of Japan’s MITI) can lead to increased prosperity. Among other reasons for skepticism, Arnold states that we should doubt that government officials are "smart enough to know which industries will be the industries of the future. They shouldn’t try to impose their uninformed guesses about the future on society" (p. 459). The recent collapse of Asia’s state-managed markets and industrial policy provides ample evidence that Arnold’s perspective is correct.

Criterion 4: The Distribution of Income and Poverty

Arnold takes an analytical approach to income distribution and poverty. He explains that poverty has several causes, including governmental impediments to self-improvement. Here, the book strongly encourages the student to focus not on the stated intentions of laws and programs, but rather on their effects.

The book’s discussion of the unintended effects of welfare programs is very good. For example, Arnold shows the impact of high implicit marginal tax rates on the incentive for welfare recipients for work. He describes at length two alternatives to welfare, the negative income tax and the free-market policy of eliminating obstacles to self-improvement. Finally, Arnold explores the unintended consequences of Medicare and Medicaid in driving up the cost of medical care.

Criterion 5: The Role of Government

The author begins his discussion of the role of government with a rarely considered but important point: that a free-market economy requires a mechanism for the enforcement of contracts: "Without government to enforce contracts, the risk of going into business would be too great for many people" (p. 48). He then continues with the public goods argument. His definition and explanation are clear, but he fails to make the point that many of the goods government now provides are not public goods at all (such as corporate welfare).

The book also has a good treatment of "negative externalities"—spillover effects from a transaction that affect third parties. Arnold examines pollution as a problem of trade-offs, and asks pertinent questions, such as, "Why is there air and water pollution, but not front-yard pollution?" Here, the author does an excellent job of showing that government action to deal with negative externalities may impose costs far in excess of benefits and have adverse, unintended consequences.

On the other side of the coin, the author chooses a dubious example of positive externalities, education. It is true that education may create positive externalities (free benefits for others), but it does not follow that individuals will systematically underinvest in education simply because some benefits may spill over to others. Furthermore, the proposed "solution" of government-provided education deserves much more discussion than just asking the student, "What do you think?"

Criterion 6: Public Choice

Given that Arnold was a student of Nobel Prize-winning economist James Buchanan, acknowledged as a founder of the public choice school, the absence of a concentrated presentation of public choice theory is surprising. To be sure, there are hints of public choice analysis scattered throughout the book, but only that. On p. 406, for example, Arnold includes a "Case Study" on economic growth and special interest groups, but this would have had more impact if he had explained why special interest groups so often triumph in the political arena. Likewise, a "Thinking Like an Economist" box on p. 387 states, "There is sometimes tension between economics and politics. The economist knows that politics may often be a stronger force than economics." True, but a section on public choice theory would have helped the student to better understand why.

Criterion 7: The Role of the Entrepreneur

Arnold tells the reader that an entrepreneur is someone who has a special talent for searching out and taking advantage of new business opportunities and developing new products and ways of doing things. He explains further that the entrepreneur is interested in his own gain, but if he is to be successful, he has to please large numbers of people. The book provides several examples, giving the student both a theoretical and a "real world" understanding of this important topic.

The treatment of entrepreneurship would have been stronger, however, if the author had stressed the high risks involved. Most new products and businesses fail the test of the market. Investors know that, and will risk their capital only because of the high profits that accrue from those ventures that succeed. Arnold should have stressed the risk-reward connection. He also should have let the student know that entrepreneurship is not something that can be taken for granted; burdensome taxes and regulations can easily stifle it.

Criterion 8: Taxation

Arnold describes the various types of taxes, but he should have done more analysis of the economic effects of taxation. For one thing, there is no discussion of the problem of tax incidence, i.e. how different groups are affected by particular taxes. Neither with regard to the corporate income tax nor Social Security is there any suggestion that the party writing the check to the government may not be the party that actually bears the burden of the tax. This is an important omission. Thinking about the problem of tax incidence is good practice for the student. Also, the section on taxation would have been better with an analysis of the ways taxation can change incentives and divert resources from other uses.

Criterion 9: The Business Cycle

Perhaps the most serious weakness in the book is the absence of a focused discussion aimed at answering the question: "What causes economic fluctuations?" The closest the book comes is an "Analyzing Primary Sources" feature containing a number of short quotations relating to the subject of the business cycle (pp. 316-17). Unfortunately, this does not give the student much guidance. There are a few glimpses into what different schools of thought have to say—for example that Keynesians blame economic downturns on "stickiness" in wages and prices (p.357) and Monetarists point to erratic monetary policy (p.366)—but there is no cohesive, well-developed treatment of this important issue.

Arnold should have had a few pages on the famous controversy between Keynes—who believed that during a depression, government was needed to intervene to create jobs—and the classical economists over Say’s Law, which said that supply created its own demand without government involvement. Arnold’s text would also have benefited from a description of the major non-Keynesian theories on the business cycle. However, the book is solid in describing how hard it is to manage the economy through fiscal and monetary policy.

Criterion 10: Wages, Unions, and Unemployment

Supply and demand, the author shows, explains the price of labor (wages), just as it explains the price of other resources. Missing, however, is a discussion of the connection between a worker’s wages and his productivity.

Arnold does well explaining the effects of minimum wage laws, but he gives no economic analysis of anti-discrimination laws. The latter are mentioned, but Arnold does not delve into the subjects of discrimination in labor markets and the consequences of trying to solve this perceived problem through "affirmative action."

On the subject of labor unions, the book is more descriptive than analytical. Several pages are devoted to a history of labor unions and the laws affecting labor-management relations. Eventually the book turns to an analysis of the economics of unions and the author demonstrates that there are secondary effects of union strikes and wage gains. The analysis is correct, but the student would have been better served with a more wide-ranging investigation.

The book discusses unemployment by dividing it into the traditional categories (frictional, structural, and cyclical) and Arnold does a good job of explaining why there must always be some unemployment in a free economy. Unfortunately, he says nothing about government programs to deal with unemployment.

Criterion 11: Trade and Tariffs

Arnold’s discussion of trade is excellent, beginning with his reminder to students that "international trade" is really no different from other trade: It is one individual or firm trading with another who happens to be on the other side of a national border. His explanation of comparative advantage and the economic benefits of specialization is very clear, but he needs a discussion of trade imbalances.

Arnold does a fine job of analyzing the effects of and arguments for trade restraints: national defense, infant industry, dumping, low foreign wages and tit-for-tat arguments. He shows the weakness in each, particularly in getting the student to penetrate through simple slogans and emotional appeals. Given the importance of the debate over trade policy in the U.S., Arnold should perhaps have provided a deeper analysis. Single paragraphs are not enough to get very far into these arguments.

Criterion 12: Money and Banking

The book’s discussion of the fundamentals of money is outstanding. Arnold shows how money developed because it suited the needs of traders in the market. Money, Arnold explains, like other market phenomena, was an unintended consequence of self-interested actions. In addition to covering the functions of money, the book goes into related matters, such as Gresham’s Law. What is missing is a discussion of the reasons for and consequences of the nation’s abandonment of the gold standard.

The book says very little on the origins of the Federal Reserve System except to quote a passage from the Federal Reserve Act. How the Fed operates and its fallibility is brought out in a "case study" on its role in the Great Depression. Unfortunately, Arnold fails to bring out the key point that poor Fed policy during the 1920s and early 1930s helped trigger the Great Depression. There is also a case study (pp. 290-91) on the S&L bailout that argues against the popular notion that the great losses were caused by dishonest people running S&Ls, arguing instead that federal regulation had created a situation rife with bad incentives.

On the subject of inflation, the book fails to mention the view of Milton Friedman and many other economists that inflation is always a monetary phenomenon. In one of the very few questionable assertions in the book, Arnold states that inflation can have either demand-side or supply-side causes, citing the possibility of a drought that lowers agricultural output as an example of the latter. But many economists would counter that rising prices in one sector of the economy does not, and in the absence of an increase in the supply of money, cannot lead to rising prices generally.

Economics by Design

Economics by Design
by Robert A. Collinge and Ronald M. Ayers
(Upper Saddle River, N. J.: Prentice Hall, 1997), 606 pp.

Rating: A-

General Comments: This book is an excellent teaching tool. On virtually every page, it illustrates the economic way of thinking and trains students to look below the surface to perceive economic effects they would otherwise miss. In helping the student to develop the mental toolkit of the economist, Economics by Design is wonderful. Moreover, the authors explore a wide array of topics: they show that economics is not just about production and trade, but extends to all purposeful human action. For example, they briefly discuss the economics of crime. The writing is engaging and clear. The only drawback to the book is that it is aimed at advanced high school students, and even college students.

Criterion 1: Costs and Prices—How Production is Determined

The authors begin with a masterly exposition of "the basics"—scarcity, choice, cost, the price system and the allocation of resources, and profit and loss. Their discussion is careful and thorough. The student who learns the early chapters will have a remarkably good grasp on the functioning of the market and the economic way of thinking.

Along the way, the authors introduce the reader to the uses of economic thinking on issues not usually perceived as "economic." They devote several pages, for example, to the effects of drug prohibition. They don’t make a normative judgment on whether prohibition is good or bad, but show how government policy changes prices and incentives. The great virtue of this and many other topics they cover is that the student learns to set aside preconceived value judgments and examine the real world trade-offs. Attentive readers will often find themselves thinking, "I never thought of that."

Where many books stop with basic price theory, this ones goes further, drawing out important implications. For example, the authors discuss how prices influence resource conservation, and the way black markets work as "safety valves" when government regulations have blocked the operation of the free market.

Criterion 2: Competition and Monopoly

The book’s treatment of competition and monopoly is very good. Monopolistic competition is not attacked for theoretical shortcomings, but instead as a market structure that very efficiently serves consumer desires. The allocative efficiency problem with monopoly is explained well, as is the logic of the monopolist’s decision-making. The authors also point out that successful collusion to eliminate competition in a free market is very difficult and that monopolies are hard to sustain.

Not much space is devoted to antitrust. The student learns what the objective of antitrust law is and that the wording of the statutes is so vague that it is often difficult to know beforehand whether various business actions will or will not be subject to legal attack. The book would have been stronger with a more thorough treatment of antitrust economics.

In their "current issues" section, the authors have several pages of solid analysis of the U. S. Postal Service and the feasibility of open competition in mail delivery.

Finally, the book gives the student an excellent discussion of mergers, leveraged buyouts and "junk" bonds, shedding light on these much misunderstood topics.

Criterion 3: Comparative Economic Systems

Economics by Design explains the differences between free market economies and those subject to central planning. The authors show that the choice between "the chaos of the market" and "the rationality of central planning" (as it is so often phrased) is a false choice. "Government planning is often disorderly and wasteful," they write (p. 555). As an example, they cite the Nigerian government’s foolish purchase of far more cement than could be unloaded at the port, which led to tremendous waste when the cement eventually hardened in the holds of ships.

The authors explain why it is hard to make rational decisions without a price system, and discuss many of the undesirable consequences of command and control economic systems. Their treatment would have been stronger, however, if they had explained the strong tendency for planners to allocate resources abundantly toward the production of goods and services that benefit the government and its apparatus.

Criterion 4: Income Inequality and Poverty

The issues of income inequality and poverty are dealt with rather briefly under the chapter on "Income from Labor and Human Capital." The authors present data showing changing shares of after-tax income earned by the various groupings between 1977 and 1992. The authors caution against leaping to the conclusion that "the richer are getting richer and the poor are getting poorer" by pointing out that there is considerable income mobility in the U. S. economy. "The poor" and "the rich" are not the same people over time. They also make the important point that the government’s income distribution figures do not take account of in-kind transfers.

The book says little about the impact of welfare programs, except that they have disincentive effects. Also, there is only a brief suggestion that some poor people are poor because of laws and regulations that get in the way of their earning ability. The authors should have developed this point at greater length. The discussion of the "wage gap" for working women and critique of "comparable worth" legislation, however, are excellent.

Criterion 5: The Role of Government

The book gives the student a good analysis of the role of government in dealing with instances of market failure. First, regarding the problem of public goods, the authors clearly explain the free rider problem. They also caution that just because a good has "publicness" qualities does not mean that government should be the provider. They write that entrepreneurs "may find ways to tie public goods to private goods that individuals or firms are willing to buy" (p. 322). A point they omit here, however, is that just as the market may be inefficient by under-providing the public good, so may government be inefficient by over-providing it, or doing so at low quality.

The authors have an enlightening discussion of the problem of externalities, with a detailed examination of the pros and cons of the various policy tools at the government’s disposal. A point they make strongly is that government regulators do not have to bear the cost when they create rules that produce high costs with almost no benefits.

Collinge and Ayers also include an interesting discussion on "merit goods" such as access for the handicapped. Instead of treating them as moral imperatives, they employ sound economic thinking to show that there are trade-offs. For example, government safety mandates may make the workplace marginally safer, but safety is not free. Workers will find that their compensation is reduced; if given the choice, they might have preferred somewhat higher pay to a somewhat safer work environment.

Criterion 6: Public Choice

One of the greatest virtues of this book is its full coverage of public choice theory.

Collinge and Ayers reject the naive view that government generally responds in "the public interest." Lest the student miss the key point, it is put in bold type: "rational ignorance means that politicians and bureaucrats can often safely follow their own personal agendas, even when those agendas conflict with what the public would want them to do" (p. 365). The rational ignorance of the public leads to several political maladies the authors discuss, including the "fiscal illusion"—the tendency of voters to fix their attention on the government spending that benefits them, while ignoring the fact that they are being taxed far more to pay for programs, projects and services that benefit others.

Equally important to understanding economics in politics is the role of interest groups. The authors show how the behavior of interest groups refutes the common view that democracy leads to government actions that are in the interest of the majority of the people. The wastefulness of the quest for government favors is brought home in the discussion "Rent Seeking—A National Pastime" (p. 367).

Finally, the authors show the student how the incentives of bureaucrats lead them to enlarge their budgets and fend off any cuts through tactics such as "The Washington Monument" strategy: threatening to curtail popular and even necessary public functions in order to save the unpopular and unnecessary ones.

Criterion 7: The Role of the Entrepreneur

Collinge and Ayers nicely define entrepreneurship and explain its importance. Entrepreneurs must take initiative and run risks if they are to succeed, and success comes only if they produce goods or services that fill an unmet need in the market. The authors write, "The common theme to the success stories of America’s modern entrepreneurs is insight into what the public likes to do and how they could do it better or more conveniently" (p. 41). This topic would have been stronger, however, with some discussion of how taxes and regulations affect entrepreneurship.

Criterion 8: Taxation

The discussion of taxation in the book is good, as far as it goes. The authors explain the different kinds of taxes levied and the importance of marginal tax rates. They also cover the subject of tax incidence. The student learns why it is misleading to talk about the employer’s "matching contribution" for Social Security and why the corporate income tax ultimately is borne by individuals. They also demonstrate that taxes alter people’s behavior.

The authors discuss several tax reform possibilities and suggest their probable economic effects. They also provide a good analysis of "sin taxes," and the tendency of politicians to shift the tax burden to vulnerable groups.

One thing the authors should have discussed at greater length is the overall cost of taxation. Students need to give serious attention to the burden that taxes and the tax system impose on the economy—compliance costs, enforcement costs, and avoidance costs.

Criterion 9: The Business Cycle

The discussion of the business cycle is one of the weaker parts of the book. They present the Keynesian aggregate demand explanation for the business cycle, but don’t analyze it well. Neither do they clarify the conflict between Keynes and J. B. Say (and his later defenders). The authors need to describe the debate between those economists who believe that a market economy is inherently unstable and requires frequent government intervention, and those who believe that a market economy is stable if left alone and suffers from instability because of needless government intervention.

What is missing from the book is the idea advanced by the Austrians and the Monetarists that the business cycle is not really a macroeconomic phenomenon, but a problem of many microeconomic adjustments that must be made because of government policy. Monetarism is only discussed in conjunction with monetary policy, not as an alternative explanation of the business cycle; Austrian theory is not mentioned at all.

Criterion 10: Wages, Unions, and Unemployment

The authors explain wages as a market phenomenon of supply and demand. But they should have made more clear the connection between wages and productivity.

The presentation on labor unions is too brief. The authors say it is hard to know how much difference unionization makes in wages, but go no further than saying that the difference is less than it appears to be if one looks only at raw wage data. The book, unfortunately, does not go into the questions surrounding the economic impact of unions on efficiency, productivity, prices, unemployment, and so on.

Collinge and Ayers explain the different types of unemployment and that there must always be some unemployment in a free economy (the "natural rate"of unemployment). They also cover how hard it is to accurately measure unemployment. They have a competent discussion of government programs aimed at unemployment, but they need to consider the economics of unemployment insurance.

Criterion 11: Trade and Tariffs

The book’s discussion of trade is very thorough, with clear explanations of the law of comparative advantage, balance of payments, and the foreign exchange market. The authors could have stressed more that "foreign trade" is economically no different from any other trade between human beings.

The treatment of the various arguments in favor of tariffs is excellent. Of the "lost jobs" argument, the authors write, "buying imported goods and services does not imply any reduction in aggregate employment. The reason is that dollars that are spent on products abroad bump up against the currency market and are immediately bounced back into the U.S. economy" (p. 173). The authors dispatch the "infant industry" argument after much analysis. They also cover the supposed harms of "dumping" and demonstrate that policies to prevent it do much more harm to consumers than dumping itself. They also cover "strategic trade initiatives" and the contention that government can bring about greater national prosperity by encouraging "the right" new industries. The authors note the "public choice" problem: that industries chosen for assistance would most likely be chosen on the grounds of political influence.

Finally, the book uses the case of bricks made in Mexico to show students how to analyze hidden protectionism in seemingly innocuous government mandates.

Criterion 12: Money and Banking

Collinge and Ayers explain the function of money and how it facilitates commerce better than barter. Money is a market phenomenon, not an invention of the state, and the authors could have made that point more explicitly. One of the few questionable statements in the book occurs when they say, "Paper money was more readily accepted if issued by government" (p. 49). Evidence from our monetary history often reveals just the opposite. Sometimes, privately issued paper notes circulated with great confidence and sometimes government paper money, as the expression goes, was "not worth a continental."

The book’s discussion of the banking system is good, with several important points brought out besides the nuts and bolts of bank operations. For example, the student learns about the tendency of federal deposit insurance to encourage lending institutions to make riskier loans than they would otherwise, and how the Glass-Steagall Act restricts competition in the financial services industry.

The role of the Federal Reserve in creating inflation is explained well, as is the point that inflation is actually another kind of tax. The authors connect monetary policy with interest rates and conclude, "Monetary policy cannot lower interest rates in the long run, except through lower inflation" (p. 483). The problem of hyperinflation is also handled well.

The authors briefly analyze the argument for reestablishing a gold standard, but unfortunately ignore the disadvantages of having a fiat money system subject to political manipulation by free-spending officials.

Economics: Work and Prosperity

Economics: Work and Prosperity
by Russell Kirk
(Pensacola: Pensacola Christian College, 1989), 398 pp.

Rating: A-/B

General Comments: The late Russell Kirk was a historian, not an economist, but this book is an excellent introduction to the principles of economics. It is readable and short, and gives students a clear grasp of prices, costs, and the roles of entrepreneurs and governments. The book is especially useful for its many illustrations of economic ideas from history and literature. Kirk is a storyteller and high school students will appreciate learning economics through stories rather than graphs. Kirk’s book has not been revised since its release in 1989. The mixed rating of A-/B reflects the need for updating the book to include the fall of communism and other developments of the 1990s.

Criterion 1: Costs and Prices: How Production is Determined

The opening section on costs and prices begins a useful discussion. Kirk differentiates between needs and wants; and he points out that some person had to work to produce any good. People produce goods, government taxes and distributes some of the production. Kirk describes what makes something valuable and concludes that "it is scarcity, rather than the amount of labor required to produce a good, that usually determines the value of any good" (p. 21).

Throughout this book, Kirk uses clear examples from history and literature to make his points. In this section, he tells the story of the Pilgrims and how they dealt with scarcity, labor, and production in the early 1620s. Governor Bradford at first had a socialist economy, but food shortages resulted; then he assigned private property rights to the pilgrims and production went up in his second season at Plymouth.

Criterion 2: Competition and Monopoly

Kirk’s chapter "The Good that Competition Does" is a clear and useful analysis of competition. He makes an interesting distinction between healthy competition, which "leads people to work hard and produce good things" and evil competition, or "strife," which produces "deception, fierce quarrels, and war" (p. 123). Healthy competition, Kirk argues, is rooted in human nature and is what makes market economies so prosperous. He quotes from Samuel Johnson, the British writer of the first dictionary, that "a man is seldom more innocently occupied than when he is engaged in making money" (p. 124) and Irving Babbitt that "There is something in the nature of things that calls for a real victory and a real defeat. Competition is necessary to rouse man from his native indolence, without it life loses its zest and savor."

Kirk then describes efforts inherent in any economic system to stifle competition. Even in a market economy, as Adam Smith observed, businessmen will meet together and try to set prices. Kirk points out that the U. S. Congress has passed antitrust laws to try to prevent "combinations in restraint of trade." He seems to approve of this intervention, but admits that the free market itself is an important element in preventing monopolies.

Kirk’s analysis would benefit from specific examples. The Sherman Antitrust Act, written in 1890, for instance, was first applied to the American Sugar Refining Company, which bought the E. C. Knight Company and thereby controlled 98 percent of the sugar market. The Supreme Court refused to break up American Sugar Refining because it was not restraining trade—anyone else could have entered the sugar market. In fact, that happened during the next 30 years and by 1927 American Sugar Refining controlled only 25 percent of the U.S. sugar market. U. S. Steel is an example of another large company that lost business in the early 1900s because other companies, such as Bethlehem Steel, entered the steel market and made a better product.

Criterion 3: Comparative Economic Systems

In his study of comparative economic systems, Kirk compares mixed economies (e.g., the U. S., Taiwan, and Kenya) with command economies (e.g. China, Tanzania, and Russia). His book was written in 1989, before the fall of the Soviet Union, but his comparisons of the performance of market and command economies are still valid.

Kirk lists the strengths of market economies and emphasizes the creative results that occur when millions of people compete to provide the best and cheapest goods and services for others. The command economy has the advantage of being able to target resources for quick results. But it has inherent inefficiencies, Kirk argues, that result when people are not free to own property and accumulate wealth. He uses Alexander Solzhenitsyn’s experiences recorded in The Gulag Archipelago to show the problems with bureaucracies, black markets, and lack of consumer support in Russia’s command economy of the 1950s.

In any future edition of this book, the author will want to describe Russia and Eastern Europe in the 1990s, after the fall of communism.

Criterion 4: The Distribution of Income

Kirk has an interesting section on how the politics of envy affects the distribution of income in market economies. Some people see their neighbors getting rich in business and they envy this wealth and the possessions it can buy. Eventually, the "have nots" and their lobbyists appeal to government for higher taxes on the "haves." Kirk uses Holland after World War II as a historical example of the politics of envy in action. Government taxation on wealth had so reduced the gap between rich and poor that entrepreneurs no longer had incentives to take risks and create new products. Kirk cites Prime Minister Andries van Agt’s recent efforts to stifle the politics of envy and restore rewards to those who succeed in business.

Kirk describes the moral basis of income distribution and poverty. He recognizes that some people are poor because of bad luck, but he stresses hard work and careful planning as the keys to success. In a market economy, talents in different areas of life do indeed vary, so income stratification is an inevitable result. Command (or socialist) economies, Kirk notes, sometimes try to equalize incomes, but often with negative results. The work ethic diminishes; shortages of goods and services plague the economy.

Criterion 5: The Role of Government

Kirk notes that the role of government often determines a nation’s prosperity or poverty. All economists agree that government needs to enforce contracts and laws. Government also provides for the national defense. Should there be any other functions of government in a free society, Kirk asks. He reviews the changing role of government in history from the times of Plato and Adam Smith to the late 20^th Century.

Edmund Burke, Kirk notes, said that government should not "provide for us in our necessities," (p. 241) yet has done so to an ever-increasing degree over the course of the 1900s. The 20^th Century has witnessed the growth of government across the globe in both market and command economies. Kirk does not explain why this is so, but he does look at its consequences in higher taxes, increased regulation, and the decline in individual liberty. American society, Kirk notes, has prospered in the 20^th Century, but he sees the growth of government as a potential brake on economic growth.

This text would have benefited from a stronger analysis of public goods, the free rider problem, and externalities.

Criterion 6: Public Choice

There is no special section on public choice in this text. Since most public choice research is relatively new, and since this text was written in 1989, Kirk may not have thought public choice ideas were worth including in his text. None of his writing, however, conflicts with the best available research on public choice theory.

Criterion 7: The Role of Entrepreneurs

Kirk’s section on the role of entrepreneurs is useful. He defines the entrepreneur as a person with "a gift for thinking up new undertakings and getting them accomplished." (p. 59) This definition is helpful because it emphasizes risk and imagination—two interesting qualities that few people have. Kirk points out that the entrepreneur "needs to imagine economic developments that have not yet come to pass. . . ." (p. 165). Henry Ford, for example, imagined a low priced car in every garage 12 years before he could produce one. Kirk gives several examples of entrepreneurs in action. Most prominent is his discussion of E. I. duPont de Nemours, the French immigrant to the U.S., who made gunpowder cheaply and capably in the early 1800s.

Criterion 8: Taxation

The discussion of taxes is light on specifics but strong on theory. Taxes do alter behavior and increases in taxation often have unintended consequences. Kirk describes the sequence of events that follows when governments levy high taxes: (1) individuals can’t save, (2) businesses can’t invest (in capital goods or material goods), (3) supplies of goods diminish, (4) incomes drop, and tax rates must be raised again.

Kirk does not discuss tax incidence or the dynamics of tax reduction. In the 1920s, 1960s, and 1980s, tax rates in the U. S. were slashed on all groups. These cuts helped boost economic growth during these decades; also, revenue into the government sharply increased. These empirical developments support Kirk’s conclusion that "it seems unwise to expect government to perform economic functions for which sound and free government never was designed" (p. 246).

Criterion 9: The Business Cycle

The section on the business cycle is good as far as it goes. Kirk describes historic business cycles—especially the Great Depression of the 1930s—and how they effect market economies. He also describes the Federal Reserve System—its history, its function, and its role in modern economic life. He needs to make a further point: Recent research suggests a strong connection between the manipulations of the Fed (lowering interest rates in the mid-1920s and raising them sharply in 1929) and the onslaught of the Great Depression. Readers might also benefit from a description of Austrian economics and how economist Ludwig von Mises and Nobel laureate F. A. Hayek looked at human behavior.

A more thorough discussion of the Great Depression would also give Kirk another chance to illustrate the harm done by interest groups in the political arena. Kirk likes to show how interest-group politics can undermine liberty. In the Great Depression, farmers, veterans, and silver miners (just to name three) were groups that extracted special favors from government at the expense of taxpayers.

Criterion 10: Wages, Unions, and Unemployment

Kirk strongly links wages to productivity and not to political action. He also cites many verses in the book of Proverbs in the Bible to argue that Jews and Christians have historically linked hard work to higher wages and economic success.

In the short section on unions, Kirk describes the role of unions, collective bargaining, and right-to-work laws. He implies that government help to labor unions in the U. S. (through mandatory collective bargaining) has tilted the balance of power in favor of organized labor. The increase in prosperity in the 20^th century, Kirk argues, is not the result of organized labor, but "principally because of the increase of skilled labor as contrasted with unskilled labor" (p. 50) Skilled labor is more productive than unskilled labor and provides more and quicker goods and services.

Criterion 11: Trade and Tariffs

The section on tariffs is short, but is reliable as far as it goes. Tariffs restrict free trade and results in higher prices for consumers. "Competition from abroad," Kirk argues, "tends to keep prices low and quality high" (p. 132).

Kirk does not get into the infant industry argument, nor does he discuss the disastrous historical consequences of high tariffs historically. The Smoot-Hawley Tariff of 1930, for example, was the highest in U. S. history. When we refused to accept foreign imports, other countries retaliated and refused to buy U.S. goods. The collapse of the American auto industry, for example, in part occurred because Europeans refused to buy American cars after 1930.

Criterion 12: Money and Banking.

Kirk’s section on money and banking is thorough. In explaining the origins of money, he stresses the role of private businesses, not government. The origin of paper money, Kirk shows, was in bills of exchange from one merchant to another.

Kirk discusses the gold standard and the more recent development of paper money under government control. The French and American Revolutions provide Kirk with illustrations of inflation when no backing existed for the government’s paper currency.

The book has a competent discussion of the Federal Reserve system and the emergence of a managed paper currency instead of a gold standard. Most of the discussion on the Fed explains its function and impact, not its technical operation. The text would be more useful if it had described how the Fed’s manipulation of currency affected the business cycles in the 1930s and inflation in the 1970s.

Junior Achievement: Economics Student Text

Junior Achievement: Economics Student Text
(Colorado Springs: Junior Achievement, 1996), 211 pages.

Rating: B+

General comments: The Junior Achievement text is an excellent introduction to economics for high school students. The chapters are carefully outlined, and clear headings and subheads introduce the material. The text chooses good examples of economics in action that will appeal to students and show clearly how different economic principles operate. At about 200 pages in length, the text condenses considerable information and presents it in logical sequence for the student.

Criterion 1: Costs and Prices—How Production is Determined

Junior Achievement gets off to a strong start by describing economics as a way of thinking about the world. The text starts with the concept of scarcity, presenting resources and means of production as scarce by definition. Students are told that entrepreneurs must choose what to produce; and consumers, using opportunity costs, must choose to consume some products and avoid others. Price is shown to be the key mechanism that directs exchange in an open market.

In making points on scarcity, resources, and opportunity costs, this text uses examples students can identify with or easily visualize—shopping in a mall, making cornflakes, and drafting players for a basketball team.

Criterion 2: Competition and Monopoly

Junior Achievement has an excellent description of competition and its advantages for consumers. The book defines oligopoly and shows how a high concentration ratio among, say, four firms can still mean lots of competition is taking place. The text defines monopoly and shows how monopolies in a free market are hard to achieve. "Pure monopolies are rare. Rarer still are those able to survive over many years" (p. 111). In fact, monopolies can rarely be created without help from the government—as in the case of public utilities.

One weakness of the Junior Achievement text is that it accepts the argument that public utilities are a natural monopoly. The authors could have told students about the movement toward "retail wheeling"—which allows the free movement of electricity along interconnected wires, and is breaking down the public utility monopolies in many states. Public utility companies have always bought and sold electricity from one another, but legal barriers, not natural ones, prevented homeowners from doing the same thing. If the deregulation of public utilities follow the pattern of deregulation in telecommunications, airlines, and natural gas, we should see prices fall and service improve in the years ahead. Students need to be aware of just such economic trends.

The section on antitrust is a bit weak, and also contradicts the good points made earlier about monopolies and collusion. On page 110, the book shows why collusion among companies—to raise prices and stifle competition—is a difficult situation to negotiate, much less achieve over any effective period of time. This would seem to argue against the need for antitrust laws, yet the authors offer without qualification that antitrust laws are needed to prevent businesses from restricting competition and raising prices.

The student would profit from an examination of the historical record here. Have companies with large market shares been able to maintain their dominance easily over time? Have mergers and consolidation tended to make large corporations more efficient? The answer is no in most cases. American Sugar Refining, the first company to be prosecuted under the Sherman Antitrust Act, Standard Oil, and U. S. Steel are all examples of large dominant corporations that lost large chunks of business to more efficient competitors in the early 1900s.

Criterion 3: Comparative Economic Systems

The section on comparative economic systems is competently done. The text gives clear definitions of communism, socialism, and capitalism. But in describing Japan, the text presents the advantages of keiretsus, or cartels, in planning and in providing security while ignoring the disadvantages in innovation and efficiency. That omission is not repeated in the discussion of central planning and Russia. In describing the collapse of the Soviet Union, the authors show the problems of central planning and how risk and innovation are discouraged. Hungary is presented as an example of a communist country that was more prosperous than other Soviet satellites because it provided some incentives for private businesses.

The authors correctly note that most capitalist economies are really mixed economies. In describing developing countries, the text might have pointed out that those developing countries with the strongest economies (e.g. Hong Kong and Singapore) often have much lower tax rates than those developing countries that are floundering (e.g. Zambia, Ghana, and the Dominican Republic). The systematic testing of variables to explain prosperity and poverty is a key task of the economist—and is especially relevant in a section on comparative economic systems.

Criterion 4: The Distribution of Income and Poverty

The Junior Achievement text does not have a section on the distribution of income, or on government welfare programs. The section on "Consumers and Savers" does have some helpful comments on income from work and income from savings, but nothing on distribution of income. The section on "Government and Its Budget" has helpful information on transfer payments, such as Social Security, and the costs and benefits to society of welfare payments.

The text would be stronger if it showed how inequalities in income are inevitable in a free-market economy—and how some poor people over time (especially immigrants) worked their way up and how some rich people have sharply fallen in wealth over time.

Criterion 5: The Role of Government

The "Government and Its Budget" chapter is generally reliable in describing the role of government in the economy. But it also has unfortunate flaws.

The text starts by presenting the historic and constitutional role of government in establishing and enforcing property rights and contracts. Next comes a good definition of public goods and externalities, with clear examples of both.

The authors argue that one clear role for government is in promoting economic security for the poor. The assumption here is that the market system, plus the charitable impulses of philanthropists and churches, will not meet the needs of poor people—and that government money must come in to fill this gap.

Some economists would agree with this argument, but others would not. They would cite the failure of many government programs. Social Security, for example, is headed toward bankruptcy early in the 21^st Century unless authorities impose massive tax hikes, drastically reduce benefits, or implement some form of privatization. In any case, the program provides a much lower return than almost all private pensions. A system of private pensions such as has been adopted in Chile, might provide greater benefits to poorer Americans. Also, government drug rehabilitation programs, to give a specific example, have many fewer successes per capita than privately run programs such as Teen Challenge.

It is also useful to note that the percentage of Americans below the poverty line fell much more sharply from 1900-1960, when government benefits were minimal, than from the 1960s to the present. The increase in government aid since the 1960s has, in many cases, provided incentives not to work. A text should not automatically assume that government solutions work better than private solutions in helping poor people. In part, the Junior Achievement text seems to recognize this point when it argues that government intervention in general will often distort incentives and be open to abuse from special interests. Yet, it loses the point in other areas.

Criterion 6: Public Choice

There is no section on public choice in this text. The authors, however, are aware that the interests of politicians and regulators are not necessarily the same as the "public interest." In the section on government, the text observes that "various interest groups have strong incentives to stay well informed on particular issues that affect them. They also have strong incentives to lobby government officials for special benefits relating to these issues."

Criterion 7: The Role of Entrepreneurs

The Junior Achievement text is very strong on entrepreneurship. It classifies entrepreneurs—along with private property, the price system, and competition—as being "essential to the success of any market economy" (p. 94). The text is sprinkled with examples of entrepreneurs and how their inventions have changed markets and consumer tastes. The examples of Will Kellogg and Henry Ford are well chosen. The case of George Jacob Mecherle, the founder of State Farm Insurance, is an example the text uses well to help explain how the whole insurance industry works. Other examples—in the area of baby-sitting, tutoring, toy marketing, and photocopying—have special appeal to students through products and services they understand.

Criterion 8: Taxation

This text does a capable job of covering the basic principles of taxation. The authors describe the different types of taxes—on personal income, businesses, sales—and the issue of tax incidence. A student will also see that a tax on corporations often translates to higher prices for consumers. The student will also learn about progressive taxes, flat taxes, and regressive taxes in this book.

The text could be stronger on the issue of how taxes alter behavior. Soak-the-rich strategies of taxation, for example, have historically throttled economic development and depressed revenue. Conversely, tax cuts have often spurred economic booms. For example, research on the 1920s and 1980s shows that during both of those decades income tax rates were slashed; investors plowed capital into industry and created many new jobs; and, federal income tax revenue, even after the steep cut in tax rates, rose rapidly. Students need to be aware of these findings.

Criterion 9: The Business Cycle

The Junior Achievement text does not have a lot on the business cycle, but what it does have is often useful. The authors describe peaks, recessions, troughs, and expansion in a market economy. On p. 152 is a chart showing business cycles over time, but there is not much historical description of the Great Depression or other recessions.

The text describes how government can influence fiscal policy, and the authors are aware that government policy can create many problems. It is not always true, however, as the text says, that "if government reduces taxes to fight a recession, revenues decrease." An awareness of supply-side economics and the historical results of tax cuts could improve this section. The text shows a clear awareness of the historical problems of handling economic problems by having government manipulate interest rates or rush to the printing press to make more money.

Criterion 10: Wages, Unions, and Unemployment

The "Productivity and Labor" chapter shows students how improved labor productivity has allowed "business and workers to earn more over time while also providing consumers with better and lower-priced products" (p. 94). The text uses a cooking metaphor to show how entrepreneurs and workers often work together to "bake a bigger pie" of income. The strong implication is that wages cannot exceed worker productivity in any industry.

For supporting evidence, the authors could have used the historical example of Henry Ford, America’s second billionaire. Ford sharply hiked the wages of his employees and cut the costs of his Model Ts at the same time. He later said that paying his workers a minimum of $5.00 per day in 1914 (about $100 per day in 1998 dollars) was the best cost-cutting move he ever made. The improvement in productivity among the workers in Ford’s factories outstripped the sharp rise in their wages.

The text has a thorough section on labor unions and their history in the U. S. The authors define both craft unions and industrial unions. Then the students read good capsule histories of the Knights of Labor, the AF of L, and the CIO. Labor-management issues receive several paragraphs and the authors describe the Wagner Act and the somewhat counterbalancing Taft-Hartley Act.

Some labor unions originally opposed minimum-wage laws because workers would be allowed to benefit without help from a union. The text describes the minimum-wage law, but doesn’t mention the motives for its original passage or the consequences of it in the marketplace. The prime movers behind the minimum-wage law were the highly paid New England textile workers, who wanted to impose higher costs on their competitors in the South. The consequence of these laws for those workers retaining their jobs has been a wage increase; many employers, faced with rising costs, have had to lay off many workers—which is why minimum-wage increases often correlate with higher unemployment rates, especially among minority workers with limited skills.

Criterion 11: Trade and Tariffs

The chapter entitled "A World of Exchange" is an excellent and balanced introduction to the subject of trade. The text shows why nations trade, what comparative advantage is, and how free trade can benefit all traders. The authors describe tariffs, give the arguments for and against tariffs, and show the importance of balance of payments. Finally, the text describes the European community, NAFTA, and GATT.

Criterion 12: Money and Banking

The money and banking chapter in the Junior Achievement text is clear and sometimes thorough. The authors do a fine job describing the rise of money as a medium of exchange. Then they describe the development of banks from the Middle Ages to today. Reserves, reserve ratios, demand deposits, and loans receive attention—and the authors have a helpful page on the Savings and Loan problem of the 1980s. The Junior Achievement text has a section on inflation, but it would be stronger if it showed more explicitly how increases in the money supply cause prices to rise.

The text explains the Federal Reserve System and how it functions. The authors imply, however, that the Fed works well in stabilizing the economy. In fact, the Fed has a mixed track record at best (a Great Depression, at least nine recessions and a dollar worth perhaps a nickel of its 1913 value), which the text needs to bring out so students aren’t given a one-sided view.

The Fed was established in 1913 (not 1914 as the text states) to improve the banking system. But in the mid to late 1920s, the Fed expanded the money supply and then in 1929 sharply constricted it. Many economists argue that this expansion-constriction helped trigger the Great Depression. The chairman of the Fed is appointed by the president, and often the Fed will shift policies on money growth to please presidents and help them get re-elected. President Nixon, for example, wanted a rapid growth in money supply in 1972, when he ran for re-election, and the Fed accomodated him with the largest growth rate in the money supply since the end of World War II. Before Nixon, President Eisenhower, and Presidents Ford and Reagan after him, wanted slower growth in the money supply and the Fed chairmen dutifully obeyed. A good text will show that the Fed—and all regulatory agencies for that matter—are not independent, but instead are subject to lobbying and a variety of other political pressures.

Economics (Worth Publishers)

Economics
by Timothy Tregarthen
(New York: Worth Publishers, 1996), 859 pp.

Rating: B+

General comments: Tregarthen’s book is very good in all respects save one. It is a beautifully produced book, with easy-to-read typeface and printing, with an appropriate number of color photographs, charts and graphs. It is thorough. It is engagingly written. Best of all, it gets the student to use the economic way of thinking. Over and over again, the author discusses issues in a way that compels the student to consider opportunity costs, unintended consequences, incentive changes, and so forth. The book’s focus is on thought processes rather than conclusions. While there are certainly points to cavil over, on the whole it is solid; students who master this book are well on their way in the study of economics. The one significant drawback is that this is mainly a college textbook. In high schools, it can be assigned to honor students; for other high school students the instructor will need to clarify, explain, and eliminate a lot of material in this text.

Criterion 1: Costs and prices—How Production is Determined

Tregarthen begins with a broad definition of economics: "The study of how people choose among the alternatives available to them. It’s the study of little choices (‘Should I take the chocolate or the strawberry?) and big choices (‘Should we require a reduction in energy consumption in order to protect the environment?’). It’s the study of individual choices, choices by firms, and choices by governments" (p. 2). He illustrates this throughout the book, using economic thinking to explore topics as varied as channel surfing, cattle grazing, and the drug war. Economics, Tregarthen explains, is "defined not by the topics economists investigate but by the way in which economists investigate them." Throughout, the book stays commendably true to the goal of teaching the mental toolkit of the economist and away from preaching dubious conclusions.

Tregarthen’s discussion of scarcity, cost, and decision-making (including the importance of marginal analysis) is excellent. The way that market competition tends automatically to eliminate surpluses and shortages, thereby putting resources to their best uses is explained very clearly, although the connection between the quest for profit and consumer welfare was left implicit—an important point that should be made very explicit.

The book’s handling of the fundamentals of individual choice and market dynamics is complete and well-conceived. There is, however, an odd omission. Adam Smith is mentioned only in passing and his famous "invisible hand" metaphor does not make an appearance at all. While the concept of rational self-interest as a guide and regulator of the economy is touched upon, Smith’s work is so important in the development of economic thought that the slight attention paid to him is surprising.

Criterion 2: Competition and Monopoly

The discussion of competition, monopoly, and related issues is handled with accuracy and objectivity, with the focus upon the logic of decision-making and its effects.

Perfect competition is presented as a theoretical model, not as an ideal. Monopolistic competition and oligopoly are explained as different, but not necessarily undesirable, market structures. Particularly good is the author’s lengthy discussion of the economics of advertising, frequently condemned as "wasteful." Tregarthen observes that much advertising is informative, although the point might have been made more strongly that consumers’ search costs are reduced by advertising. Even in the case of obviously non-informative advertising, consumers may still benefit, he notes, because "the fact that the product is advertised, regardless of the content of that advertising, signals consumers that at least its producer is confident that the product will satisfy them" (p. 309). Tregarthen also explains that advertising facilitates competition by allowing new firms a chance to enter the market successfully.

On the subject of monopoly, Tregarthen again takes an analytical approach. When government grants special privileges to some firms, that is an "important basis for monopoly power," he writes. That is true, but unfortunately he fails to discuss the hardiest monopolies of all: those operated by government. His discussion of the fragility of monopoly power in the absence of government protection (p. 275) is excellent. High profits tend to lure rivals if new entry is not blocked by law, and technological change often undermines a monopoly’s position, leading the author to observe that "the barriers to entry that help define monopoly are falling so rapidly that one can reasonably ask whether the model is useful" (p. 276).

Tregarthen devotes half a chapter to antitrust, but it is more descriptive and less thought-provoking than most of the book. There ought to be more discussion of the economics of mergers, the tendency for antitrust actions to attack and deter competitive behavior, the benefits of tying arrangements, the incentives of antitrust officials themselves, and so on. A few added paragraphs on the presumptions behind and the effects of antitrust policy would have made for a stronger book.

Criterion 3: Comparative Economic Systems

Tregarthen admirably analyzes the different types of economic systems, beginning with his distinction between market and command capitalism (or what used to be called "fascism"). He makes the key point that command capitalism will almost inevitably result in a great deal of corruption because "government officials are in a position to hand out valuable favors or withhold them from private firms" (p. 287). Furthermore, command capitalist systems are apt to limit innovation since government approval is usually required before firms are allowed to introduce new products or processes—approval that may be costly or impossible to obtain.

Market capitalist economies are not burdened with those problems, he explains, because government permission need not be obtained for private action. Consequently, he writes, "The average income in market capitalist economies is several times greater than the average income of command capitalist or socialist economies" (p. 828). Market capitalism works so well because it harnesses the self-interest of people for production and innovation, as the book makes clear.

Marxist economic theory is presented and discussed at some length. This section would have been stronger if it had included more analysis of the inherent weaknesses in Marxist theory and practice. True, Marx’s predictions proved faulty, but it would do the student more good to probe the errors in Marxism, e.g., the labor theory of value and the exploitation thesis. The inefficiency of socialist economies is explained well: the absence of personal incentives to produce quality goods, the absence of a price system to guide the central planners in their decisions, the inflexibility of central plans, the stifling of innovation, and other problems. The extreme pollution problems of much of eastern Europe and Russia is laid at the foot of the labor theory of value. Tregarthen writes, "Since natural resources aren’t produced by labor, the value assigned to them was zero. Soviet plant managers thus had no incentive to limit their exploitation of environmental resources, and terrible environmental tragedies were common" (p. 848).

Finally, the book has an excellent section on the problems involved in making the transition from socialism to capitalism. Tregarthen makes it clear that establishment of property rights, an independent capital market and banking institutions, and control over inflation are all necessary if a nation is to make the transition quickly and smoothly.

Criterion 4: The Distribution of Income and Poverty

The book provides an insightful look at the questions of income distribution and poverty. Tregarthen writes, "While some people conclude that this increase in inequality suggests that the latter period was unfair, others want to know why the distribution changed" (p. 780). This is exactly the way the economist should approach questions—seeking explanations rather than dispensing moral judgments.

Tregarthen identifies several reasons for increasing income inequality: family structure (more families headed by women), technological change, and public policy. As to the last of these, he finds, contrary to popular myth, that the 1981 tax cut did not make the rich richer and the poor poorer. Unfortunately, his policy discussion does not include the impact of governmental restrictions on job and business opportunities, or that falling educational standards also have something to do with increasing inequality. He suggests that economic growth is a better policy to pursue if we are interested in helping the poor than is direct federal aid.

The book’s analysis of economic discrimination is not complete. Missing is the usual and very important observation that discrimination tends to impose costs on firms that practice it, and that it creates opportunities for those that don’t. Competition among non-discriminators would tend to bid up the compensation for workers originally discriminated against to the level of their marginal productivity. Economists who have studied the phenomenon of discrimination argue that it plays only a small role in income disparity. Tregarthen is remiss in not giving a more thorough analysis of this issue. He recognizes that laws against discrimination have little impact on wage differences, but says nothing about the costs they impose. "Affirmative action" is a prime example of the tendency for market interventions to have unintended, harmful consequences and students would benefit from a more extended discussion.

Criterion 5: The Role of Government

Tregarthen devotes many pages of his analysis of the role of government, including entire chapters on health care, pollution control, and business regulation.

On the subject of "public goods," the author correctly defines the term and explains why they pose a problem for the market. To his credit, he does not say government should be the only provider of public goods. He considers the alternative of having them produced privately, but paid for by government. He should also have had the student consider the possibility that, while the market may be inefficient in under-producing public goods, government may be inefficient in over-producing them, or producing them at exorbitant cost.

Tregarthen suggests that education may be a public good. He asks whether government should provide "free" education for people by producing it directly or by subsidizing the purchase of privately produced education services. He does not expressly say so, but evidently regards education as a quasi-public good because of the potential for benefit spill-overs. But merely because some benefits may spill over to others does not mean that individuals will fail to invest in education to the optimal degree. This section would have been stronger if it had questioned the assumptions underlying the rationale for "public education," rather than assuming them to be true.

Another government function is the definition and protection of property rights. Tregarthen’s exposition here is excellent, including "Case in Point" features on saving elephants through the establishment of property rights, and the problems of common pastureland for cattle in America’s frontier days.

Tregarthen also discusses government’s role in providing or subsidizing "merit goods" and taxing or banning "demerit goods" (p. 340). As to both, he gets the student thinking along economic lines: What are the costs and who bears them, what are the benefits and who receives them?

The chapter on pollution is very good. First, he gets students to think about pollution as a trade-off problem. That way, they will understand that there is no such thing as "no pollution," and consider the possibility that there is an efficient level at which the public interest in the environment and the economic interest of companies come into balance. The costs and benefits of the various government remedies to pollution control are discussed at length. Students may find this material rather difficult, but the analysis is worthwhile.

Criterion 6: Public Choice

Public Choice is one of the great strengths of this book. Tregarthen contrasts two theories on government decision-making: the public interest theory and the public choice theory. After reading his presentation, students must be strongly inclined to view public choice theory as far more realistic and having great explanatory power.

Tregarthen discusses two of the main elements of public choice analysis. First, the problem of rational voter abstention (although the rational voter ignorance problem seems more fundamental) and second, the special interest group problem. Other elements could have been introduced, but these suffice to give the student a good introduction to public choice thinking. At various points elsewhere in the book, Tregarthen raises questions that reflect public choice analysis; it is unlikely that an attentive student could complete this book and still hold to the naive view that government decisions always or usually reflect "the public interest."

Criterion 7: The Role of the Entrepreneur

The treatment of entrepreneurship in the book is disappointingly slight. The term is correctly defined (p. 47) and Tregarthen notes that entrepreneurs must take risks. However, he gives no profiles of successful entrepreneurs. Bill Gates is discussed, but only in conjunction with his legal battles with the Justice Department—and students really do not get much exposure to the tremendous importance of entrepreneurs. Nor do they get a sense of how entrepreneurship can be thwarted by onerous taxation and regulation.

Criterion 8: Taxation

Tregarthen gives the reader a description of the various kinds of taxes levied in the U.S. before he comes to the important issue of tax incidence. He explains when taxes can and cannot be shifted, and gives a "Case in Point" on the Social Security payroll tax. That is good, but some discussion of the incidence problems with other taxes, such as the corporate income tax and sales taxes, would have made the point more clearly.

Unfortunately, that is all the book has to say on taxation, except for a discussion of tax reform proposals to increase economic growth (p. 631, containing an error that says Georgia Senator Sam Nunn was from Tennessee). This is only suggestive of some important points concerning taxation that need a more thorough examination, especially the cost of taxation to the economy through compliance and enforcement costs, the altering of incentives for work and investment, and the diversion of resources from the market to the government.

A "Case in Point" feature on p. 343 briefly discusses the question of whether the rich pay their "fair share" of taxes. Tregarthen recognizes that this is a normative judgment. He shows students that after the cut in top marginal income tax rates in 1981, the percentage of total taxes paid by the wealthiest 5 percent of the population increased. That is a telling fact, but it would have made for a more enlightening chapter if he had explored the dynamics of the tax cut and how investment and tax revenues both increased as a result.

Criterion 9: The Business Cycle

Tregarthen provides an excellent historical overview of the debate between classicists (Ricardo and Say), who argued that the economy would automatically pull out of periods of recession, and their opponents (such as Malthus), who argued that recessions could be long-lasting due to insufficient demand. This sets the stage for the debate over the causes of the Great Depression. Tregarthen proceeds with a straightforward presentation of the Keynesian analysis (inadequate aggregate demand, sticky wages and prices), the Monetarist analysis (bad decisions by the Federal Reserve, allowing the money supply to contract and banks to fail in large numbers), and the "new classical" analysis (government policies blocked the natural adjustments in wages and prices that had kept previous recessions fairly short). The policy debate in the 1960s through the 1990s among the contending schools is given an extended treatment, bringing in "New Keynesianism," rational expectations, and supply-side theory. Unfortunately, the Austrian School is never brought up.

The discussion of supply-side theory avoids the common error of branding the theory a stabilization policy. Tregarthen explains that "The Reagan program was justified not as a stabilization effort, but as a program that would stimulate long-run economic growth" (p. 747). He issues no judgment as to whether supply-side theory worked, failed and merely added to the national debt, or was not really given a trial at all. That is a high-level debate that cannot easily be discussed in a textbook, but at least the broad outlines of the debate could have been set forth.

To his credit, Tregarthen does mention problems with trying to use fiscal policy changes to "fine tune" the economy. For instance, he discusses the time-lag problem, which is often ignored by other authors. He describes the "crowding out" effect at length. He alludes to the difficulty of making accurate economic forecasts. These sections of the book would have benefited, however, from a fuller discussion of the tendency for political expediency to lead to overstimulus. Also, he implies that the economy needs and benefits from automatic stabilizers, which "act swiftly to dampen the impact of changes in autonomous expenditures on the level of economic activity" (p. 701), ignoring the contrary view that the economy is weakened by such government policies.

Criterion 10: Wages, Unions, and Unemployment

Wages, Tregarthen explains, are market-clearing prices and are necessarily linked to productivity: "Wages and employment have generally risen as the availability of capital and other factors of production have increased, as technology has advanced, and as human capital has increased. All have increased the productivity of labor, and all have acted to increase wages" (pp. 210-11).

Alas, the book’s discussion of the impact of minimum-wage laws is vague and perhaps misleading. He gives the standard analysis in Chapter 9 that the minimum wage leads to higher unemployment among low-skilled workers, but in Chapter 14, he includes a "Case in Point" box on the Card/Krueger New Jersey fast food study, purporting to show not only that raising the minimum wage did not lead to an increase in unemployment, but that employment actually rose, leading many politicians and union leaders to declare that the standard theory on the minimum wage had been disproven. Tregarthen does not say that, but simply leaves the matter unresolved. Doing so is unjustifiable because the New Jersey study has been widely criticized on methodological grounds. Other economists, working with more accurate data from the same businesses, found that there actually was a significant decrease in employment in New Jersey’s fast food establishments. Unfortunately, none of this is included, nor does the author make the obvious point that you cannot refute the law of demand by a short-term study of one industry in a small region.

The book’s discussion of the economic effects of labor unions is rather brief. Tregarthen writes, "Where unions operate effectively in otherwise competitive markets, they may reduce economic efficiency. . . . In each case, the wage gain will increase the cost of producing a good or service and thus shift its supply curve to the left. Such efforts, if successful, increase the earnings of union members by creating higher prices and smaller quantities for consumers. They may also reduce the profitability of their employers" (p. 330). These are sound conclusions, but he needs to explain how he reached them.

Criterion 11: Trade and Tariffs

Trade, Tregarthen writes, is an individual activity: "People participate in international trade because they make themselves better off by doing so" (p. 253). In saying that, he dispels the common mistake of regarding international trade as somehow different from other trade. He also does a good job of explaining comparative advantage and specialization.

On the subject of trade barriers, Tregarthen says, "The gains from trade are so large, and the costs of restraining it so high, that it’s hard to find any satisfactory reason to limit trade in a competitive environment" (p. 267). His discussion of the arguments in favor of protectionist policies is good, but uneven. The "cheap foreign labor" argument is much better analyzed than is the "infant industry" argument, for example. Moreover, the book includes discussion of two protectionist arguments that are not usually found in principles texts—the supposed need to restrict trade to protect environmental standards and the argument that "dumping" must be prevented.

A particularly good point is when Tregrathen argues that trade restrictions have unintended consequences. U.S. import quotas, he shows, were actually a bonanza for Japanese auto companies (p. 262).

Criterion 12: Money and Banking

Tregarthen gives the reader a good discussion of the importance and development of money, although he gives the mistaken impression that commodity money, especially gold, is more apt to lead to inflation than is fiat money. Over long periods of time, gold retains its value, sometimes rising, but later falling in response to market forces, whereas the experience with fiat money has been that of steady, sometimes rapid erosion of value. The case for commodity money is stronger than one would gather from the book.

Banks and financial institutions are ably discussed. He explains the moral hazard problem inherent in government deposit insurance. He could have improved this section by exploring the feasibility of open bank (and non-bank) competition in the absence of government regulation and deposit insurance. The "Case in Point" feature on the savings and loan bailout focused only on one S&L (Silverado) and did not adequately convey the government’s role in the entire S&L debacle.

The origins and functions of the Federal Reserve system are covered well, with a most useful presentation on the way the Fed creates money through open-market operations (p. 529). Whether there are better alternatives than an independent central bank controlling a fiat money supply is an interesting question that is, unfortunately, never raised.

Finally, the book explains clearly that inflation is caused by a growth of the money supply: "Factors other than money growth may influence the inflation rate from one year to the next, but they are not likely to cause changes in the inflation rate over long periods" (p. 720).

Economics: An Integrated Approach

Economics: An Integrated Approach
by Benjamin Davis
(Upper Saddle River, N. J.: Prentice Hall, 1997), 329 pp.

Rating: B-

General comments: This textbook is for the most part good at teaching students how to think economically and encouraging them to use the economist’s mental toolkit. It eschews photographs to concentrate on the material. The writing is engaging and often witty, but sometimes goes overboard in trying to sound chatty and "in tune" with students. The coverage of the main topics is uneven—sometimes very enlightening, but in other places very shallow. Some economic myths are slain, but others are reinforced. Davis sticks mainly to the economic issues and seldom tries to smuggle in normative conclusions under the guise of positive economics, but is not entirely free of that vice.

Criterion 1: Cost and Prices—How Production is Determined

Davis does a very good job explaining the fundamentals of economics. He begins with a broad definition and points out that virtually all of our decisions are economic in nature since they entail trying to satisfy our unlimited wants from scarce resources. He also writes that the study of economics develops a "new set of tools" with which to look at the world. That is exactly what a good economics textbook should do—train the student to use the mental toolkit of economic thinking.

The book is excellent in explaining scarcity and the explicit and implicit costs it imposes. The book also introduces early a vital axiom that few high school books cover: rational self-interest. As Davis writes, "Rational self-interest means that individuals weigh the costs and benefits as they perceive them and make decisions that will increase their welfare. This includes decisions to buy and sell, to invest or save, to take a job or retire, to spend on one’s self or give to charity" (p. 9). He also draws a useful distinction between self-interested behavior and selfish behavior.

Davis also includes a section on common fallacies. It is important to show students that apparently sound reasoning can actually be illogical and that they need to guard against it. Similarly, the book devotes a chapter to understanding graphs and charts.

The author’s explanations of the laws of supply and demand, equilibrium prices, shortages and surpluses and other fundamental concepts are very clear, and he makes the important point that the market makes its adjustments automatically: "No one has to set prices or determine how much should be produced or sold" (p. 79). Unless this is expressly stated, students may fail to grasp the spontaneous nature of the market order; Davis does so.

His discussion of the impact of price controls, working through agricultural price supports and rent controls as examples, put to work the student’s ability to think economically, and simultaneously demonstrate that good intentions do not lead to good results when you tamper with the market order.

The book is also good on the concepts of elasticity (incorporating a discussion of the impact of drug policy on supply and demand) and cost (including a good discussion of sunk costs).

Criterion 2: Competition and Monopoly

Davis juxtaposes perfect competition and monopoly in a chapter to show how decisions and behavior differ at the two extremes in market structure, but he cautions that "Every market, in reality, lies somewhere in between these two extremes" (p. 162). The discussion of monopoly is remarkably thorough, with the observation that the barriers to entry that protect monopolists from competition are frequently artificial (i.e., erected by government) and that without government help, it is very hard to achieve and maintain a monopoly or cartel. Davis also points out that monopolists still have to compete for scarce consumer dollars and cannot continually afford to raise prices without reducing sales and profitability.

The book’s discussion of mergers, however, is not as good. What is missing is a clear sense of the reasons why firms want to merge. Moreover, Davis argues that horizontal mergers lead to a decrease in competition, an analysis that many economists and antitrust scholars reject. Horizontal mergers decrease the number of competitors, but that is not necessarily the same as decreasing competition, the intensity of which could even be enhanced by some mergers. Also, Davis uses the term "economic power" in conjunction with mergers. Economic relations, however, are not based on "power" at all; they are based upon voluntary transactions for mutual benefit. All that any firm can do is to make offers to consumers, workers, and suppliers. Power is a term more accurately applied to government action, to which firms often turn for favors.

The book’s treatment of government’s means of dealing with monopoly is uneven. Antitrust is given just one short paragraph without much in the way of analysis at all, concluding with a flippant, "You decide whether that would be a good or bad thing" (p. 176). The discussion of price regulation is only slightly better; it ignores the various problems associated with regulation. Davis claims that it is inefficient for the government to own and operate monopolies, but he needs to say why. Finally, the author devotes the greatest amount of space to the laissez faire option of just living with whatever inefficiencies monopolies create. He writes, "Intervening in the market may reduce, not increase, the likelihood of competition, and the outcome might be to support the monopoly’s hold on the marketplace" (p. 177).

The book has surprisingly little space on "monopolistic competition," and instead spends a great deal of time on oligopoly. Perhaps it is true that, as Davis writes, "Oligopoly does an even better job of describing the reality that businesses and consumers face today" (p. 183), but firm behavior under conditions where there are many competitors is worth some analysis. Another shortcoming here is Davis’ discussion of advertising, which was considered solely from the standpoint of sellers. The benefits that consumers derive from advertising are important, but not mentioned.

Criterion 3: Comparative Economic Systems

Davis compares market economies with the essential conditions of command, or socialist, economies. But in discussing the effects of socialism, Davis is rather weak. He does note that economic growth is slower under socialism, and concludes that "The key issue seems to be incentive" (p. 219). Incentive is indeed an important reason for the difference in economic performance between free markets and command-and-control economies, but it is not the only reason. This would have been the place for an analysis of the inherent problems of centralized decision-making and the absence of a price system to guide the allocation of resources. But Davis neglects these important issues. He does, however, note that the distribution of income is often as unequal or more so under socialism than under capitalism.

Criterion 4: The Distribution of Income and Poverty

The book devotes little space to income distribution. Davis includes the typical chart on income distribution by quintiles, but does not analyze the impact of government poverty programs. That is an unfortunate omission because analysis of such wealth-transfer programs help us hone the tools of economic thinking through examination of incentives, implicit marginal tax rates, costs, and alternatives. Davis says merely that government programs can have unintended results and may wind up helping the wealthy rather than the poor and for that reason we should carefully consider the impact of such programs.

Davis also needs to consider the impact of government regulations on economic opportunities for poorer people. For example, students ought to be thinking about the impact of the minimum wage, occupational licensure, and other laws that keep newcomers out of some jobs, and keep wages high for the people already in them.

Davis argues that discrimination is a major reason for differences in earnings between men and women. Oblivious to the persuasive evidence that earnings differences between men and women are mainly due to differing family roles, Davis repeats the frequent complaint that women earn only 70 percent as much as men do for equal work. Thomas Sowell and other economists have long pointed out that mere statistical differences do not prove discrimination. Davis’ one-sided treatment is not sound economic analysis.

Finally, the usually suggested remedy for discrimination—affirmative action laws—is hardly mentioned at all, except to say that such laws are "certainly worth a try." There has been a great deal of economic analysis of the effects of "affirmative action," with many economists concluding that they are counterproductive.

Criterion 5: The Role of Government

Davis begins with the problem of negative externalities, but he never explains exactly why economists view them as undesirable. Negative externalities pose an efficiency problem (too much production of goods where the producer does not bear all the costs), but this important insight is left out. The author lists and briefly explains four kinds of responses to pollution (elimination, regulation, negotiation and adjudication), but does not engage in any serious analysis or comparison of them.

Similarly, the book discusses the "public goods" problem without much detail. Davis explains the free rider problem and cautions against the mistake of thinking that every good provided by government is a "public good." But he never explains why government is an inefficient provider.

A third reason for government intervention discussed in the book is the common ownership problem. How do we prevent overuse of a resource when there are no clear property rights, such as in schools of fish in the ocean? Alas, Davis brushes over possible market responses, leaving the impression that either designating a single owner or imposing government regulation is the optimal response. He neglects to consider any problems that might arise from these solutions.

Criterion 6: Public Choice

The book does not address public choice analysis per se, but does offer the student some hints at various points that there are reasons to be skeptical about political solutions to economic problems.

For example, Davis notes that "Government decision makers do not bear the costs of their decisions (taxes are paid by the citizens) but do reap some benefits from their decisions. Politicians gain re-election and bureaucrats can count on job security. When people benefit from something but do not bear the costs, they are likely to do a lot of it whether or not it needs to be done" (p. 232). Saying that public decision-makers don’t directly bear the costs of their actions is a vital element in public choice analysis. But Davis should have developed this point in more detail.

On p. 60, Davis says this about special interest groups: "Because many people benefit a little while some are hurt a lot, those who do pay the high price tend to be ‘noisier’ than those who benefit a little, and democratic governments tend to respond to noise." This sentence refers to international trade, but it has widespread applicability to the problem of concentrated benefits and diffused costs. A coherent treatment of the various difficulties with public decision-making would have made for a much stronger book.

Criterion 7: The Role of the Entrepreneur

Entrepreneurship is briefly discussed, but not explored in any depth. Davis explains that "Entrepreneurs are people with vision who can see an opportunity, accept the risk, and try something different" (p. 8). He stresses the riskiness of entrepreneurship again in his discussion of profits. Unfortunately, the book has no case studies of entrepreneurs to put some meat on the theoretical bones. Nor does Davis convey the vital role entrepreneurs play in economic progress, or the damage government policy can do to their endeavors.

Criterion 8: Taxation

The discussion of taxation is one of the best parts of this book. Davis notes the different kinds of taxes, but rather than wasting space on merely descriptive matters, he devotes pages to good economic analysis.

Tax incidence is a good example. The common assumption is that businesses pay taxes (and probably ought to pay a lot more), but Davis meets this headlong: "YOU pay taxes. Not businesses, not landlords, not any organization, but the individual" (p. 232). The Social Security tax is analyzed briefly, but Davis would have aided his readers far more if he had engaged in a more thorough discussion of where the employer’s "contribution" comes from than simply writing, "guess where it comes from!"

Davis also shows that imposing taxes can have unintended consequences. He cites the 1990 luxury tax that was supposed to raise lots of money from millionaires, but instead wound up costing a lot of ordinary workers their jobs. Taxes, he explains, cause people to change their behavior at the margin. That way, Davis causes students to think of the impact of taxes dynamically.

The book also reminds students that there is an opportunity cost to collecting taxes. Funds taxed away from individuals would have been put to some purpose of their choosing. Davis writes, "These monies have been earned in the private sector and would have been spent in the private sector where market signals of price and profit, supply and demand would direct them toward their optimal uses" (p. 235). Moreover, the process of taxation itself uses up resources through the cost of enforcement of tax laws and in what citizens expend to avoid paying taxes.

The only real weakness in the book’s treatment of taxation is the implied notion that business taxes are invariably "passed on" to consumers. Whether sales and corporate income taxes are ultimately borne by consumers, or by stockholders, or each in some degree is more complicated than the book indicates.

Criterion 9: The Business Cycle

Davis’s treatment of the business cycle is very brief. He lists a number of theories, but evaluates none of them. Among those he lists is the "erratic government policy theory." As Davis writes, "Certainly governments have caused business cycles by creating too much money and causing expansions or by restricting the supply of money and causing a recession" (p. 280). Here he is on the right track, but is derailed with this sentence: "However, the major cause of the business cycle is believed to be aggregate demand, in particular consumer spending." While there are some economists who hold to the Keynesian view that fluctuations in aggregate demand drive the business cycle, many others hold that the cause lies elsewhere. For most students, Davis’ analysis will be confusing.

To the author’s credit, he does not dwell upon the Keynesian counter-cyclical policy, sparing the student the silly "multiplier" exercises that were common in economics textbooks a generation ago. Instead, he provides a synopsis of the major schools of macroeconomic thought: classical, Keynesian, monetarist, and rational expectations (but he neglects the Austrian). The students do not learn very much about any of them, but at least they are not led to believe that all economists believe in macroeconomic "fine tuning" by the federal government.

Criterion 10: Wages, Unions and Unemployment

The book’s discussion of market determination of wages is excellent. Davis explains that firms have a demand for workers solely because they help produce goods consumers will buy. Firms try to combine inputs, including labor, to produce those goods as efficiently as possible. Workers in turn supply labor, searching for the best offers. The result: wages that bring supply and demand into balance.

Davis also devotes much space to labor unions. After lengthy definitions, he turns to the effect of unions on wages and states, "Labor unions cannot force higher wages on an employer. No ifs, no ands, no buts" (p. 134). He soon modifies this extremely strong statement by saying, "they cannot force employers to pay higher wages without pretty severe consequences on the union and its members." Such equivocation may confuse students.

To justify his original statement, Davis shows the effects of pushing wages above their market equilibrium—a surplus of workers, i.e., unemployment. He concludes that "It is not in the union’s best interest to force wages up, and self-interest is the motivating factor in economics" (p. 135). While this is true sometimes, it is not always true. Much depends on the elasticity of demand for labor. If the firm’s demand is inelastic, the gains for the majority of workers who keep their jobs will exceed the losses to those who eventually or immediately lose theirs. Unions often find it in their self-interest to push for gains for some at the expense of others. While Davis is right to be skeptical of the ability of unions to increase wages generally, his treatment of the issue is too thin to show students how economists think about their effects.

Finally, the book is weak on the subject of unemployment. The author does not give the standard classifications of unemployment (such as frictional and cyclical) and devotes his space to merely descriptive rather than analytical points. He writes, for example, "Why unemployment rates vary is the key question, and one with which we must all concern ourselves" (p. 40). Unfortunately, he drops the matter there, doing nothing to help the reader answer the question.

Criterion 11: Trade and Tariffs

Davis begins his discussion of trade with the crucial observation that trade occurs only when people find it mutually beneficial. Unfortunately, some careless writing then implies that international trade is a government, not an individual action: "Has the United States taken advantage of its trading partners in the Third World? Yes. Did those countries benefit from the trade? Yes" (p. 61). But the United States does not engage in trade; individuals and firms do. And the "taken advantage of" language is misleading and polemical.

Next, the book explains comparative advantage and specialization; then it analyzes artificial trade barriers. Davis explains that when governments erect artificial barriers, "both nations suffer because of it" (p. 61). It would be better to eliminate the reference to the abstraction "nation" and examine the effects of trade and restrictions on individuals. Many individuals lose when tariffs or quotas cause prices to rise (as Davis subsequently notes), but some benefit. A more complete analysis of the effects of trade barriers would have made for a stronger book. Davis does show, however, how people and firms will act creatively to find ways around trade barriers. He cites as an example the re-engineering of Japanese motorcycle engines to fall just below the tariff on engines of more than 700 cc.

Davis also covers non-tariff trade barriers, suggesting that students should look skeptically at supposedly pro-consumer regulations that are, in fact, subtle forms of protectionism.

When it comes to the standard arguments in favor of trade restrictions, the book deals with only two—national defense and infant industry. He notes that the danger in the former is that "it is almost impossible to know where to draw the line" (p. 62). True, but Davis doesn’t really convey the danger in opening the door to special interests. Even if economists could tell where to "draw the line," there is little chance that politicians and bureaucrats would stick to it.

On the infant industry argument, Davis says, "Used appropriately in a limited way for a very short period of time, the infant industry argument can, however, be quite beneficial to the developing economy" (p. 63). This is a weak conclusion and Davis needs evidence for such a statement. Economic development flows optimally in the free market without any government "help" in picking certain industries for growth. Central economic planning has a poor historical record in creating successful industries.

Criterion 12: Money and Banking

The book is good on the functions and benefits of money, but does not clearly convey the idea that money is a natural market phenomenon. Davis writes that, "For whatever reason, people like gold and have been willing to accept it in exchange. . . ." (p. 268). Unfortunately, he completely fails to explain why the characteristics of gold made it the world’s top choice as a medium of exchange.

The analysis of the supply of and demand for money is correct and does get the reader thinking of money as subject to the standard tools of economic thinking. However, Davis errs in saying that gold (or other commodity money) is troublesome because "the amount of money in circulation is controlled by an outside factor that is not linked to the economy itself" (p. 268). This is badly mistaken. The production of gold is directly linked to the economy. Supply and demand operate to increase the price of gold when there is deflation. At times of inflation, the economy signals a need for more money by decreasing the price and production of gold. The author says that, "Clearly, control over the currency needs to extend beyond merely linking it to some external standard." This is a common belief, but shows that he has not done his homework in this area.

Davis says nothing about the origins of the Federal Reserve System, but seems to believe that government control of the monetary system is inevitable. His discussion of the operation of the Fed is adequate, but idealized. He gives the often-criticized view that the Fed is independent of political pressure and neglects to mention the Fed’s role in the Great Depression and subsequent economic downturns.

Davis provides an adequate explanation of business of banking and interest rates. The student, however, does not get much understanding of why banks are important in our economy, or why capital markets are essential to economic growth and prosperity. Moreover, he neglects the problems of federal deposit insurance; as in many other texts reviewed in this report, the S&L bailout is mentioned without saying anything about the role of government regulation in the debacle.

Principles of Economics

Principles of Economics
by Karl Case and Ray Fair
(Upper Saddle River, N. J.: Prentice Hall, 1996), fourth edition, 1014 pp.

Rating: C+

General Comments: This is a densely-packed textbook. Wasted space is at a minimum and the authors’ discussions are often very extensive. It does a good job of developing the student’s ability to employ economic thinking, but is not always well balanced on disputed policy issues. Case and Fair lean heavily toward the mathematical approach, and the book is mainly a college text and should only be used with advanced high school students.

Criterion 1: Costs and Prices—How Production is Determined

The authors begin with a broad definition of economics, then devote several pages to the question, Why study economics? They provide persuasive answers, developed at length. They also include a section on the scope of economics, making the point that economics encompasses not just business and consumer behavior, but virtually all human decision-making.

The book gets the student off to a good start in understanding the essentials of economic thinking—scarcity, cost, specialization and exchange, the production possibilities curve, and so on. It does a good job explaining market dynamics and the importance of the price system in allocating resources for satisfying consumer wants. The vital point that free markets allocate resources efficiently without any central direction (the "invisible hand") is driven home—so is the role of profits and losses.

The book has many good "Issues and Controversies" boxes to put "real life" emphasis on theory. The box on ticket scalping (p. 111) makes the point that underpricing leads to shortages and that the actions of ticket scalpers actually have beneficial economic consequences. That analysis helps show the student that with economic thinking, you will often see much more than first meets the eye.

Criterion 2: Competition and Monopoly

The authors provide a sound, analytical look at the various market structures from perfect competition to monopoly. They include several pages on the debate over the efficiency of monopolistic competition (pp. 353-56) in which they give "both sides." But they omit one of the strongest arguments for adopting a laissez-faire approach: the high cost of government regulation itself.

Regarding monopolies, the authors note how government barriers to entry often encourage monopolies. They then say that governments often create monopolies where morally questionable activities such as drinking and gambling are involved so that they can tax them. They pose this strange, uneconomic question: "How can anyone criticize the state-licensed, implicit taxation of drinking and gambling?" (p. 325). They seem to imply that "sin taxes" can’t be criticized, but they certainly have been. Rather than exploring the question further, the authors leave the reader dangling.

The book has a lengthy discussion of antitrust laws, but it omits a vital argument in the case against antitrust laws—that they often do more to protect competitors than to protection competition, an observation made by many scholars. Also, antitrust officials have their own incentives that don’t necessarily coincide with the "public interest."

Criterion 3: Comparative Economic Systems

Case and Fair seem unequivocal on the inefficiency of centrally-planned economic systems, writing, "It is an understatement to say that the planned economies of Eastern Europe and the former Soviet Union . . . have completely collapsed" (p. 41). However, in the later chapter on comparative systems, they cite dubious statistics purporting to show a very fast rate of economic growth in the Soviet Union. It would have been more instructive to explore the realities of life for ordinary Soviet citizens: long lines, shortages, poor quality goods. Even better would have been an analysis of the inherent problems of planning an economy without a price system and profits. The book lacks a theoretical discussion of the well-known difficulties of central planning.

The book also devotes much more space to discredited Marxian theory than it does to the arguments of the classical economists. Students might conclude that there is something to be said for the Marxian idea that labor is exploited by capitalists because it (and other tenets of Marxist thought) is not held up to scrutiny.

The book gives no analysis of the economic implications of the welfare states of Europe. Also, the discussion of the Japanese economy is marred by its enthusiasm for MITI, which many economists believe has done the Japanese more harm than good, citing the recent collapse of the Japanese economy and that of other Asian nations which practiced MITI-style "industrial policy." In any case, the authors need to address the central question: Can government planners produce better results than investors and managers operating in the market?

Criterion 4: The Distribution of Income and Poverty

Case and Fair make several excellent points about income disparities. First, they note that "Income and wealth are imperfect measures of well-being. Someone with a profound love of the outdoors may choose to work in a national park for a low wage rather than to work for a consulting firm in a big city for a high wage" (p. 436). That is an important point. People often assume that low income means unhappiness, which is not necessarily true. Second, they point out that exchange among individuals will certainly create inequalities in wealth, but since voluntary transactions leave both parties better off, there is no reason to condemn differences in wealth when they arise from free exchange and the natural differences between individuals’ talents, savings rates, investment inclinations, and willingness to work.

However, when the authors analyze the distribution of income, they ignore the high degree of income mobility in the U. S., or that the "rich" and the "poor" are not the same people over time. Furthermore, the book quotes socialist Michael Harrington, who engages in tired bromides of class warfare, blames capitalism for poverty and calls for a government "war on poverty." The authors could have subjected Harrington’s rhetoric to some economic analysis, but decline to do so. Indeed, the section favoring income redistribution receives about three times as much space as any opposing view. Since the discussion centers on such non-economic matters as utilitarian justice and social contract theory, it teaches little about economic thinking.

Case and Fair also include a short presentation of the "comparable worth" controversy, but fail to give the student much insight into the economic problems and unintended consequences that would arise from having government officials decide what compensation must be paid for jobs.

Finally, the book’s treatment of the various redistribution programs is mostly descriptive, with little or no economic analysis. Of Social Security, for example, the authors write, "Currently, the system is collecting more than it is paying out, and the excess is accumulating in the trust funds. This is necessary to keep the system solvent" (p. 452). This is extremely misleading—all that is "accumulating" in the trust funds is debt in the form of federal bonds. Many scholars have concluded that it is impossible to keep such a system "solvent." In any case, the student is not informed that Social Security is headed for bankruptcy early in the 21^st Century without either massive tax hikes, massive cuts in the level of benefits, or some form of privatization.

Criterion 5: The Role of Government

Case and Fair begin their chapter on the role of government with the problem of externalities, and observe correctly that negative externalities are not exclusive to free market economies. They write, "Many were shocked at the disastrous condition of the environment in virtually all of Eastern Europe" (p. 403). That is a good point, but the authors need to make the connection between the absence of private property and pollution.

The problem of providing public goods is explained clearly and the authors note that it may be more efficient for government to pay private enterprises to produce public goods, a possibility that is frequently overlooked. Unfortunately, the authors push the student toward the belief that there are many public goods. For example, the book devotes four paragraphs to the dubious argument that income redistribution is a public good. This has been contested by many economists, but the authors never give any counter-argument.

Another area the authors discuss is imperfect information. They give a good explanation of the problems of adverse selection and moral hazard, and make the point that the market often finds solutions to problems of asymmetrical information. But the book fails to point out that government action can also make things worse.

Criterion 6: Public Choice

The book has a good section on public choice, or "social choice" as the authors prefer to call it. They devote nearly a page to the voting paradox, but barely explore the problem of rational voter ignorance. The authors do recognize that public officials have their own personal incentives, writing, "To understand the way government functions, we need to look less at the preferences of individual members of society and more at the incentive structures that exist around public officials" (p. 428).

The ensuing discussion of government inefficiency is good. The authors note that government officials have an incentive to provide visible benefits, while hiding the costs or spreading them widely. More concrete discussion of actual cases, however, would have made this section more beneficial to the student.

Case and Fair introduce the concept of "rent-seeking." They state that, "Some have argued that favorable legislation is, in effect, for sale in the marketplace" (p. 429). This idea is good as far as it goes, but the authors don’t explain why interest groups are often able to buy the favorable laws they want.

Criterion 7: The Role of the Entrepreneur

Entrepreneurship is almost ignored in the book. It is defined and briefly discussed on p. 73, but hardly ever comes up again. There are no features on successful entrepreneurs and no discussion on the link between risk and reward. The authors do ask whether there is an entrepreneurial spirit in the formerly communist nations in Eastern Europe, but do not consider how it is stifled by onerous taxes and regulations—in Eastern Europe or anywhere else.

Criterion 8: Taxation

The book’s chapter on taxation devotes several pages to the different kinds of taxes, their classification, and the normative issues of tax equity and "the best" tax base. After that, they come to the analytical issue of tax incidence and they correctly conclude that, with regard to payroll taxes, "Most of the payroll tax in the United States is probably borne by workers"(p. 474). This is a sound conclusion. The authors also consider the incidence of the corporate income tax and write, "Because it is levied on an institution, the corporate profit tax is indirect, and therefore it is always shifted. . . . It is difficult to argue that a tax is a good tax if we can’t be sure who ultimately winds up paying it" (p. 476). Students benefit from this kind of analysis.

Where the book is weak is on the costs of tax enforcement, compliance, and the opportunity costs of transferring resources from the private sector to the government. Contemplating those points is part of good economic thinking.

Criterion 9: The Business Cycle

Students looking for an explanation of what causes business cycles will find this book frustrating. Whereas many texts present the main contending theories in one section, this one scatters them in different places. Moreover, it never gets to the crucial question: Is the market inherently unstable, prone to recurring cycles that only government action can deal with, or is the market stable if left alone, and only thrown into cycles because of poor government policy? They omit the big debate over Say’s Law, even though it is an important topic in the economics profession.

Students learn the controversial Keynesian aggregate demand-aggregate supply model, along with the Keynesian policy prescriptions. However, little critical analysis follows. The authors do discuss the shape of the aggregate supply curve in a number of places in the text and in ways that raise questions about Keynesian assumptions, but much more could have been done to inform the student of recent critiques of Keynes. For decades, some economists have been asking whether "the multiplier" really multiplies at all and whether government spending ever really "stimulates" the economy, but the student is given the Keynesian approach almost straight up as if it were gospel.

In discussing Monetarism, the authors fail to point out what many economists believe, namely, that bad monetary policy during the 1920s was a cause of the Depression. They also fail to describe the history of the Depression to show the many policy errors (huge tax increases, increases in tariffs, attempts to keep wages and prices from falling, among others) that deepened and prolonged it. Students never read arguments against government activism.

Case and Fair include a discussion of the Marxist theory of the business cycle, but say nothing about the Austrian theory.

Criterion 10: Wages, Unions, and Unemployment

The authors provide a good analysis of what determines wages in the market; unfortunately they do not make explicit the link between productivity and compensation.

On the policy issues relating to labor markets, the book tends to be one-sided. The occupational segregation hypothesis is presented as the explanation for the lower average earnings of women, but there is much debate over this question. Many prominent economists argue that rational decisions married women make with regard to family responsibilities better explain lower average earnings for women. Nonetheless, the authors write, "Those in positions of power (often white men) have both the incentive and the ability to maintain discriminatory practices over long periods of time" (p. 503). This idea has also been subjected to considerable attack by economists who argue that irrational discrimination tends to be rare because it is harmful to people and institutions that practice it. The student, however, is given the impression that it is a settled question.

The minimum wage dispute is marred by the uncritical acceptance of recent studies purporting to show that increasing the minimum wage has "virtually no effect at all on unemployment." The Card/Krueger studies cited by the authors support no such broad conclusion, and many economists have criticized them as methodologically unsound.

The book has several pages on the history of labor unions, including their decline, which the authors suggest is mainly a result of increasing competition. The authors understand that unions operate as monopolies of labor, although they fail to make the point that those who organize and run unions are just as self-interested as are business monopolists. They tell the student that unions can cause higher unemployment and reduce productive efficiency.

The authors’ discussion of the causes of unemployment is good, but they do not go into an analysis of the true economic effects of various government programs to deal with unemployment.

Criterion 11: Trade and Tariffs

Case and Fair capably explain the reasons for trade and how it follows the law of comparative advantage. Their only shortcoming is that they fall into the common pattern of discussing international trade in nationalistic terms. Students should understand that nations do not specialize and trade, people do.

The authors clearly explain the effects of tariffs and quotas. Unfortunately, the presentation too often looks to government programs to solve problems. Why not leave the investment decisions to entrepreneurs, who stand to lose their own money if they are wrong? Students should think about this key point. There is little evidence to suggest that politicians spending other people’s money are smarter at picking winners and losers than are private entrepreneurs.

Finally, the authors endorse too readily the argument that "dumping" and other "unfair trade practices" must be met with government policies. Many economists believe predatory pricing is an overblown worry, both domestically and internationally, and that if we establish laws against it, many domestic producers will try to use those laws to stifle competitors. Unfortunately, the student is not encouraged to think about such unintended consequences of laws.

Criterion 12: Money and Banking

The book capably shows the functions of money, but it fails to connect its origins to the marketplace. Little is said about the advantages and disadvantages of commodity money versus fiat money. There is a brief discussion of the gold standard in an appendix, but it understates the benefits of the gold standard (that it facilitated international trade and imposed monetary discipline on governments) and overstates its problems.

The historical development of banking is covered well, as is modern banking and regulation. However, there is a serious omission: Very little is said about federal deposit insurance, so important in the savings and loan crisis.

The Federal Reserve System is given almost no historical treatment. Why was it begun? How well has it done its job? The authors avoid these questions and concentrate instead on the functions of the Fed, which are clearly explained. What the student needs here is at least a hint of skepticism. Some economists, for example, have argued strongly that a governmental agency should not be a "lender of last resort." But Case and Fair make it sound as if it were incontestably good that the Fed can bail out troubled banks. The fact that the U.S. has suffered a Great Depression, at least nine recessions and a vastly depreciated currency since the Fed was created should at least raise a question.

On the subject of inflation, the authors may confuse the student. At one point, they present the very dubious idea of "cost-push" inflation; later they state the sound and proven principle that sustained inflation is a purely monetary phenomenon.

Economics Today & Tomorrow

Economics Today & Tomorrow
by Roger LeRoy Miller
(New York: Glencoe, 1995), third edition, 626 pp.

Rating: C

General Comments: This is an attractive, hardcover book with an abundance of photographs. The writing is good, but unfortunately the book doesn’t do very much to develop the economic way of thinking in its 626 pages. In part, this is because Miller devotes a large amount of space to photos and other visual effects. More important, however, is his decision to spend a great deal of time on "how to" questions. Many chapters are concerned with subjects like these: how to shop for clothing, how to buy or rent housing, how to plan a trip, how to start a business, and so on. This turns the book into an amalgamation of "personal economics" and economic theory, in which the latter plays second fiddle. The book doesn’t do nearly enough to help the student develop the "mental toolkit" of the economist.

Criterion 1: Costs and Prices—How Production is Determined.

After a broad definition of economics, Miller states that "economists gather data from the real world and then use the data to explain events or test theories" (p. 18). Many economists have argued, however, that economics is not a science of numbers, but is based on the logic of purposeful human action. Miller does set forth the value-free nature of economics when he writes, "Economics will not tell you whether the result will be good or bad" (p. 20).

The book’s discussion of scarcity, resources, and cost is very good. The key concept of opportunity cost is brought out very well. So is private property, competition, and the profit motive. The book’s superficiality manifests itself early, however. An example is the treatment of the "too big to fail" phenomenon (p. 39). The student learns that the federal government bailed out Chrysler, Lockheed, and other large firms with loan guarantees. True, but here some economic analysis was in order, getting the student to think about the effects of such bailouts. What were the intended and the unintended consequences? Unfortunately, the author does not lead the reader into that analysis.

The book contains a good profile of Adam Smith and through several "Focus on Free Enterprise" sections, suggests to students the essence of the "invisible hand" concept—that you succeed only by providing goods and services consumers will pay for.

Criterion 2: Competition and Monopoly

Miller explains the differences between perfect competition and monopolistic competition without the erroneous notion that the former is ideal and the latter wasteful. Also, he notes that there is "little proof that oligopolies are harmful" (p. 240). The treatment, however, is a bit sketchy and fails to analyze whether or not oligopolies are efficient.

Missing from the book’s discussion of monopoly is any analysis of how hard it is to create and perpetuate a monopoly in a free market. Some businesses, as Miller might have noted, have turned to the government to stifle competition because they could not succeed otherwise. Moreover, the section on mergers and antitrust is threadbare, failing to lead the student into analysis of the costs and benefits. Miller’s treatment of the economics of regulation and deregulation is also superficial.

Criterion 3: Comparative Economic Systems

The differences between capitalism and command and control economic systems is correctly explained, but without much depth. Miller correctly observes that "all economies are planned in one way or another" (p. 485), but does not explore the inherent drawbacks of central planning—the problems of quality, indifference to consumer preferences, and especially the impossibility of rational allocation of resources in the absence of a price system. It is certainly true that "capitalist countries are economically healthier," but the student does not get a good grasp of the reasons why this is so. The student learns how to think like an economist by exploring such issues.

There is a good, although brief, discussion of the transition from command and control systems in China and the Soviet Union toward the free market, emphasizing that personal incentives change dramatically once property is in private hands and profit-making is legal.

The book’s section on economic growth is much less satisfactory. Miller describes foreign aid at some length (amounts given by various nations, the channels through which it flows, and the different kinds of aid programs), but he does not analyze the economic effects of foreign aid. This leaves the impression that foreign aid relieves suffering and promotes economic growth. Miller gives no indication that the effects of foreign aid are different from its intentions. Learning to think from the stated intentions of a policy to its actual effects is one of the most important economic lessons, but the book fails to deliver here.

Furthermore, the author leaves the student with the false impression that international trade only springs up if we first give governments in developing nations some purchasing power through foreign aid.

Criterion 4: The Distribution of Income and Poverty

Miller devotes very little space to income distribution and poverty. Instead of a chapter concentrating on these matters, the student only finds sprinkled throughout the book statements that suggest the market’s distribution of income is inequitable. Missing is any sustained investigation of the economics of poverty, including the role of government in impeding people from making economic progress on their own.

The treatment of income redistribution programs is superficial. Miller simply tells students that the task of ensuring that everyone is provided with "a certain minimum level of income" is "accomplished primarily through income redistribution, using tax receipts to help citizens in need" (p. 417). Here is another instance where the book needs economic analysis. Students should be encouraged to think about the effects of anti-poverty programs and alternatives to them, but Miller does not do so.

Criterion 5: The Role of Government

Miller begins with the "public goods" problem and the treatment is very thin. He gives no clear definition of public goods; he only says in a vague way that they are "goods or services that government sometimes supplies to its citizens" (p. 416). That "definition" may lead students to the erroneous view that whatever the government provides is a public good. The student needs to understand why it is hard for private enterprise to provide an optimal level of true public goods, but that is missing.

Similarly, in Miller’s discussion of "merit goods," he asserts that goods can have "social value," and that "government" determines which goods do. This reinforces the mistaken idea that value is objective and collective. Miller would have done the student more good if, instead of saying that classical music concerts, ballets, and so forth are "merit goods," he had analyzed the effects of government subsidies and the process that brings them into existence.

The book needs improvement on the subject of externalities. The student is merely told that government regulation is needed to protect citizens against pollution. The economic problems that give rise to the problem of pollution and the consequences of pollution (or other negative externalities) are not analyzed. In a "Point-Counterpoint" box (pp. 76-77), Miller presents some arguments for and against pollution taxes, but this takes the form of "some say this, but others say that"—which does little to teach economic thinking.

Students are also told that redistribution of income and economic stabilization are both functions of government. But, inquiring students will want to know, what are the consequences of government action?

Criterion 6: Public Choice

One of the major weaknesses of this book is the absence of public choice thinking. There is just a fleeting reference to "the political system’s overwhelming predisposition toward ‘government failure,’" but this is never developed. Students need to be presented with a cogent exposition of the difficulties with public decision making—the incentives of politicians and bureaucrats, the rational ignorance of voters, the power of interest groups, and so on.

Rather than helping the student learn to think critically about public decision-making, the book reinforces civics class platitudes with statements like this: "Through their elected representatives, Americans have chosen to see that almost everyone is provided with a certain minimum level of income" (p. 417). Public choice analysis calls into question the idea that democracy works in this idealized fashion. Government action is rarely occasioned by the desires of "the people" in general, and a good public choice section would explain why.

Criterion 7: The Role of Entrepreneurs

The book is very good on the subject of entrepreneurs. Students learn that entrepreneurship is a key ingredient in economic progress, that it entails considerable risks, and that it is motivated by the desire for profit. Most of the material is gleaned from the several "Readings in Economics" and "Focus on Free Enterprise" sections that appear throughout the book. These sections do a lot to demonstrate that business success is something to be applauded, not scorned. The book would even be stronger if Miller had shown that entrepreneurs can easily be stifled by hostile taxes and regulations.

Criterion 8: Taxation

In the author’s slender section on taxation, he asks if people should be taxed according to their ability to pay. He then describes the different kinds of taxes, and finally makes the point that taxes can encourage or discourage activities. None of this really helps to develop the student’s understanding of the economics of taxation—its costs, the incidence problem, or its tendency to misallocate resources. Miller says that "Taxes are also used to direct resources toward investments that are desirable but costly" (p. 430), without leading the student to ponder why, if the use is desirable, it is necessary to subsidize it through the tax system.

Criterion 9: The Business Cycle

Miller’s discussion of the business cycle is incomplete. He notes correctly that economists are divided into two camps in their "approaches toward controlling unemployment and inflation" (p. 443). The point that he needed to explore first was how the two camps differ in their assessment of the origins of economic fluctuations: 1) those who maintain that cycles are an inherent part of the market ; and 2) those who maintain that instability is induced by poor government policy. That important debate is only hinted at in the discussion of Monetarism, which is the only non-Keynesian theory examined.

In discussing Keynesian theory, Miller never dissents from the idea that government spending can "strengthen" the economy. Miller writes that, after the end of World War II, "The economy was strong enough by then to continue operating without the extra government aid" (p. 446). Much criticism has been leveled at the contention that government spending can aid the economy, but unfortunately the student hears none of it. There is also a gaffe on p. 446, where he says, "Keynesian economists believe that as a result (of the 1964 tax cut), unemployment fell. . . ." This makes it sound as if only Keynesian economists have figured out that cutting taxes can have economic benefits.

In the short chapter on Monetarism, Miller correctly shows that the money supply fell significantly between 1929 and 1933, and he explains that Monetarists regard this as the precipitating event of the Great Depression. He also includes some of the difficulties in trying to make Keynesian "fine tuning" of aggregate demand work, but the student is never led to question the fundamental premise that government is needed to manage aggregate demand.

Criterion 10: Wages, Unions and Unemployment

Miller informs the student that "Supply and demand are factors in the labor market," (p. 307) but he needs to clearly link wages to productivity. Furthermore, he mentions in passing that minimum-wage laws "affect wages," without giving any economic analysis of their effects. Only the exceptional student would think to apply the discussion on price floors and ceilings (more than 100 pages earlier) to see that the minimum wage also affects the number of jobs available to low-skilled workers. Working through the economic effects of the minimum wage would help the student to understand economic analysis better, but the book fails to do so.

The chapter on unions is, typically, much more descriptive than analytical. While two full pages are devoted to a timeline of American unionism, the student reads nothing on the extent to which unions can raise compensation to above-market levels, and if they do so, what economic impact this has on consumers, investors, and other workers. The book also reinforces the common assumption that because sick leave, paid vacations, and health care benefits followed the advent of unionism, they came about because of unionism. Unions certainly have been able to change the composition of the total compensation package paid to workers, but many economists deny that they have or can increase compensation in total. Miller ignores the role of competition in the labor market to attract and keep good workers.

He briefly discusses unemployment (pp. 438-39), but says nothing on the programs and policies to deal with it.

Criterion 11: Trade and Tariffs

The author’s explanation of the reasons for and benefits of trade is very sound. The vital point that exports pay for imports is made clearly and the analysis of the law of comparative advantage is excellent. Also, the book helps the student to understand that "international trade" is nothing different: "You should consider international trade as an economic activity just like any other. It is subject to the same economic principles. For you and everyone else in the United States, the purpose of international trade is to obtain imports, not to export" (p. 465).

Unfortunately, in the following chapter, Miller briefly describes foreign exchange markets and conveys the false idea that it matters whether we have a "favorable" or an "unfavorable" balance of trade. The misleading terminology that is used makes it seem to students that some action must be taken to stop "unfavorable" trade balances. If a textbook uses those terms, it ought to correct the erroneous conclusions that are apt to follow.

The economic effects of import restrictions are mentioned briefly, but there is no in-depth treatment of their impact. Furthermore, the main arguments in favor of protectionism are presented, but not scrutinized. The book leaves it up to the student to decide whether there is any validity to the "infant industry" argument, among others. Unfortunately, the book does not give the student enough competence in economic analysis to do that.

Criterion 12: Money and Banking

The functions of money are explained well. The connection between the supply of money and its value is also explained. However, the student never sees the market nature of money or the damage that can be done by turning control of the monetary system over to government. The only mention of the gold standard is in a time line (p. 371) and it is criticized for causing periodic money shortages and economic panics. This is a dubious attack. Many economists and historians have argued that the panics in the 19^th Century were caused by poor banking laws, occasional issues of government paper money, and government mandated purchases of silver.

The organization and functions of the Federal Reserve System are capably discussed. The book also gives the student a brief look at banks and other financial institutions, but does not explain their importance in the economy. Nor is there anything on the effects of regulating financial institutions, or on the causes and effects of the S&L crisis.

Economics (South-Western)

Economics
by J. Holton Wilson and J.R. Clark
(Cincinnati, South-Western Educational Publishing, 1997), 748 pp.

Rating: C

General Comments: This is a colorful, hardbound textbook that is written at a level appropriate for most high school students. Its chief drawback is that it gives too much space to description and too little to analysis to show students how economists think. For example, the book includes biographies on people as diverse as Alan Greenspan, Arnold Schwarzenegger and Donna Shalala. Interesting as these may be, the information does nothing to help the student develop the ability to think like an economist.

Criterion 1: Costs and Prices—How Production is Determined

Wilson and Clark begin by telling the student that "economics is the science that deals with how society allocates its scarce resources among its unlimited wants and needs" (p. 7). It is unfortunate to use a macroeconomic definition. Students are more likely to understand what economics is about (and take an interest in it) if it is presented in microeconomic terms—the study of purposeful human decision-making. In the aggregate, millions of human decisions do "allocate society’s resources," but it is best to start with the individual as the unit of analysis. Other than that, the book is very good in its explanation of the fundamentals of economics—scarcity, choice, opportunity cost, and so on.

Wilson and Clark are very clear in their treatment of the three basic economic questions and the ways in which the organization of a nation’s economic system will give different answers to those questions. Unfortunately, they waste a page describing the "Goals 2000" program (p. 27). This reinforces the tendency to focus on noble objectives and intentions rather than thinking economically about costs and benefits, means and ends.

The book’s treatment of the way in which the pursuit of self-interest leads to prosperity and harmony (Adam Smith’s "invisible hand") was too brief to convey to the student the nature and efficiency of free markets.

The book capably covers supply, demand, price, and market dynamics, but not until after the discussion of market failure and other intervening material. It would be better to cover how markets work much earlier. The authors describe the effects of mandatory price floors and ceilings, including the minimum wage, and the authors correctly draw out their implications. However, a more complete analysis of the ways businesses react to a mandatory increase in the cost of labor would have done more to stock the student’s mental toolbox.

Criterion 2: Competition and Monopoly

Wilson and Clark do a good job of describing the different types of market structures from perfect competition to monopoly, and how they affect a firm’s decision-making. The authors make it clear to students that monopolies are not immune to the laws of economics.

One important omission, however, is the significance of potential competition. The book briefly mentions Alcoa to make the point that control over a necessary resource can confer monopoly status upon a firm. The authors fail to note that Alcoa’s history is one of continuing improvements and efficiency. The firm has behaved in a very competitive manner, fearing that it might attract competition if it does otherwise. The disciplining force of potential competition in a free market is a point that ought to be discussed.

The authors also need to explain how hard it is to keep a monopoly or cartel when there is free entry into the market. One of the widely held beliefs regarding monopolies is that big firms can easily kill off smaller rivals to create a monopoly. The book reinforces this idea, saying, "If one company grows so strong in the market that it pushes out all other products, there will be no competition" (pp. 104-05). That "if" calls for much more analysis.

Finally, the book says little about antitrust. The Sherman Act is mentioned only once, in conjunction with labor unions. Students ought to learn why the government’s attempts to maintain market competition have often produced more cost than benefit.

Criterion 3: Comparative Economic Systems

Wilson and Clark explain that in a command economy, "The varieties and choices of goods and services in the market are limited to what the central planning committee decides will benefit the whole society. The goods and services produced do not have to pass the difficult test of individual market choice" (p. 53). This is true, but it gives the student only a superficial idea of the great problems that central planning entails. The conclusion that the consumer suffers in a command economy comes through clearly enough, but students need a detailed case study of the economic problems that have arisen when government planners have tried to run economies. Also, the book needs some discussion of the problems involved in making the transition from a command to a market economy.

Criterion 4: The Distribution of Income and Poverty

The book devotes many pages to a description of poverty (some history, breakdown of poverty by age and race, how the poverty line is calculated and more) before getting down to an analysis of its causes. The authors break them down to three: unemployment, low productivity, and restrictions on job entry. The authors’ case for the first is weak. The average duration of unemployment is only about 10 weeks (the fact is not mentioned) and rarely do workers who have been in the labor force but lost their jobs fall below the poverty line before finding new employment. The discussion of low productivity is excellent. Pay is inevitably linked to productivity and people who, for whatever reason, cannot produce much cannot earn much. As to restrictions on job entry, the authors confine their analysis to labor union practices that keep people from pursuing certain kinds of work. A more thorough analysis would have gone into the various laws and regulations that pose even greater obstacles to entry into the labor market.

The authors only briefly discuss job discrimination as a form of labor market restriction. Many economists, however, doubt that job discrimination is widespread in the free market or that it has much actual impact on the poverty rate.

A key omission in the book is the high degree of income mobility in the U. S. (or any free economy). Despite the various union and government impediments, there are many ways for people who begin life poor to become wealthy, and many do. There is also considerable downward income mobility. Students should understand that the rich do not necessarily stay rich and the poor do not necessarily stay poor.

Finally, the book’s analysis of government anti-poverty programs focuses more on intentions than on results; it is in the latter where the student learns to apply economic thinking.

Criterion 5: The Role of Government

The authors define public goods as "goods and services available to the whole society" (p. 57). Just because government makes a good or service available to everyone does not mean that it is a "public good." Public goods are those that the market would under-provide because of the inability to require that all who benefit pay. Sound economic teaching would show students why national defense, for example, is a public good, but why schools, libraries, stadiums, and many other government-provided goods are not.

Wilson and Clark make a weak argument that education is a public good because it produces positive externalities for the entire society (p. 88). It does, but it does not logically follow that education is a public good and ought to be produced by government. Education is a human capital investment that improves the individual’s earning capacity; others who wish to benefit from that productivity must pay for it. There is no free rider problem and no reason to believe that there would be general under-investment in education in the absence of government provision.

Also weak is the book’s contention that government provision of passenger rail service (Amtrak) is a public good. After acknowledging that many economists view Amtrak as a waste of resources (it incurs substantial losses on virtually every route), they write, "keeping the trains running does provide train service in places where it is vital to our nation’s interest" (p. 108). The student who wants serious economic analysis is bound to ask why it is in "the national interest" to keep passenger trains running where there are alternate, less costly means of transportation available.

The book also explains that government action may be necessary to deal with the problem of negative externalities, such as pollution. But when it comes to discussing the means by which government does this, Wilson and Clark fail to address the efficiencies of the various approaches to pollution control.

Finally, with regard to government income distribution, the authors state that "the public sector can redistribute income more efficiently than the private sector" (p. 111). This, however, is a highly disputed opinion, not economic analysis. Government redistribution programs are riddled with unintended consequences—and students ought to think about results more than intentions.

Criterion 6: Public Choice

The book contains a short summation of the main tenets of public choice theory in a box on p. 102: the rational ignorance of voters, the interest group effect, and political shortsightedness. The interest group problem is discussed more fully on p. 115. The student is informed that "Special interest groups are very powerful politically," but the authors never explain why this is the case, or its impact on economics.

There is only a fleeting reference to "rent-seeking" when the authors write, "There will always be individuals and groups who try to use the public sector to their advantage. There will always be situations where smaller groups and individuals benefit at a cost passed on to everyone in the society" (p. 116). But that shouldn’t end the discussion. What’s needed next is an analysis of the great waste and inefficiency that can occur when those efforts succeed.

Criterion 7: The Role of the Entrepreneur

The treatment of entrepreneurship is good. Entrepreneurs, Wilson and Clark write, "must take the risk that their finished products can satisfy a need, be attractive to consumers, and sell at a price that covers the cost of production. Entrepreneurs take the risk that the product will produce profits" (p. 84). True, but the section would have been stronger if they had stressed that most new ventures fail; the occasional, successful entrepreneur who produces enormous wealth is the needed incentive that keeps people searching for new and improved products and services.

Criterion 8: Taxation

The book’s section on taxation has too much description and too little analysis. Many pages are devoted to telling the student why the government collects taxes, how it spends the tax revenue, how state spending differs from federal, what the "principles" of fairness are, and how taxes are classified. Finally, we come to tax incidence. The authors explain that the entity paying the tax does not always bear the real burden. They illustrate this point with the corporate income tax, writing, "Economists generally agree that the combination of stockholders, employees, consumers and the corporation itself all bear some part of the corporate tax burden" (p. 548). But since all wealth is ultimately owned by people, "the corporation itself" cannot bear any part of the tax. Instead of showing the student that taxing corporations is simply a means of disguising taxes that must be paid by others, this sentence may encourage them to believe that tax authorities just haven’t come up with the right formula for making "the corporation itself" bear the whole tax.

The authors include a fairly lengthy discussion of Social Security, and consider the tax incidence problem, writing that "the employer’s share of the Social Security tax can be shifted" (p. 552). This is too vague. Economists widely accept the argument that the employer’s "contribution" to Social Security comes entirely at the expense of lower gross earnings for employees. Unfortunately, the authors do not tell the student that Social Security currently reduces the pay of workers by 15.3%; nor are they enlightened as to any of the financial problems that confront the program or of the costs it imposes on the economy. Indeed, the book paints an indefensibly reassuring picture: "Social Security payments have, on the average, amounted to more than the amount paid in by each taxpayer (including the employer’s contributions)" (p. 551). That has been true in the past, but many analysts insist that it cannot continue that way.

Finally, missing from the entire discussion of taxation is its cost—the diversion of resources away from the private sector, the collection and enforcement costs, the tax code’s creation of artificial incentives and so on.

Criterion 9: The Business Cycle

There is no concentrated discussion of the business cycle in the book. The student learns that we occasionally suffer from recessions and depressions, but never learns why. When Wilson and Clark mention the Depression, they blame it on insufficient demand, which gives the student only the outdated and much-criticized Keynesian view. One of the most important of economic controversies is between those economists who argue that the market economy is unstable and needs frequent government intervention to avoid booms and busts, and those who argue that the market economy is inherently stable, but is thrown into disequilibrium when government tinkers with it. The student learns very little of this crucial debate.

The authors discuss the problems with "fine tuning" the economy through fiscal policy (the time lag problem, the difficulty in getting accurate economic forecasts and the political bias towards over-spending). They note that there are economists (the term "Monetarist" is correct, but they do not use it) who favor relying upon a fixed rule for monetary policy instead of discretionary policies. Those points need fuller development.

Criterion 10: Wages, Unions and Unemployment

The book correctly explains wages in the market as a matter of supply and demand, no different from the determination of other prices. Then comes a good analysis of the effects of minimum-wage laws. Unfortunately, the next step is a misleading discussion of "comparable worth" legislation. The costs and inefficiencies of having government officials decide upon the price of many different kinds of labor in an effort to make things "fair" have been analyzed at great length by economists. But the authors write, "While it is difficult to quantify these aspects of a job, doing so is seen as a step in the right direction" (p. 337). While a few people think "comparable worth" is a "step in the right direction," most economists do not—in any case, merely presenting this normative conclusion does not help the student learn how to think like an economist.

The treatment of labor unions is also unsatisfactory, repeating the long-disproven idea that legal injunctions were frequently used to stop strikes and conveying the mistaken impression that non-union ("yellow dog") contracts were only a management tool to thwart unions.. The authors fail to provide any economic analysis of the impact of unions. They merely write, "unions helped to balance out the bargaining power between labor and management" (p. 339). The phrase "bargaining power" has been criticized by economists as empty and misleading, since economic relationships are not based on power, but on voluntary exchanges for mutual benefit. The economic effects of unions on prices, employment, and productive efficiency are important, but the authors do not explore them.

Criterion 11: Trade and Tariffs

The authors write about international trade as if it were a macro phenomenon ("Nations trade with each other because . . .) rather than a micro phenomenon of individual action. The law of comparative advantage is also explained in this way: "Germany" produces steel, "England" produces cloth, and then they trade so that "both countries will be ahead" (p. 632). National considerations are not irrelevant, but the students need to remember that individual Germans and individual Englishmen do the producing, trading, and benefiting.

The book correctly states that tariffs and quotas make imports more costly for consumers, but neglects to say that prices of domestic goods usually rise also. The arguments for and against tariffs are accurate, but too brief to really inform the students.

The section on international payments begins with a discussion of the gold standard that misses its paramount advantage—a disciplining effect upon the natural tendency of governments to inflate—and instead concentrates on the temporary disadvantages a nation’s economy would suffer from a trade imbalance. The fact that inflation would lead to a trade imbalance and economic pain was one of the disciplining virtues of the gold standard.

To make matters worse, the authors mention "favorable" and "unfavorable" balances of trade at the end of the chapter, leaving the student with the impression that "unfavorable" trade balances must be harmful. This is the central fallacy of mercantilism, and the book does nothing to ensure that the student does not fall into it.

Criterion 12: Money and Banking

Wilson and Clark explain the functions and benefits of money, but the student gets no sense of the market origins of money. When they come to the monetary system of the U. S., they leap right into a discussion of the Federal Reserve, its structure and functions, without explaining why and how the nation went from commodity-based money to fiat money under the control of a central bank.

The book says nothing about the Fed’s track record and especially its role in the Great Depression. Also, the connection between the actions of the Fed and inflation is not clear. When considering inflation, the authors discuss "demand-pull" inflation without saying anything about where all the dollars come from. They also present the "cost-push" theory to the student as economic truth ("a rise in the general level of prices that is caused by increased costs of making and selling goods"—p. 460). Many economists, however, deny that you can have a general increase in prices without an increase in the supply of money.

The discussion of banking is accurate as far as it goes, but there is no analysis of the effects of regulation in the banking industry, most notably the Savings and Loan fiasco and how unsound government insurance policies contributed to the problem.

Introduction to Economics

Introduction to Economics
by Henry F. Billings
(St. Paul, EMC Publishing, 1991), 432 pp.

Rating: D+

General Comments: An Introduction to Economics is well-organized and follows a systematic progression from foundational issues, through microeconomics, to macroeconomics. In content, however, there are serious problems. Billings assumes that massive government intervention is needed to make an economy run smoothly. In fact, he argues that without government intervention, wild swings will occur in economic development. He adopts the outdated and discredited Keynesian prescriptions developed in the 1930s and 1940s, and avoids recent research on the unintended consequences of government action.

Criterion 1: Costs and Prices—How Production is Determined

Billings begins by explaining the central role of scarcity and the need for individuals to make choices. Next, he develops the notion of opportunity costs as a means of determining which choices make the most sense. Finally, he closes by presenting the basic economic questions: What should be produced? How much should be produced? How should products be produced? Who gets what and how much? This approach is an excellent means of focusing student attention on questions which will be addressed throughout the text.

These questions are further developed through the introduction of the four factors of production: land, labor, capital, and entrepreneurship. Billings presents a short biography of Steven Jobs, cofounder of Apple Computer, and nicely explains the interplay between labor and capital.

Definitions are interspersed throughout, and this helps to make the text accessible for the young reader. For instance, Billings presents the law of diminishing returns, specialization and technology as mechanisms that help to determine or increase the level of production. He also includes a useful discussion of the issues involved in starting your own business.

Also, Billings describes the interdependence of producers and buyers and uses a circular flow diagram to map out the specific relationships among households, businesses and government. All in all, this approach is successful at distilling the basic processes behind consumer choice and economic interdependence.

The author explains the central role of prices as a rationing mechanism. He also has instructive sections that highlight the role of the market in providing the consumer with information and motivation.

The text does an adequate job of examining the relationship between demand and supply. Demand is developed first. The book traces the inverse relationship between the amount demanded and the price of the product, factors which shift the demand curve and determine elasticity. The approach is simple, straightforward, and unencumbered by excessive terminology. Next, Billings examines the supply schedule and discusses the related details. This analysis is also quite solid. Finally, demand and supply are brought together and the market clearing equilibrium developed. The entire chapter concludes with a clear and informative capsule on the "Wonders of Free Enterprise."

Criterion 2: Competition and Monopoly

The section on competition and monopoly is misleading in many respects. In an effort to make the material accessible to students, Billings goes too far by suggesting that "monopolies are called ‘natural’ because they seem common sense to almost everyone" (p. 43). He does not mention that natural monopolies are a result of economies of scale—the more you make, the lower the costs for each unit of production. Then, Billings discusses what he considers to be basic government services such as libraries, schools, and the police department—but he never raises the possibility that the private sector could supply many of these functions more efficiently than the public sector. He concludes with a discussion of consumer protection, which strongly suggests that the principle of "let the buyer beware" be replaced with federal agencies such as the FTC, Department of Agriculture, and NHTSA. He discusses federal regulation without mentioning that these agencies greatly reduce consumer choice.

Next, the text addresses competition through the use of the pure competition model. The concern here is that students will come to identify competition as largely imperfect and therefore in need of corrective action. A better approach would be for the text to develop a stronger analysis of supply and demand to avoid this confusion. However, the chapter concludes smartly with a biography on entrepreneur Debbi Fields, of Mrs. Fields Chocolate Chip Cookie fame.

Criterion 3: Comparative Economic Systems

The free enterprise system is presented first. The chapter opens with the ideas of Adam Smith on laissez-faire and "the invisible hand" principle. Both of these concepts are clearly developed. However, he suggests that the invisible hand "works fine for doughnuts and bagels" (p.52), but not for other goods and services. This is the first time the idea of market failure is presented; yet Billings never mentions the many failures that can be laid at the doorstep of government. Presumably, he thinks markets fail but government rarely does. In a flippant and unscholarly fashion, Billings suggests that when Adam Smith’s invisible hand does not hold (which is almost always, in his view), government should intervene.

Billings uses an example of John D. Rockefeller to show that competition may result in monopoly through unfair business practices. But Rockefeller never had a monopoly; his 90% percent share of the kerosene market was achieved in the face of intense competition and was quickly chipped away by that very competition, long before the Supreme Court intervened (See the review of Economics: Institutions and Analysis by Antell and Harris). Billings needs to consider the more recent scholarship, especially the work of John S. McGee and Robert Bradley, which defends Rockefeller’s business practices. Billings presents no counter example that shows how competition can help consumers.

Billings discusses socialism next. He argues that the average worker is much better off today than 100 years ago, in part, because of reforms brought about by the influence of socialism. Sweden is then used as an example of socialism at its best. He describes Swedish society in glowing terms with few criticisms. Anyone even remotely acquainted with Sweden’s economic malaise and today’s overwhelming consensus that the Swedish socialist model has failed would find Billings’s presentation here woefully inadequate.

The ideas of Karl Marx are presented last. Billings devotes a great deal of space to Marx’s Communist Manifesto, his views on the proletariat, and the bourgeoisie. Billings also discusses the Russian Revolution and the application of his ideas in the Soviet economy. Not all of the discussion is favorable but a sizable portion is sympathetic to what Marx tried to accomplish. All told, the text spends more time discussing Marx (whose ideas are largely discredited) than Smith (whose ideas continue to undergird most economic analysis).

Criterion 4: The Distribution of Income and Poverty

Billings gives the impression that the best distribution of income is one which minimizes the difference between the affluent and the impoverished. When discussing the Swedish experience he writes, "the gap between rich and the poor is relatively small" (p. 63), as if this should be a goal of policy.

It apparently does not occur to him that this income gap encourages productivity, or that if the rich and poor received the same wage production would fall to near zero. Moreover, as the income gap narrows because of coercive redistribution by government, incentives collapse and total production falls. A society with an egalitarian distribution of income is likely to have slower economic growth than a society with meaningful differences in income. A society with an income structure that rewards innovation, productivity, and the entrepreneur through higher wages will eventually create more wealth and even the poorest members will see their incomes advance.

Billings, thus, displays a negative bias toward material inequality. His statistics are misleading because they are not corrected for differences in education and experience in the workforce. Also, the text fails to include longitudinal studies of income, which demonstrate the transitory nature of poverty for most people. His chief suggestion is that people need to improve their education and training to avoid poverty. This point is well taken.

However, Billings also strongly argues that the minimum wage is a useful tool for reducing economic inequality, without presenting an opposing view. Many economists point out that the minimum wage is a political tool and rarely is set above the market wage. Billings makes an error when he states, "Usually the minimum wage is higher than the wage would be if it were set by the free market. Otherwise it would serve no purpose" (p. 197). Here, Billings fails to take into account the political advantage politicians derive from promoting a minimum wage and taking advantage of the poor economic understanding of their constituents. Considerable economic research suggests that the minimum wage law creates unemployment, encourages discrimination, and prevents newcomers from acquiring on-the-job training, but Billings only acknowledges that the issue is "up for debate." What is not debateable is that the minimum wage is partly to blame for high rates of unemployment among blacks and Hispanics.

Criterion 5: The Role of Government

The economic role of government is explored in the last chapter in the unit on microeconomics. This is a curious assignment since the economic role of government is usually treated under macroeconomics. Billings apparently wishes to treat government as just another institution which is part of the economy. However, government also attempts to directly manage the economy, so this approach is deceptive.

Billings directs the student to the "four reasons for market failures and what the government does to correct them" (p. 222). Nowhere is it mentioned that government failure is also a serious issue. Two pages later the text discusses spillovers without noting that under the Coase Theorem the market might solve this "failure" so long as property rights are clearly defined and enforced. Next Billings defines public goods in such a way to include public schools. Billings’ definition of a public good is, "outputs provided by governments and not allocated by the market’s pricing mechanism." The proper definition would distinguish between pure public goods, those goods that cannot be adequately supplied by the private sector, and impure public goods, those goods which the market could provide if encouraged to do so. Public schools are demonstrably an impure public good because private schools exist alongside their public counterparts. Billings’ definition is so broad that almost anything the government does falls under the category of a public good—a view that would be disputed by most economists. This approach encourages students to view government activity without cautionary restraint.

Billings also blames economic instability on the market. He writes, "Without government involvement, there is nothing to prevent wild fluctuations in the overall economy" (pp. 226-27). Nowhere does Billings mention that the Fed, through manipulating interest rates, has created wild fluctuations in the overall economy, especially when it raised interest rates and helped trigger the Great Depression in 1929. This section is so biased that it alone is an excellent reason to choose another textbook. He writes that "public schooling seems a bargain at almost any price," which is not only bad economics since it does not consider the costs and benefits of public schooling compared with the alternatives, but it is also ideologically designed to influence student’s opinions in favor of public schools. It betrays an appalling and perhaps deliberate ignorance of the devastating documentation of many public school failures in our inner cities.

The text also includes the story of the Tennessee Valley Authority and titles the discussion, "The Federal Government as Entrepreneur" ( p. 72). The discussion focuses on the many projects that the TVA has built and the social welfare created through this process. Never is it mentioned that the TVA competes with other private power firms. Nor is it ever mentioned that the TVA could be sold by the federal government and the services could be provided privately. Back in the 1920s, in fact, Henry Ford offered to buy TVA and run it as a business to build up the South. A well-designed economic argument would consider the opportunity costs of the TVA and try to analyze the welfare created by the TVA.

Criterion 6: Public Choice

There is no separate section on public choice in this text. Billings’ textbook would have benefited from a section on this topic, which examines government actions by many of the same standards he applies to those of the free market. Politicians and bureaucrats often have agendas far removed from any public interest; analyzing this issue would have provided needed balance.

Criterion 7: The Role of the Entrepreneur

Billings highlights entrepreneurs and he correctly identifies profits as a motive for risk-taking. Then he asks whether or not profits are too big. This subjective question is nicely handled through a discussion of the proper use of statistics. When profits are compared over time and adjusted for changes in inflation the net result is that the size of corporate profits makes greater sense than appears at first glance. They are not the result of the exploitation of consumers, as Marx had argued. Billings also distinguishes economic profits from accounting profits. This section ends with a capsule on the "Economy versus the Environment," which is surprisingly balanced and concludes that the "debate is bound to turn to the issue of costs versus benefits" (pp. 160-61).

Criterion 8: Taxation

Billings describes "wild swings" in the business cycle and argues that "government spending helps to create lots of jobs" (p. 339). However, what the government spends, it first must take away from citizens through taxation. So it is not accurate to write merely that the government creates jobs without mentioning that it transfers employment from the private sector to public sector.

The text opposes the Reagan tax cuts of the 1980s. Billings correctly notes that the tax cuts ended the recession of 1981-82 and helped to produce an economic boom in the mid-1980s. But he also blames the tax cuts for the runaway deficits that followed. He offers no explanation—or mention—of the fact that tax revenue actually doubled between 1980 and 1990. Then Billings presents a series of startling statistics designed to create the impression that the economy is on the verge of collapse due to the size of the national debt. This approach is very misleading. In real terms, the national debt was higher in the years immediately following World War II than it is today. Nowhere is this mentioned.

The supply-side position is also presented negatively. Billings writes, "Supply-siders gave economists something they didn’t need—another issue to debate" (pp. 349-50). He even makes a serious factual error when he describes an "increase in corporate taxes" as a supply-side solution. It would be impossible for a student reading this material to get an objective understanding what "supply-side" economists believe. For instance, we read that the "poor have been hurt by the spending cuts" (p. 367) brought about by "Reaganomics." No statistics are given to back this assertion and what evidence is now available suggests that while we still have rich and poor, the growth of income of the poor has paralleled the growth of the rich over the last 15 years.

Next, Billings outlines and justifies the causes for government spending increases. He does point out that increases in government expenditures crowd out private investment. He points out that legislative efforts have been made to reduce the ongoing problem by mandating ceilings on the yearly deficits. However, he also notes that the federal government’s budget is different from the average citizen’s since the government can print money to pay its bills. He discusses balanced budget amendments and laments that under a balanced budget the government would "not be able to do things that many people think it should do, like building roads and providing for the needy" (p. 366). That, of course, is incorrect. A balanced budget simply means that whatever government wants to do, it must pay for through current taxation and not through borrowing or printing money.

Billings also misses the mark by failing to note that an amendment to limit spending would encourage private sector growth without the need to balance the budget. The obvious solution to the problem of deficits, namely less government spending , is never mentioned. Smaller government spending would place dollars back in the hands of consumers, who would then be able to decide how best to spend the money. This would make more capital available for investment and entrepreneurial activities and promote economic growth.

Criterion 9: The Business Cycle

Students are presented with basic terms and the recent history of economic expansions and contractions. However, Billings uses the word "uncontrollable" to describe the business cycle. He explains the external causes and internal causes for the business cycle without suggesting that government actions—tariff manipulation, tax hikes, and the Fed tinkering with interest rates and money supply—played a role in the Great Depression. Instead, Billings ends the discussion of the business cycle with an extended development of the Keynesian multiplier, a largely discredited notion.

The author defines inflation, explains how it erodes the value of money and income over time, discusses how it is measured, and provides historical examples of rapid inflation. Inflation is presented as a serious economic problem and Billings rightly sees any attempt by government to fight inflation through mandatory price controls as involving "high costs" ( p. 296).

Criterion 10: Wages, Unions, and Unemployment

Billings studies labor unions and the collective bargaining process at length. He empasizes two key facts: (1) that unions are less influential today than a generation ago and (2) that strikes are almost never carried out. The text does a nice job of balancing the need to explain union operations and benefits alongside the costs of union activity. After reading this section, students will better understand that unions have had a stormy history, have helped some workers at times, but through it all have had a hard time sustaining membership because workers have been able to achieve many of the same benefits on their own without unions.

The twin issues of wages and unemployment are developed, as well as the reasons for unemployment. Billings correctly identifies unemployment as arising from inadequate training—and he also notes that the main component of wage differences is a worker’s productivity. He lists lesser factors contributing to wage differences as job characteristics, benefits, location, and discrimination.

Criterion 11: Trade and Tariffs

Central to economic analysis are the laws of comparative advantage and free trade. Billings covers the arguments in favor of protectionism and then explores the benefits of free trade. The treatment of the GATT and the EEU is fair and unbiased. He discusses exchange rates and defines the balance of payments. Overall, the text presents free trade favorably and criticizes protectionism.

Finally, Billings describes the problems of developing countries. Unfortunately, he understates market forces in his description and focuses on the level of natural resources, population, and credit—none of which prevent economic development. The key to developing a country is providing services that others wish to buy. Therefore, creating a literate workforce, providing a stable political climate, and promoting production through markets are the key mechanisms for escaping third world status. Billings perceptively notes that "prosperity loves company" (p. 401). If, through free trade, we can encourage underdeveloped countries to expand their economies this will have a beneficial effect on us as well.

Criterion 12: Money and Banking

Billings describes barter exchange, the functions of money, and the transformation of the money supply from gold to paper currency. He then points out that our currency today is "backed only by the good faith people have in their government." But he errs when he states that, "people had to accept the paper money issued by their government" (pp. 304-305). The error can be seen internationally in the way people avoid the Russian ruble and instead transact in U. S. dollars in many locations in the former Soviet Union. The ruble is legal tender but not a very desirable commodity.

The text then examines the role of banks in supplying money and the relationship between deposits, loans, and interest rates is brought out as are the types of financial institutions. The thrust of the presentation involves the S&L crisis of the 1980s. Here it is clear that Billings believes that added regulations on the industry will prevent a similar crisis in the future. No mention is made of the alternative view that industry regulations could be removed and consumers would benefit from greater competition. The student will not learn from Billings that the major reasons for the S&L crisis were the unsound insurance policies of the federal government (charging poorly managed S&Ls the same insurance premium as the well-managed ones, and doubling the amount of deposits Washington would cover if reckless managers lost them through bad investments).

Billings goes on to detail why the Federal Reserve system was created, how it is organized, and the tools the Fed uses for monetary policy. Billings takes the time to develop both the arguments for and against monetary policy. He discusses the dangers of loose money and the "problem of choosing the right medicine for the right disease at the right time"(p. 333). He also gives space to the monetarist critique of Fed efforts to control the business cycle.

The Study of Economics: Principles, Concepts & Applications

The Study of Economics: Principles, Concepts & Applications
by Turley Mings
(Guilford, Conn.: Dushkin Publishing Group, 1995), fifth edition, 526 pp.

Rating: D+

The fifth edition of The Study of Economics introduces economic concepts through examples from current issues, such as the fall of communism, the information superhighway, NAFTA, deforestation, and health-care reform. Its examples, then, are up to date, but the research isn’t. Mings fails to incorporate much economic research of the last two decades on monopoly, taxation, regulatory agencies, and business cycles. Students, therefore, come away with a benign view of government and a perception that market failure is rampant. Mings’s examples are often those used by Keynesians in the 1940s and 1950s, not those used by most economists today.

Criterion 1: Costs and Prices—How Production is Determined

Mings begins by explaining the central role of scarcity and the need for individuals to make choices. He then articulates the scientific method and explains the central role that hypothesis testing plays in testing whether or not an economic policy makes sense. Next, he develops the notion of opportunity costs. Mings nicely explains how scarcity necessitates trade-offs as a means of determining which choices make the most sense.

The author asks and answers basic economic questions through the use of case studies on the "peace dividend." Here Mings adeptly shows both the negative consequences of job loss in the defense sector (p. 38) and the efficiency gains from conversion to other types of industry (p. 48).

Mings then explains what determines prices in the marketplace. He introduces the twin concepts of demand and supply along with the forces that drive the market price toward equilibrium. Along the way he analyzes the effects of price changes and notes that government involvement can also be a source of higher prices. The section revolves around the demand and supply of peanut butter—a good choice of product for students.

Criterion 2: Competition and Monopoly

Mings uses the standard treatment of market structure by dividing markets into four categories: perfectly competitive, monopoly, oligopoly (he uses the term "shared monopoly" here), and monopolistically competitive. The section is surprisingly only 10 pages. Mings never develops the cost curves that analyze the profits of firms; instead, he presents diagrams that show total revenue and total cost. While this approach has some advantages, it fails to develop the thinking that is essential for business decision-making. Also, Mings uses the DeBeers Company, the world’s largest diamond manufacturer, as an example of a monopoly. However, due to the evolving nature of the industry, DeBeers no longer has anything near a worldwide monopoly. Intense competition from Russian firms, and new diamond finds over the last 10 years, have eroded the share of the market held by DeBeers. So, at best, the example given is merely historical. Mings should have used an example of a pure monopoly (such as a public utility) to further drive home the distinguishing features of a monopoly.

Criterion 3: Comparative Economic Systems

Early in the book, Mings describes the major economic systems. His central contention is that as societies become more specialized and interdependent they need economic systems to organize and coordinate production and distribution. He highlights four economic systems: the market economy, the centrally directed economy, the traditional economies and the mixed economies. The market economy is thoroughly described and Mings uses the example of Russia to explain why it is hard to go from a centrally planned economy to a market-based one (pp. 68-69).

Mings explains how the market economy resolves the central economic questions through the underlying factor and product markets, creating incentives for entrepreneurs and establishing a circular flow of funds. Essentially, in a market economy one person’s spending becomes another person’s income.

Much later in the text, Mings examines the alternatives to capitalism. He writes, "communism, socialism, and welfare statism are fading into history" (p. 439). He uses data from the International Monetary Fund to contrast the growth rates of the former Soviet Union, Asia, the European Community and United States. He argues that the stagnant growth rates in Europe cannot sustain the cradle-to-grave welfare systems in place in many of the nations (p.441).

Mings also examines the impacts of capital investment, inflation, and unemployment in different economic systems. The outcome of each system is compared with respect to its environmental consequences, impact upon economic security, and equity. The section is balanced and the advantages and disadvantages of each system detailed. Mings concludes with a biographical sketch on Karl Marx. He points out that while Marx will remain an enduring social critic, his reputation as an economist has "dimmed" (p. 462).

Criterion 4: The Distribution of Income and Poverty

The Study of Economics explains the distribution of income as arising from two sources: differences in productivity and differences in opportunity. There are problems with the analysis. The text fails to mention that differences in productivity are far more important in determining earnings than are differences in opportunity in the U. S. today.

Mings develops the Lorenz curve to show the degree of income inequality. This graphic nicely displays the difference between the current income distribution and what would arise with complete equality. However, Mings misses the chance to use the tool appropriately. There are two problems here. First, the Lorenz curve compares the existing level of inequality with an egalitarian ideal, which, if implemented, would ruin the economy (no serious economist believes that complete equality as expressed by the Lorenz curve should be a policy goal). Second, Mings fails to show Lorenz curves for different points in time. If this approach had been implemented it would have shown that the degree of inequality (as measured by the Lorenz curve) was practically unchanged from the period 1960-1990.

Instead, Mings focuses on minor variations in the income distribution. He misuses data from the U. S. Bureau of the Census to argue that the income distribution is now more unequal than it was a generation ago. This analysis does not consider the overall rise in income, nor does it control for differences in education, work experience, and motivation across groups. In other words, people are moving up and down the income scale as they become educated, change jobs, take risks, and retire from business. The Lorenz curve misses this mobility.

Mings’s analysis of poverty is very weak. He argues that the welfare programs of the Johnson administration during the 1960s lowered the rate of poverty in this country, only to have the trend reversed by the "cuts" during the Reagan years. This argument is pure political mythology, completely devoid of analysis. Actual poverty rates remained constant during the 1965-1995 period. Mings writes, "in the 1980s, decreases in work training opportunities . . . slowed progress on increasing opportunities for economically disadvantaged groups" (p. 238). In fact, the tax cuts of the 1980s created greater incentives for poor people to escape poverty by fostering economic growth and creating more jobs in the private sector. Mings goes on to write that "in the short run "’throwing money at the problem’ raised some 30 million people out of poverty" (p. 239). This claim is false and ignores recent scholarship by Charles Murray and Marvin Olasky. Mings needed to ask two key questions. First, at what cost are the 30 million people raised out of poverty? Without that information, students can’t evaluate whether or not the benefits of welfare programs outweigh the costs. Second, what about using these funds to spark employment through the private sector? For Mings to suggest that "throwing money at the problem" is a positive solution is to ignore how incentives are changed when one group is receiving tax dollars and another group is paying them.

Criterion 5: The Role of Government

The economic role of government is explored in great detail. Mings argues that governments should be responsible for regulating monopolies, protecting consumers, workers, and the environment. He argues that the creation of government regulatory agencies since 1887 has produced better products, services, fairer hiring practices, less pollution, and safer working conditions. He gives some attention to deregulation (such as with the airline industry), but the thrust of the section is to portray the public sector has having a widespread role in managing the affairs of the economy. Moreover, even though the text points out that deregulation "resulted in lower prices and better services for the consumers" (p. 195) the photo above this caption above shows passengers stranded at the airport when an airline carrier went bankrupt. This approach sends a mixed signal about the desirability of deregulation.

The text ignores the problems of government regulation and the adverse effect it has on economic growth and entrepreneurial activity. For example, leading historians such as Albro Martin, former professor at Harvard University, argue that government regulation through the ICC damaged the railroad industry and made it uncompetitive by the 1930s. Many antitrust scholars, such as Robert Sobel and D. T. Armentano, argue that the antitrust laws have made many American industries uncompetitive in foreign trade. The only acknowledgment Mings makes that there are competing theories about government regulation is in his biographical sketch on the Austrian economist F.A. Hayek (p. 211). Hayek’s work on socialism and the questions surrounding government involvement in the economy are noted. The solution that Hayek presents, namely that all public-sector activity be subject to a cost-benefit analysis, is mentioned as an alternative to the frank acceptance of the public sector as arbiter of economic affairs.

Criterion 6: Public Choice

Mings fails to include the recent research in public choice theory. Since the 1970s, economists have increasingly come to understand that interest groups dramatically influence bureaucrats and politicians. Government action, in other words, is not a reflection of public interest but of pressure from powerful lobbyists. We are also increasingly able to document unintended consequences that occur from government action—all of which must be calculated when we assess government intervention and its costs and benefits. When Mings first wrote this text in 1976, public choice theory was new; but by his fifth edition 20 years later, he needs to show more awareness of it.

Criterion 7: The Role of the Entrepreneur

Scarcely a paragraph is devoted to a discussion of the entrepreneur. The text defines an entrepreneur as "a particular type of human resource" (p.10) who sees the possibility of profitable production and is capable to organizing resources to produce goods and services. While the definition is adequate, the text fails to explain how entrepreneurs contribute to the advancement of society. Also, there are no concrete examples of successful entrepreneurs offered to spark reader interest. Instead the text is more concerned with factors of production, such as land, labor and capital. These topics are clearly important, but no more so than the person who transforms them into useful resources.

Criterion 8: Taxation

The principles of taxation are treated under the umbrella of public finance. Mings examines government spending and revenue sources and highlights the growth of government spending during the 20th century (p. 353). He explains the various sources of taxation and explores the questions of equity, efficiency, and incidence.

One concern that Mings relegates to a small paragraph is the benefits principle of taxation, namely that taxes should be paid by those who use government services. He discusses the equity of various taxation schemes throughout this section and concludes tht the value-added tax (VAT) is the fairest of all taxes. Mings bases his argument for the VAT partly on its deceptive qualities. It is superior to a sales tax because "the public does not have a constant tax irritant to react to" and that there is likely to be "less squealing than with a normal sales tax" (p.350). This is a curious argument because the efficiency of taxation depends upon all parties correctly perceiving the true costs of taxation. Since the amount of the VAT is concealed at the point of purchase, many people think they are not paying taxes when in fact they may be paying a large tax.

Criterion 9: The Business Cycle

Mings compares the business cycle to a roller-coaster ride. Expansions follow recoveries and eventually reach a climax at the peak of the business cycle. As the economy starts downward, it experiences a contraction and eventually the entire process starts over again. This analogy works up to a point. However, Mings writes that, "as the economy starts its downward plunge, it rapidly gains momentum. Widespread bankruptcies result in a collapse of the credit market" (p. 296). This section implies that the severity of the contraction phase causes substantial hardship. In truth, contractions are often short and relatively mild. In only a few instances have contractions led to severe recessions or depressions—and in these cases, many economists argue, government action spurred the problem.

The Phillips curve is used to explain the trade-off between inflation and unemployment. The Phillips curve was developed as a tool for balancing and controlling the fluctuations in the business cycle. This tool has been almost completely discredited in the last 10 years and yet it remains an integral part of Mings’ analysis. The discussion of the business cycle would have been better if Mings had used more historical examples and focused on policies designed to alleviate economic instability. He does mention the stock market crash of 1929, but he ignores the Crash of 1987, which was twice the magnitude (in absolute terms) of the 1929 crash. Of course, the Crash of 1987 is less dramatic because the economy did not slip into a depression—but that makes it all the more useful as a teaching point.

Criterion 10: Wages, Unions, and Unemployment

The text is right on the mark when it writes that, "labor unions affect wages, although perhaps not as much as people think" (p. 221). Mings explains collective bargaining and describes the major pieces of legislation governing labor practices. He looks at unemployment by examining the underlying root causes. The discussion is centered around jobs for Generation X, and focuses on the types of employment being created in today’s economy. This section is informative and easy to read.

Criterion 11: Trade and Tariffs

Mings does an excellent job of handling international trade. He describes the principle of comparative advantage and uses this to argue persuasively for free trade. Along the way he chronicles changes in U. S. imports and exports to show how the distribution of jobs and commodities are affected.

Next, Mings asks why we restrict foreign trade. He examines tariffs, the most-favored-nation clauses in many trade agreements, quotas, and embargoes. After explaining how trade is restricted, Mings then dispels the traditional protectionist arguments. For a case study, he presents Frederic Bastiat, the French economist who satirized the protectionist position.

Last, Mings uses the Smoot-Hawley Tariff act to show the dangers of import restrictions. Many economists blame the Smoot-Hawley act for creating the downturn of the 1930s. Mings uses trade balance data from the 1920s and 1930s to drive home the point that the Smoot-Hawley was a primary culprit for the Great Depression.

Criterion 12: Money and Banking

The text describes how money works, how it is defined, what money is used for, and how it is created. There are interesting case applications on credit cards and how POWs used rations during World War II as a form of money.

Mings chronicles the history of the Federal Reserve System and argues that it is needed to prevent market failure. He criticizes banks in the nineteenth century for "unrestrained issuance of currency and imprudent lending" (p. 263). He provides no data, however, to back these criticisms. Mings then describes how the Fed works and the ways in which it influences monetary policy.

Much later in the text (completely apart from the chapter on money) Mings addresses the gold standard, from a negative perspective. He argues that the gold standard was associated with periods of "high inflation and severe depression" (p. 434) but does not explain how these conditions arose or why the gold standard was to blame. He also does not explain why inflation became so much greater after we went off the gold standard. Mings avoids blaming the Fed for cutting interest rates in the mid-1920s, and hiking them after 1929. A fairer treatment of the gold standard would place it within the section on monetary policy so that it could be more directly compared with the Federal Reserve System of today.

Economics: Institutions and Analysis

Economics: Institutions and Analysis
by Gerson Antell and Walter Harris
(New York: Amsco School Publications, 1997), third edition, 649 pp.

Rating: D

General comments: This book (EIA) is a hefty paperback, printed in black and white with few pictures. It is sober both in tone and appearance. The writing is generally clear and neither too advanced nor too simple for most students. On some topics, the book is very good, concentrating on teaching the economic way of thinking. Unfortunately, on many controversial policy issues, the authors stop being even-handed and provide their own conclusions as unchallenged truth. On some issues, such as antitrust laws, the authors seem confused and unaware how history affects their argument.

Criterion 1: Costs and Prices—How Production is Determined

In its treatment of "the basics," EIA is very good. The authors take the student carefully through scarcity, choice, opportunity cost, the price system, allocation of resources, consumer sovereignty, marginal analysis, and other foundational matters. The early chapters are solid and get the student off to an excellent start.

Criterion 2: Competition and Monopoly

On the subjects of competition and monopoly, the book begins to falter. While the authors do not themselves disparage market structures that are not purely competitive, they present a feature on Joan Robinson [xx—who?] that does. Readers are told that "many economists disagree with her conclusions"(which call for government intervention to correct markets that are not perfectly competitive). After reading Robinson’s call for vigorous national regulation to prevent the "abuses" of the free market, students ought to read some counter-arguments, but sadly none are provided here.

EIA properly analyzes the economic effects of monopoly, explaining that monopolists rationally find their profit-maximizing price (a point the authors later forget when discussing inflation). The weakness in the book’s treatment of monopolies and cartels is that it fails to consider how hard it is to establish a monopoly or cartel in a genuinely free market. The authors repeat the conventional wisdom that Standard Oil secured a virtual monopoly by driving competitors out of business through predatory pricing, but this charge was thoroughly disproven in a celebrated October 1958 article in the Journal of Law and Economics by John McGee. More recent scholarship (e.g., the 1996 book by Robert Bradley, Oil, Gas, & Government) has confirmed McGee’s conclusions. Even socialist historian Gabriel Kolko in the 1985 reissue of his classic, The Triumph of Conservatism, paints a very different picture of Rockefeller and Standard Oil from EIA.

The authors also charge Standard Oil with securing low railroad rates. Here, they could have encouraged the economic way of thinking by asking students to think about the economic reasons for and consequences of Standard’s ability to negotiate low freight rates. Several noted scholars, including D. T. Armentano in his 1996 book, Antitrust Policy: Anatomy of a Policy Failure, have written extensively on these points, but the book shows no awareness of their work. Nor do the authors note that Standard Oil (which always had dozens of competitors in the U.S. and abroad) steadily lowered its prices and improved the quality of its product over a span of decades.

The book’s treatment of antitrust is, overall, quite poor. The student reads the familiar arguments for antitrust action by the government (e. g. monopolies are wasteful, insensitive to consumers, and they threaten our political institutions). The authors portray antitrust laws as an easy, effective remedy. The benefits of antitrust are simply assumed, and the costs—useless litigation, the deterring of competitive behavior—are ignored. The economics of antitrust is a hotly debated field, but one would scarcely know it from this book.

The authors say nothing about the role of the government in creating and protecting monopolies and stifling competition, which is where many economists think the real problem lies.

On the subject of mergers, however, the book is sound, and even makes the important point that much of the corporate downsizing of recent years has occurred because of previous mergers that had produced inefficient economic combinations.

Criterion 3: Comparative Economic Systems

EIA’s section on comparative economic systems begins with several pages on the theories of Karl Marx, presented without criticism. For instance, are there reasons to disbelieve his contention that profits are really value stolen from the workers? Yes, and discussing them would sharpen the student’s economic thinking ability. When the authors finally get around to asking, "Why was Marx wrong?" the answer they give is that governments passed laws to help consumers and workers. That answer says nothing about the internal logic of Marxism and greatly overstates the role of the state in quelling revolutionary fervor. Contrary to Marx, real wages rose steadily long before the passage of any "pro-labor" legislation in nations with free economies. One reason Marx was wrong was that he did not understand that the benefits of rising productivity cannot be confined just to the owners of capital.

In discussing the failure of the Soviet economic system, the authors point out that the absence of a price system made it impossible for economic planners to allocate resources efficiently, leading to shortages and surpluses. That is a vital point. They should also have discussed the problems of poor quality goods when competition and profits are not allowed. The student learns that people living under socialist regimes had to wait in long queues to make purchases, but does not get a full idea of the privation suffered by ordinary people and the low standard of living they had compared with ordinary people living in market economies.

The Swedish "middle way" is given a very favorable presentation ("highly successful from the 1930s to the 1990s," they write), but this conveys the misleading impression that Sweden has enjoyed a prosperous economy because of its welfare system. Sweden’s stagnating economy, its high level of unemployment, its alcoholism and suicide, and its highly authoritarian state contrast sharply with the book’s glowing picture of that country. Students would have been better served by a serious analysis of the economic effects of welfare and government economic control.

Criterion 4: The Distribution of Income and Poverty

The book’s section on income inequality and poverty is weak because it focuses on polemics, not economic analysis.

The discussion of poverty begins with the Census Bureau data on the percentage of the population living below the poverty line. The authors do not mention that these figures are not adjusted for in-kind transfers [xx—such as food stamps?]. Nor do they mention that there is a high degree of income mobility in the U.S. Those who are in the lowest quintile while young often advance by the time they have reached middle age. Failing to bring out these points makes the "poverty problem" seem much greater than it is. An accompanying "mini-reading" entitled "The Growing Problem of Homelessness" on p. 469 reinforces the impression that the authors are interested more in proselytizing than in instilling an economic way of thinking. Despite the title, nothing in the reading says that homelessness is, in fact, growing. The book’s discussion of public assistance programs fails to go into the effects of those programs; nor is there any analysis of the costs and benefits of government job training and public works programs.

Worse still is the book’s assertion that "discrimination has been a major cause of poverty" (p. 476). This gives the authors a springboard for a brief discussion of affirmative action programs that considers intentions rather than results. Both the premise that labor market discrimination is "a major cause of poverty" and the conclusion that affirmative action is the solution are highly contested points in the economics literature. But the student only hears one side of the issue.

The treatment of minimum wage laws is only slightly better. The student at least learns that there is debate over the impact of minimum wage laws, but the arguments are threadbare.

The book proceeds to a lengthy discussion of health care reform. The analysis is not bad, pointing out that health insurance encourages unnecessary spending on health care. Unfortunately, the possible reforms that are then discussed are all interventionist. One is to mandate that insurance companies cover everyone who applies. The authors say, "Insurance companies warn that forcing them to insure poor-risk individuals will cause insurance premiums in general to increase dramatically. Supporters reply that insurance companies overestimate the added costs. Moreover, they say, the moral issue (the belief that it is unfair to deny any individual insurance protection) overrides economics of costs: Consumers should be willing to pay higher premiums so that more people are covered" (p. 489). Such polemical discussion does little to improve the student’s ability to analyze.

The section continues on through "Play-or-Pay," compulsory health insurance and nationalization. Tellingly, there is no discussion at all of reforms that move toward the market and individual choice, such as medical savings accounts. Even though government intervention in medical care is already substantial and has been shown to have fostered many costly distortions in the market for health care, the authors would have the student believe that problems that exist must be due to free markets. The message to students in this book is that improvements in our vastly complicated health care system can only come through more government intervention.

Criterion 5: The Role of Government

Antell and Harris explain the "public goods" problem very briefly, giving police services and street lamps as examples. They correctly state that many things that government provides are not public goods, but fail to explore the well-known inefficiencies associated with government-provided goods and services, except to note that "some people argue that the government already provides too much." This does not help the student understand the economics of government-provided goods and services.

The authors give more space to the problem of externalities, but still do not engage the student in any economic analysis. They deal with the issue of pollution without examining the economic trade-offs that are always involved in such issues. Economic thinking is largely a matter of analyzing competing options, but here the authors fail to encourage the student to look at the problem this way.

In similar fashion, EIA argues that government should redistribute income and maintain economic stability. The authors devote several pages to a section discussing "changing attitudes toward the role of government" (p. 257), which posits that the vast expansion of government since the 1930s has been due to public demand. The authors fail to note that interest group politics is almost always behind new laws and programs. The authors then present a list of programs created during President Lyndon Johnson’s "Great Society" of the 1960s. Again, the student reads only about the good intentions of these programs, and nothing about their actual results. Failure to acknowledge the mountain of scholarly criticism of these programs suggests that the authors are more interested in advancing their personal ideology than sound economics.

Finally, the discussion of Social Security is weak and outdated. The student does not learn about the incidence of Social Security taxes; that the Social Security Trust Fund contains no actual wealth, but only government debt obligations; that Social Security has any adverse impact on capital formation; or that it deters many older people who might otherwise choose to work from doing so. The discussion of reform proposals is limited to those that would raise Social Security taxes or lower the level of benefits it bestows. There is nothing on the widespread debate over privatization through individual investment accounts. The student, in short, will learn almost nothing from this book’s treatment of Social Security that will equip him to deal with one of the most important policy debates of our day.

Criterion 6: Public Choice

In yet another glaring omission, the concepts of public choice theory never appear in this book. The closest the authors come to mentioning the incentives of political decision-makers is to say that "political considerations" may make it difficult to implement fiscal policy in an ideal way. Students learn nothing about the impact of voter ignorance, interest group pressures, or the self-interest of politicians and bureaucrats. This omission leads to a persistent bias toward government action.

Criterion 7: Entrepreneurship

EIA includes a brief discussion of entrepreneurship, defining the term and explaining that the motivation for entrepreneurial activity is profit. There is also a short case study on one successful entrepreneur. What is missing is any sense that entrepreneurs are important in promoting prosperity, or how government policy can deter it.

Criterion 8: Taxation

The authors provide an extensive discussion of the various reasons why taxes are levied and the different types of taxes. Their treatment of the economics of taxation, however, is weak.

Readers are reminded that, like all other activities, there is an opportunity cost to taxation—the funds collected by the government cannot then be used by individuals and firms for their purposes. However, the book leaves the impression, especially in its discussion of estate and gift taxes, that money that isn’t taxed is somehow lost to society. Yet, this is the money that starts businesses, builds buildings and homes and pays for education. The correct point to emphasize is that the government uses money in certain ways, and the general economy puts money to use in other ways.

The book’s treatment of the personal income tax only lightly criticizes the current system. "Some critics of the personal income tax say that it is harmful to the economy because it lacks enough deductions, exemptions, and credits that would promote individual investments in private enterprise" (p. 283). The major criticism of the income tax, however, is not that it needs more deductions, exemptions and credits, but that its enormous compliance costs and high rates waste resources and deter saving and investment at the margin.

The discussion of the corporate income tax is also weak. The authors do note as a "criticism" of this tax that "Money taken by government might have been used by corporations to expand their production" (p. 283). This, however, is not merely a "criticism." It is an economic fact, one whose implications the authors fail to explore. They also call attention to the incidence problem [xx], saying that some or all of the corporate income tax is passed on to consumers. But this oversimplifies the problem. Economists have been arguing for decades over the distribution of the corporate income tax and the extent to which it is passed on to consumers. A key point the authors fail to make is that businesses cannot be taxed—that all taxes on business ultimately are borne by workers and consumers. A very dubious point they make instead is that corporate taxes are linked to inflation, though inflation is a monetary not a taxation phenomenon.

When it comes to discussion of the Social Security tax, the authors are silent on the incidence problem [??xx]. They repeat the often-criticized view that "Wage earners and their employers both pay the same percentage of the worker’s salary into the Social Security system" (p. 285). Economists who have studied the matter argue that employers factor the cost of payroll taxes into the gross compensation paid to workers. Workers do not see the full impact of the Social Security tax, but it is one that they bear entirely. Unfortunately, readers of this book do not learn this, nor do they learn the more general point that businesses make marginal adjustments to offset costs mandated by government.

Finally, the issue box on the underground economy misses the vital point that much of the economic activity conducted "underground" would not take place but for the impact of taxation on prices. The authors mention the possibility of "much lower" taxes for the populace if only the underground economy could be taxed. Instead of engaging in real economic analysis of the costs and benefits of attempting to tax "off the books" transactions, the authors merely say to the student, "What do you think should be done?"

Criterion 9: The Business Cycle

Perhaps the worst of all the major sections of the book is its treatment of the business cycle. The students are presented with the discredited Keynesian view with almost no hint of skepticism. They never learn any of the devastating criticism to which it has been subjected for more than fifty years.

First, on the causes of economic fluctuations, the authors squander space on the long-refuted notion that innovation can cause business cycles. They ignore the Austrian and Monetarist arguments that erratic management of the money supply leads to economic maladjustments that must later be rectified in a period of recession. In analyzing the reasons for cycles, the authors have tunnel vision. Their ignorance of more reliable and modern scholarship is appalling.

The Great Depression is given a brief discussion that asks many questions, but fails to describe the government blunders that helped create and perpetuate the crisis. Furthermore, the authors present the Keynesian aggregate demand analysis [xx?] in an uncritical way. Many economists have ridiculed the components of this analysis (the "multiplier," the "accelerator," the "paradox of thrift," and the idea that spending determines national income), but the reader is led to believe that the Keynesian theory is just as true as the law of demand. The debate over Say’s Law is breezily dismissed in a single sentence: "In the 1930s, however, many people concluded that Say’s Law simply did not work" (p. 405). But was that conclusion correct? Many economists have argued that it was not—see, for example, Thomas Sowell’s The Rehabilitation of Say’s Law.

Supply-side theory is presented as a form of economic stabilization policy, but supply-siders have argued that their policies will increase economic growth over the long-run. What’s worse is that the authors repeat some of the emotional attacks against supply-side theory ("would only enrich the wealthy," "indifferent to the needs of millions sorely in need of government assistance") without any rebuttal or analysis for the students. Some students may wonder if the authors’ attachment to warfare slogans has blinded them from seeing evidence that doesn’t fit their particular point of view.

Criterion 10: Wages, Unions, and Unemployment

Much of the material on the labor market in the book is descriptive rather than analytical, with several pages devoted to labor force trends. When the authors finally get to wages and the market for labor, they competently explain that worker compensation is determined by supply and demand.

Unfortunately, EIA says nothing on the effects of minimum wage laws or labor market restrictions. It correctly explains the different kinds of unemployment, but does not go into the effects of government programs on unemployment.

Regarding labor unions, the book correctly notes that unions cannot repeal the laws of economics. Unions, therefore, can affect worker compensation only marginally. Many pages are spent in describing the goals of unions, but there is little economic analysis of the effects of unions. Moreover, the union objectives are presented as if the welfare of workers was their sole concern. The authors never raise the possibility that union officials have interests that differ from the interests of all the workers they represent; nor do they analyze the adverse effects that the realization of union aims can have on other workers and on productivity.

Criterion 11: Trade and Tariffs

The authors accurately explain the fundamentals of international trade. Missing, however, is a discussion of the erroneous belief that dire economic consequences arise from trade deficits. The arguments for and against trade restrictions are presented, but not critically examined. It would be better to consider each protectionist argument, and show the student how a good economist thinks through the problem.

Criterion 12: Money and Banking

EIA provides a good explanation of the function of money and implies that money is a creation of the market, not the state. The chapter, however, assumes that government provision and regulation of money is the only imaginable state of affairs. Nothing encourages the student to think about the possibility that problems can arise as a result of government officials being in charge of the monetary system.

The book does include a section on the gold standard, but the authors make the dubious statement that it failed because of the "inability of nations to manage their money supply" (p. 543). However, a major virtue of the gold standard was that it imposed an automatic discipline on national monetary policy. Students ought to learn that the gold standard facilitated price stability and international trade. Since a strict gold standard was largely abandoned with the creation of the Federal Reserve System in 1913, the U. S. has fallen victim to a great depression, at least nine recessions, and an uninterrupted erosion of the value of the dollar—hardly a compelling case for government’s monetary management.

In discussing the causes of inflation, EIA covers both demand-pull and cost-push as if they were equally valid theories [xx]. Many economists maintain that cost-push inflation is an impossibility because there cannot be a sustained, general increase in prices in the absence of an increase in the money supply. As Milton Friedman says, inflation is always and everywhere a monetary phenomenon. The cost-push inflation idea is rooted in one of the most widespread of economic misconceptions, namely that costs determine prices.

The book’s treatment of banks correctly explains their purposes and operations, but is weak on the effects of government regulation of capital markets and financial institutions. The reader hears nothing on the tendency of federal deposit insurance to encourage unsound lending. The discussion of the S&L crisis is similarly deficient because the authors never make the link between the vast losses and federal policy.

The functions of the Federal Reserve are accurately described, but the authors do not delve into such interesting questions as the responsibility of the Fed for the Great Depression and subsequent economic downturns, and whether a fixed rule or discretionary monetary policy is preferable.

Dollars and Sense: An Introduction to Economics

Dollars and Sense: An Introduction to Economics
by Marilu H. McCarty
(New York: Harper Collins 1994), seventh edition, 372 pp.

Rating: D

General Comments: This paperback text is written at a fairly sophisticated level and some students will probably struggle with it. The amount of space devoted to photographs and filler is low, which leaves a lot of space for teaching economics. Unfortunately, that space is not used well. Too often, the book labors to inculcate government solutions rather than instruct the student in the economic way of thinking. She also has errors and confused analysis on key economic issues.

Criterion 1: Costs and Prices—How Production is Determined

McCarty’s treatment of the economic fundamentals is generally good. She clearly explains the concepts of scarcity, specialization, opportunity cost, and profit and loss. One omission, however, is a definition of economics itself. Students ought to understand that the study of economics encompasses the whole range of purposeful human action and has applications not just to business and consumer decisions, but to all rational choices.

The author’s explanation of the "invisible hand" is much too limited. It fails to give the student a true understanding of the market’s ability to coordinate economic activity. Moreover, she accepts the outdated idea that if the free market is to work, "there must be perfect competition in the marketplace" (p. 32). That idea was popular 50 years ago, but few economists accept it today.

McCarty’s discussion of the price system is capable, but does not impress strongly on the student that economic efficiency begins with the market’s spontaneous adjustments to price changes. "So what if the market gets rid of surpluses quickly?" the students may wonder. They should learn that price is the key to helping us get the maximum benefit from limited resources.

The discussion of price controls is weak. McCarty writes that price controls "can prevent markets from movng to equilibrium." Sooner or later, price controls must interfere with market equilibrium and when that happens, there must be economically wasteful shortages or surpluses. Furthermore, she writes of natural gas price controls that they were occasioned by "voters’ preferences for fairness." This is economically naïve. Natural gas price controls were a means by which non-gas state politicians tried to curry favor with voters who naturally preferred cheaper fuel.

Criterion 2: Competition and Monopoly

McCarthy sets up perfect competition as the ideal market structure and criticizes "imperfectly competitive" markets as inefficient. She writes, "Resources allocated to packaging, advertising, and designing . . . might better be allocated to real production." This attack is nowhere balanced by any discussion of how consumers benefit from product variety, packaging and advertising. Everyone could choose to buy generic cereal, for example, and save money; since most consumers don’t, they must see some value in variety, advertising, and colorful packaging.

She also asserts that "gentleman’s agreements" often lead to "shared monopolies." That belief is common, but overlooks how hard it is to make such agreements last. Often these agreements are broken as soon as one of the "gentlemen" reaches a phone. The book also implies that it is easy to drive rivals out of business and form a monopoly. Many economists argue that it is competition that is durable and easy to maintain, and monopoly that is fragile, not the other way around.

The book’s antitrust section is poor. To say that the Sherman Act "has been primarily used against labor unions" (p. 102) is wildly untrue. A few, very early cases involved unions, but there have been none since 1914 when the Clayton Act exempted unions from antitrust actions. Worse is McCarty’s failure to consider the costs of antitrust. Scholars have long noted how the government’s Antitrust Division sees competition under constant threat and brings many suits that merely waste resources. Many economists now argue that both government and private antitrust suits often inhibit rather than protect competition. Unfortunately, the book conveys the impression that antitrust is all benefit and no cost. Finally, McCarty describes Standard Oil as a case of monopoly, even though the company always had many competitors.

Criterion 3: Comparative Economic Systems

McCarty almost ignores the subject of comparative systems. Only in the introduction, briefly, does the reader find any discussion of the economic problems with central planning. She writes, "You can imagine how difficult a command economic system would be in a modern, complex economy. It would be particularly difficult without computers for planning production and without rapid communication and transportation facilities for carrying out the production plan" (p. 10). This is very misleading. The Soviet Union had computers and fairly modern communication and transportation facilities, but suffered from massive inefficiency. Students never read a serious explanation of why central planning fails whenever and wherever it is tried.

Criterion 4: The Distribution of Income and Poverty

The book’s discussion of poverty and income distribution issues is marred by overblown rhetoric. For example, McCarty writes, "If a nation guarantees absolute freedom to pursue individual gain, it will ensure misery for those who are least able to succeed" (p. 292). This implies that the only way to assist people who cannot provide for themselves is through restrictions on the economic freedom of others, an idea that many economists would find debateable, if not absurd. The nearly absolute economic freedom of early America did not "ensure misery" for anyone. Statements like that, redolent of political campaign oratory, should be left out of teaching materials. They smack of propaganda, not honest presentation of fact.

McCarty makes much of the fact that income is very unequally distributed, but students cannot know what to think about that unless they learn that many people who begin life poor advance far up the income ladder, and that many other people fall in income. The rich don’t necessarily stay rich and the poor don’t necessarily stay poor. On the subject of poverty, McCarty seeks to pin the blame on discrimination: "A major cause of poverty is discrimination" (p. 295). This is a controversial theory that many economists reject. In competitive markets, employers, landlords, or other business decision-makers who decide to discriminate put themselves at a disadvantage with non-discriminators. Instead of a penetrating analysis of the economics of discrimination, the student gets only a blanket conclusion of doubtful accuracy.

The book discusses the Social Security system in conjunction with the distribution of income. McCarty’s presentation of the financial problems confronting Social Security is clear and correct, but when it comes to solutions, she looks only at adjustments to the status quo. She does not consider the possibility of phasing out Social Security and relying on individual savings—a major element of the current discussion about the possibility of following the lead of more than a dozen countries and privatizing government-sponsored retirement programs. Nor does she bring out any of the important economic consequences of Social Security.

Finally, the discussion of urban poverty is incomplete. She never explains that many cities have created climates that are very hostile to enterprise through high taxes, zoning, burdensome regulations, occupational licenses, and poor services.

Criterion 5: The Role of Government

McCarty’s book does not have a section specifically devoted to the role of government in the economy, but discussions of the major issues are included throughout the text. The subject of public goods is hardly raised at all. The closest the book comes to it is a box entitled "Letting Government Do It." She asserts: "We ask government to do for us what we cannot do for ourselves" (p. 210). Unfortunately, there is no discussion of what public goods are, why they pose a problem for the market, and what are the costs and trade-offs in government intervention.

Negative externalities are discussed under the section on economic growth, although this problem is certainly not confined to growing economies. This section is badly flawed with dubious pronouncements on the environment such as, "The world as a whole is threatened by the greenhouse effect. . . ." (p. 325). There is much dispute among scientists over the existence of the greenhouse effect, and what its impact is if it exists.

The book treats the problem of economic instability in Keynesian fashion: The reason for economic cycles is that spending is sometimes inadequate to maintain full employment. McCarty presents Keynesian theory in much detail, but with no critical analysis. She also gives no alternative explanations for the business cycle. There is a brief discussion of supply-side theory, but not so much as an alternative theory of the business cycle as a critique of the exclusive focus on demand management policies. Even here, she gives the false impression that supply-side tax cuts were harmful, and that the nation’s economic recovery was the result of later tax increases. Many economists dispute this notion, but you wouldn’t know it from the text.

The book leaves the student with the belief that market economies are inherently unstable and that government must solve that problem in some way. Students never learn that many economists regard this conclusion as erroneous and contend that the government itself is the source of economic instability. Not only does McCarty fail to teach economic analysis, she propounds as truth ideas that have been vigorously attacked for decades.

Criterion 6: Public Choice

"Public Choice" does not appear in the index, nor do the basic public choice concepts appear much in the book. The problem of special interest groups is adverted to when the author says, "What is politically desirable for a particular group may be undesirable for the economy as a whole" (p. 208). This statement, however, doesn’t help the student see why interest groups are so successful in their quest for special favors from government. Generally, the book presents "government" as an abstraction that pursues "the public interest" rather than as a collection of individuals who are as self-interested as people in the private sector.

Criterion 7: The Role of the Entrepreneur

Entrepreneurship is barely touched upon. McCarty only briefly mentions in the introduction the role of the entrepreneur and the need and reward for risk-taking. Nowhere does she describe how important entrepreneurs are to economic progress. Nor does the student learn how entrepreneurship can be stifled by taxes and regulations.

Criterion 8: Taxation

McCarty begins by pointing out that taxation necessarily means transferring resources from the private to the public sector. "Through taxes, government takes purchasing power away from spending for private purposes and spends it instead for public purposes—for producing goods and services to be used by the community as a whole" (p. 192). This is misleading: Taxes are often spent for things that benefit only small segments of the community, and spending for "private purposes" often creates benefits for many people.

The book identifies the various kinds of taxes collected, but never gives a serious discussion of the economics of taxation, particularly its costs and impact on incentives. The author’s comments on the Reagan tax cuts are very biased. She writes, "Income tax cuts favored high-income taxpayers, whose work incentives were already high at the expense of low-income taxpayers, who had to reduce their savings to maintain their former standard of living" (p. 207). This sounds more like campaign rhetoric than serious economics. Good economists do not ask whom a tax change "favored," but the positive question of what the consequences were. In any case, when the marginal income tax rates for high-income taxpayers were reduced from 70 to 28 percent, that did not increase taxes for low-income tax payers. In fact, the Reagan tax cuts dropped many low-income taxpayers from having to pay income taxes at all. Also, the revenue to the government after the Reagan tax cuts sharply increased because entrepreneurs had new incentives to invest in industry instead of hiding their savings in tax-exempt bonds.

Criterion 9: The Business Cycle

McCarty’s one-sided treatment of the business cycle is covered in Criterion 5. Instead of wasting space on a box on the "sunspot theory" of the business cycle, she could have presented to the student the Austrian and Monetarist theories of the business cycle and criticisms of the Keynesian approach.

Criterion 10: Wages, Unions, and Unemployment

The book’s explanation of wage rates as a standard supply and demand price phenomenon is good, and the important implication that worker compensation is directly related to productivity is clearly made. Also good is the discussion of minimum wage laws; McCarty explains why they reduce employment opportunities for low-skilled workers.

The treatment of labor unions is also reasonably good. McCarty notes that while collective bargaining may raise wages for union workers, it also prevents many willing workers from being able to find ways to enter the labor market. That has led to job losses in unionized industries. She also encourages students toward skepticism about the claim that wage and benefit increases are necessarily due to union action: Market conditions often compel firms to raise wages to attract and retain good employees. She should also have said that capital investment raises productivity, and that is the ultimate source of rising wages.

On the subject of unemployment, McCarty correctly notes the various types of unemployment and that some amount of unemployment is natural and unavoidable. However, there are two weaknesses in this section. First, government programs to deal with unemployment are mentioned, but not analyzed. What are the effects of unemployment insurance; of government job training programs? They are not discussed. Second, the book advances the "Phillips Curve" notion that there is an inevitable trade-off between inflation and unemployment. Many economists reject this view and its policy implication, that we can have low unemployment only at the cost of inflation. That idea should not be presented to students as truth.

Criterion 11: Trade and Tariffs

McCarty’s discussion of trade is sound, but it would have been better if she had explained that "international" trade is not "trade between nations" but trade between individuals or firms located in different nations. She also fails to confront the popular misconception that a "negative trade balance" is something to worry about. The book’s treatment of the effects of trade restraints is also good, including non-tariff barriers and export subsidies. The weakest spot in the analysis of trade is the overly charitable view of the "infant industry" argument. Many trade scholars have cast doubt upon the assumptions underlying this argument, but the student is led to believe that planners can use tariffs to cultivate new industries.

Criterion 12: Money and Banking

The book’s handling of money and banking is mixed—some very good points, but some significant errors and omissions, too.

On the functions and characteristics of money, the reasons for the use of money, and the development of banking, the book is good, if somewhat brief. That money is a creation of the market, however, is an important insight that is not brought to the student’s attention. McCarty discusses the problem of inflation from overissuing bank notes and from "wildcat" banking, but never mentions either the role of government policy in encouraging unsound banking, or the ways market institutions (such as banknote reporters) have minimized the harm.

On the establishment of the Federal Reserve system, McCarty writes that, after the Panic of 1907, "voters finally began to support the idea of a strong national banking system." The push for a central banking system, however, did not come from "voters," but from a few large bankers who saw advantages in having a central bank to regulate the banking system and act as a lender of last resort. This is another manifestation of the book’s lack of public choice analysis.

The book’s treatment of the S&L bailout is misleading. McCarty portrays the deregulation of S&Ls as the cause of the debacle, but many economists have argued strongly that S&Ls were doomed in any event; their very existence was due to unwise regulation in the first place. Moreover, the author fails to discuss the role of government deposit insurance. She writes that S&Ls are "important to the health of the nation’s housing industry" (p. 221), but this argument is hard to defend. There has never been a need for government to encourage lending institutions specifically geared toward the housing industry, any more than there is a need for lending institutions that might concentrate on auto loans. The capital market allocates capital wherever it does the most good, but McCarty does not encourage the student to think through the way the market works.

Economics-Free Enterprise in Action

Economics—Free Enterprise in Action
by David E. O’Connor
(Orlando: Harcourt, Brace, Jovanovich), 1988, 594 pp.

Rating: D

General comments: This hardcover textbook was published in 1988 and, 10 years later, is still in its first edition. The book is attractively produced and the writing is neither too advanced nor too childish for high school students. However, the book is quite weak in training the student how to think like an economist. The author rarely works through economic issues in ways that get the student to think about results rather than intentions, to weigh all costs and benefits, to consider changes in incentives and other secondary consequences. Furthermore, the book often advocates solutions that contradict its subtitle, "Free Enterprise in Action."

Criterion 1: Costs and Prices—How Production is Determined

O’Connor starts out well with a broad definition of economics: "The study of the choices people make in an effort to satisfy their wants and needs is called economics" (p. 22). However, he does not elaborate upon this definition to show that economics helps to explain and predict a vast range of human decisions, not just matters commonly perceived as "economic." He then takes a wrong step when discussing the "Basic Questions" as aggregate rather than individual matters. For example, he writes that "the nation must determine who will receive what goods and services and in what amounts" (p. 27, italics added). But one of the most important teachings of economists from Adam Smith onward is that the basic questions of economics do not have to be decided at the national level and indeed should not be. The spontaneous order of the market will answer the questions of production and distribution. Unfortunately, the book, here and elsewhere, reinforces the notion that many economic decisions can only be decided collectively.

The book’s discussion of Adam Smith and the idea of the "invisible hand" is not clear. O’Connor writes, "Smith argued that the promotion of self-interest benefits all of society by helping the economy to grow. He attributed the growth to an invisible hand that leads individuals to unknowingly do what is best for all of society when they protect their own self-interests" (p. 30). This is somewhat misleading; it suggests that producing particular goods and services for profitable trade means doing what is "best for all of society." That is not exactly Smith’s point. Smith was saying that the overall wealth of a nation would rise if people were free to pursue their self-interest, since doing so would optimize the use of human energy, capital and resources.

The author’s presentation of basic market dynamics is good and shows how profits and losses work to direct resources in the economy. The major weakness of this section is the end-of-chapter discussion on defenders and critics of the price system. The student gets two paragraphs in defense of the price system, followed by a lengthy batch of criticisms (pp. 87-89). These criticisms have been often refuted, but they are allowed to stand without comment. For example, we hear the old "big business dominates" argument that is part of socialist folklore, but neither stands up to scrutiny nor, even if true, would constitute a reason for abandoning the price system in favor of some other rationing device. Also, while it is true that there can be negative externalities in a market economy, there can also be negative externalities in any other economic system. The market can deal with them better than other systems.

Finally, O’Connor commits an inexcusable error when he says that "Price controls are adopted because the price system is unable to reach equilibrium on its own" (p. 89). Markets always have a tendency toward equilibrium; the problem is that government often interferes with the market on behalf of people who don’t like the market’s results. We don’t have rent control, for example, because the rental housing market "can’t reach equilibrium," but because individuals who are either unable or unwilling to pay the market price for housing give their support to politicians who will pass such measures.

Criterion 2: Competition and Monopoly

The book’s discussion of various market structures from pure competition to monopoly is flawed—especially in the treatment of monopoly. The logic of monopolistic pricing and profit maximization is not raised, except to say that if prices are too high, buyers will buy less. Here, marginal cost and marginal revenue analysis would have simultaneously helped the student’s economic thinking and would have explained the point more clearly. Nor does the student learn that monopolies are inefficient suppliers.

Government monopolies are discussed in reverential tones. O’Connor writes, "Government monopolies exist in response to a public need the private sector

. . . has not met. Most enhance the general welfare rather than seek profits. For this reason, the public generally supports government monopolies" (p. 126). These assertions are entirely lacking in economic analysis. Government monopolies sometimes exist because the government has outlawed competition (the Post Office) and sometimes because government provision crowds out the possibility of private-sector action (e.g., unemployment insurance). Moreover, O’Connor never discusses the efficiency problems of government monopolies. Instead of learning economic thinking, the student is handed an almost indefensible platitude.

Antitrust enforcement is given a brief, non-analytical treatment. The student learns little except that the intent of antitrust is to protect competition and break up monopolies. O’Connor mentions only one case, the breakup of AT&T. He says nothing about the tendency of government regulators and some businessmen to bring antitrust suits that stifle competition; nor does the author discuss how hard it is to secure and maintain a monopoly without help from the government, AT&T being a good example. In many states, AT&T faced competing phone companies in the early 1900s, but managed to have them legislated out of business so it could enjoy a monopoly.

Criterion 3: Comparative Economic Systems

O’Connor’s discussion of comparative economic systems is very weak.

Under the "Origins of Socialism," he gives the long outdated view that in the Industrial Revolution "the quality of life for workers deteriorated" (p. 443). Using data on infant mortality, diet, life expectancy, and other measures, historians and economists now know that the quality of life rose for the working class. Life was indeed hard, but it had always been hard for workers and peasants; they had never enjoyed "adequate sanitation and medical facilities" before the Industrial Revolution, but many began to enjoy these things as a result of the rising productivity and incomes brought about by the Industrial Revolution.

O’Connor portrays Sweden in rosy terms as the "model" democratic socialist state. After a list of all the social programs of the welfare system, students are told that "The standard of living in Sweden is one of the highest in the world" (p. 444). This implies a cause and effect relationship. What is omitted from the text is Sweden’s stagnant GDP, crushing tax rates, and high rates of alcoholism and suicide. Many economists who have studied Sweden argue that its relative prosperity is not because of, but in spite of its welfare system. The author’s illusion about Sweden is hopelessly outdated and befuddled.

O’Connor then lavishes several pages on a history and description of communism. He fails to give an accurate picture of the mass starvation, terror and murder that were necessary for the Soviet and Chinese regimes to implement their programs. The main weakness here, however, is not in the history, but in the weak analysis of central economic planning. Students are told that "The process of creating annual economic plans is complex," (p. 452) but that is a far cry from explaining to the student how and why it is virtually impossible to make efficient use of resources in without a price system, profit motive, or private ownership.

Criterion 4: The Distribution of Income and Poverty

The book says little about the distribution of income, poverty, and the various programs to assist the poor.

O’Connor presents students with a list of some government programs, but he has no analysis of the effects of those programs—nothing to encourage economic thinking along the lines of costs, incentives, or alternatives. He seems to think that as long as the intentions of government are good, the outcome of its handiwork must be good too. This is not thinking like an economist.

The "case study" on Social Security is wholly inadequate (p. 184). It contains no analysis of the future financing problems, the negative effect on savings and work, the redistributive effects, or the incidence of the Social Security tax.

Two pages are devoted to government job-training programs (pp. 182-83), but the material is almost entirely descriptive and focuses on intentions, not results.

Criterion 5: The Role of Government

O’Connor’s book is very deficient in analyzing the economic effects of government action. Instead, he gives students what sounds like a sales pitch: "Despite fears by some Americans that governmental tampering with the free-enterprise system would be harmful, most government policies have met with success" (p. 189). Economists have filled libraries with volumes disputing this conclusion. Shouldn’t students be able to read some of this evidence in O’Connor’s text?

The author first tries to argue that government had to expand as population expanded. But he never explains why a growing population necessitates a larger and more intrusive state; nor does he explain (or observe) a much faster rate of growth for government spending than population. Second, O’Connor states that "disadvantaged groups" make up a larger percentage of the population now than in the past. Yet, many members of "disadvantaged groups" are very prosperous and today a smaller percentage of the population is below the official poverty line than 50 years ago. Third, O’Connor cites "changing attitudes." He writes that the government’s "success in ending the Depression" convinced many people that bigger government was desirable. While it may be true that there are people who believe that the government "ended the Depression," economists in increasing numbers are finding that the policies of Presidents Hoover and Roosevelt deepened and prolonged it. (This point is made in other reviews within this report). Putting that point aside, however, popular attitudes have almost nothing to do with the proposing and passing laws, as Public Choice economists have shown. Fourth, O’Connor says that national emergencies have led to the growth of government. If so, why does it continue to grow even when there is no emergency? O’Connor merely gives the students his opinions, not analysis.

On the functions of government, students are told that the government regulates economic activity and protects competition, workers, and consumers. O’Connor gives no economic analysis, however, of the effects of all those laws and regulations. He merely encourages the mistaken notion that intentions always square with results. There is no hint that regulations have costs, or that those costs could outweigh the benefits.

The book’s definition of public goods is also wrong. Economists do not define them as "goods and services that are provided for everyone by the government" (p. 179). National defense and highways are (or probably are) public goods because the market would under-provide them on its own. But many things the government provides are clearly private goods (e.g., job training, retirement income, passenger rail service). Having the government provide such goods and services has consequences for economic efficiency; consequences O’Connor fails to explore.

Last, O’Connor argues that another function of government is giving subsidies: "Each year governments grant subsidies totaling billions of dollars to private businesses and public agencies to ensure continued service or production of certain goods" (p. 181). But he never encourages the student to ask whether such subsidies are cost-effective, whether they are really needed to "ensure continued service," or what impact they have on the economy as a whole. The asking of such questions is the whole point of economics.

Criterion 6: Public Choice

O’Connor ignores public choice theory probably because he almost never doubts the ability of government to solve problems. Nowhere will the student read that government officials have personal goals that may and often do conflict with "the public interest." Of the standard public choice topics, only interest groups are treated at all. Even here, however, O’Connor never notes that interest groups lobbying for benefits have an advantage in the political arena over disorganized consumers and taxpayers who will bear highly diffused costs. Indeed, special interest groups are depicted as forces for good (e.g., AARP works "on behalf of the elderly" and Public Citizen works for "all consumers") without any suggestion that such groups might be promoting the interests of their own members at the expense of others. Accepting the motives of lobbyists at face value does little to teach students about economics.

Criterion 7: The Role of the Entrepreneur

Entrepreneurship is treated surprisingly well. There are several profiles of successful entrepreneurs throughout the book and the author even includes a good discussion of why venture capital is important. (Unfortunately, the fact that government policy has a dramatic impact on the availability of venture capital is omitted.) O’Connor includes an excellent feature on "The Entrepreneurial Explosion" (p. 119), which points out that entrepreneurs have created much of the wealth, employment, and progress in the U. S. in recent years. He also notes that entrepreneurship is risky, but fails to point out that people will accept high risks only if they think they can earn and keep high rewards.

Criterion 8: Taxation

The book’s section on taxation is all description and no analysis. Students learn about the kinds of taxes levied and that they enable the government to pay for its various outlays, but there is nothing on the costs and effects of taxation.

Taxation has its opportunity cost, namely foregone private-sector activities that generate wealth and employment. The author never brings out this fact, but does manage to get the student to worry about how much tax breaks "cost" the government (p. 203). The tax cuts of the 1920s, 1960s, and 1980s, however, actually generated more tax revenue by spurring entrepreneurs to invest in factories instead of hiding their income from the government in tax-exempt bonds. Also missing is any consideration of the costs of tax enforcement, compliance with tax laws, and how taxes alter incentives.

Finally, O’Connor never raises the problem of tax incidence. With respect to Social Security, the book reiterates the long-discredited idea that employers match employee "contributions." The "employer contribution" to Social Security actually comes out of the worker’s pay, but the student gets no inkling of that.

Criterion 9: The Business Cycle

The treatment of the business cycle and government policy to deal with it is extremely weak.

First, O’Connor ignores the debate between economists who believe that business cycles are inherent in a market economy and those who argue that they are induced by government policy that upsets an otherwise stable market. Only a single paragraph mentions the changes in the availability of money and credit, which many economists see as the key to economic fluctuations.

Second, the standard Keynesian theory of fluctuating aggregate demand is presented in glowing terms (Keynes’ General Theory is called a "monumental work" that "revolutionized economic thinking" [p. 360].) The heated economic controversy over the Keynesian theory is never discussed. Students read that "many economists" accept the Keynesian view, but never learn that many economists (including Nobel Prize winners) do not accept it.

O’Connor does describe a few of the difficulties involved in using fiscal policy to smooth out the business cycle (timing problems, the difficulty of economic forecasting, and political considerations). But the most serious drawback in the minds of many economists—that government spending and borrowing merely crowds out private spending and borrowing—never appears. O’Connor devotes a page to the "multiplier effect," but never asks, "If government spending has risen, but private-sector spending has fallen, how can there be any multiplication of income?"

The discussion of supply-side theory is both lengthy and misleading. For example, the author writes that "The first assumption of supply-side economics is that economists can identify where the economy is placed on the Laffer Curve" (p. 376). This is not true. The purpose of the Laffer Curve is not to locate the current state of the economy at any point on the Curve, but to illustrate a relationship between the level of taxation and the amount of revenue collected by the government. O’Connor says that supply-side policy was expected to produce sufficient new tax revenue to balance the budget, the implication being that supply-side economic theory didn’t pan out. He fails to give the other side of the argument: That tax cuts in the 1920s helped produce large budget surpluses during that decade, and that the tax cuts of the 1980s also produced huge windfalls of revenue—windfalls that were eaten up by a Congress that hiked spending far beyond what the extra revenue could buy.

Criterion 10: Wages, Unions and Unemployment

"Supply and demand interact to determine wages just as they determine prices," O’Connor writes (p. 148). Alas, after this good beginning, the rest of the treatment of employment issues is flawed.

For example, the book defends the minimum wage and "comparable worth" issues with superficial arguments. On the minimum wage, O’Connor says nothing about its historical tendency to price low-skilled workers out of the labor market.

The book takes a brief look at affirmative action, saying that this policy "has been established to overcome past injustices to women and minorities" (p. 147). Whether it is possible to overcome past injustices through "affirmative action" in the present is a matter much in the public debate today, but O’Connor never says so. Far later in the book, at the end of the chapter on the business cycle, he includes a page from Thomas Sowell’s Markets and Minorities in which Sowell observes that discrimination imposes costs upon those who practice it. (p. 335). This sheds some light on labor market discrimination, but why is it not placed where it is most relevant?

The book’s treatment of unions covers their history, their professed objectives, and their work in passing labor laws. But we never get to the key economic questions: To what extent, if any, are unions able to increase worker compensation above the market level? If so, under what conditions? What impact do unions have on productivity? If union workers gain, does that come at the expense of others?

Criterion 11: Trade and Tariffs

O’Connor begins well in discussing international trade. He explains it as a micro phenomenon: "International trade is the voluntary exchange of goods and services between people in different nations" (p. 386). But when he proceeds to explain the law of comparative advantage, he lapses into macro language ("A nation determines its areas of comparative advantage. . . .") Students should be encouraged to think about how individuals and firms find their own areas of comparative advantage.

Next, the author discusses "Balancing Payments and Trade." The trouble is that he does not correct the common misconception that if the balance of trade or payments is "unfavorable," the economy must somehow suffer for it—and the government should take action. A good economics text should straighten out the old mercantilistic notion that aggregate trade statistics correlate with national wealth.

Arguments in favor of trade restrictions are presented in a cursory "Some say this, but others say that" fashion. O’Connor never teaches the student to think analytically.

The worst part of this section is the "case study" on MITI (p. 391), which is not a study at all, since it (and industrial policy in general) is subjected to no critical analysis. Many economists have pointed out that some of the major Japanese success stories have occurred where MITI’s advice was ignored. Honda, for example, went ahead and built cars despite MITI’s contrary advice. More generally, economists have attacked the idea that government policy-makers have any special ability to predict the future direction of the market. Entrepreneurs and capitalists, who have their own resources at stake, have more reason to invest thoughtfully. But O’Connor makes central economic planning seem entirely beneficial and non-controversial: "Many nations are using MITI as a model for similar agencies in their nations," (p. 391) he writes.

Criterion 12: Money and Banking

The book is good at explaining the functions of money, but not at how it evolved on the market. Moreover, the student reads very little discussion of the pros and cons of commodity money versus fiat money. O’Connor says that the gold standard "failed to provide for an efficient way to regulate the amount of money circulating in the economy" (p. 228). That is a conclusion rejected by many economists, who note that inflation was lower and the business cycle more stable while the gold standard was in effect.

O’Connor discusses banks and other financial institutions at some length (pp. 230-31), but the student does not learn much about the problems that have beset the banking industry. Continental Illinois did suffer a "near collapse" in 1984, but the student who wonders why will have to look elsewhere. The role of government regulation, especially deposit insurance, in promoting risky lending is never mentioned. The "case study" on the S&L crisis gives no hint of the government’s role in making possible the huge losses and taxpayer liabilities.

The structure and operation of the Federal Reserve are presented well, and the book includes a brief treatment of the debate between those economists who favor a discretionary monetary policy and those who favor fixed rules. There is a brief allusion to the Fed’s responsibility for the Depression, but no in-depth analysis.

When O’Connor discusses inflation, he argues that "Profit-push inflation occurs when producers raise prices in order to raise their profits" (p. 317). This is illogical. Producers always desire to maximize profits and search for the prices that do so. Once they are charging those profit-maximizing prices, raising them further in search of higher profits is counter-productive. That’s what "profit maximization" means. If most or all producers raise prices together, how can consumers with limited incomes afford to buy as much? Many economists have thoroughly criticized the profit-push explanation for inflation, but readers of this book would never know that.

Economics (Addison-Wesley)

Economics
by Richard M. Hodgetts and Terry L. Smart
(Reading, Mass.: Addison-Wesley, 1993), 548 pp.

Rating: F

General Comments: This hardbound book is attractive and nicely printed. The amount of space devoted to photographs and other filler is normal, and the writing is appropriate for high school students. However, the book is very weak when it comes to helping develop the student’s ability to think like an economist. Too much of the material is descriptive, not analytical. The student is simply told about many things without being shown how economists apply their method of analysis to understand costs and benefits. Moreover, the book leaves many doubtful if not clearly mistaken impressions by giving only one view of important policy issues.

Criterion 1: Costs and Prices—How Production is Determined

The book gets off to a poor start by defining economics as "a science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants" (p. 4). "Society" is an abstraction, and has no needs and wants; this definition misses the vital idea that economics is about understanding individual decision-making in the face of scarcity.

The book does a competent job in presenting the concepts of scarcity, cost, production possibilities, elasticity, equilibrium price, and other fundamentals. Missing, however, is a sound explanation of how markets spontaneously allocate resources to their most beneficial uses. The closest the book comes to a discussion of this important point is this rather fuzzy statement: "In a capitalistic society we tend to believe that consumers determine which firms will survive and which will not. The companies that provide what consumers want should be profitable and continue to grow" (p. 33). An understanding of how the price system efficiently directs resources is important, but the student is barely pointed in that direction.

Criterion 2: Competition and Monopoly

The authors explain different market structures clearly, but do not address the efficiency issues. There is no clear explanation of the tendency of monopolists to "understock the market," for example.

The book does have a lot to say about monopoly, but much of it is false or misleading. There is no discussion of why it is tough to form and perpetuate a monopoly when rivals are able to enter the market. The authors give a biased view of the Standard Oil breakup, leaving unchallenged the view that the public interest was served when the company was broken up under the Sherman Act in 1911. Yet, Standard’s superior efficiency in producing and selling petroleum products had brought prices down significantly, and rival firms had whittled away much of Standard’s 90 percent market share long before the antitrust decision.

Also missing is any suggestion that antitrust laws can protect competitors rather than competition. The authors could also have encouraged good economic thinking habits if they had delved into such pertinent questions as the incentives of the antitrust enforcers. Similarly, the book’s discussion of mergers fails to note that efficiency is usually the motivator, and that stopping them does not necessarily "protect competition." This section of the book is typical in suffering from an excess of description (e.g., what the Robinson-Patman Act is supposed to do) and a shortage of analysis (e.g., how enforcement of that act impedes competition).

Criterion 3: Comparative Economic Systems

The book’s discussion of comparative economic systems suffers from inadequate attention to the nature of decision-making in market and command economies. Also, it commits the terrible mistake of presenting socialism as a "middle" system between capitalism and communism.

The authors give the student a lengthy historical exposition of socialism, complete with a distortion of the Industrial Revolution. They write, "Wages were so low that sometimes entire families had to work. Child labor was common in mines and factories. Working conditions were unsafe and workdays were long" (p. 347). Those statements are true, but the implication is that conditions for common people had once been better. Economic historians, such as Max Hartwell, have demonstrated that earnings had always been low, that "entire families" had always had to work, and that working conditions had always been bad. In fact, living conditions for workers improved steadily during the Industrial Revolution, but the book never says so. Indeed, socialist thinking was nurtured by conditions during the Industrial Revolution, but the great irony is that the Industrial Revolution made it possible for many people to escape from poverty.

Next comes a description of Marxism, but there is no critical analysis of the key Marxist doctrines, such as the labor theory of value and the exploitation of the worker. Again, this is a missed opportunity to teach the student good economic thinking by asking probing questions: "Where do the tools of production come from?" "Who bears the risk?"

The socialist economy is not well analyzed either. Regarding economic planning, the authors write, "Planning is the chief characteristic of a command economy" (p. 345). However, there is at least as much planning in a market economy as in a socialist one. The difference is in who does the planning, politicized bureaucrats with other people’s money or market entrepreneurs with money they’ve earned themselves or attracted because of their skills and good ideas. The incentives and information constraints are very different in the two cases. In a market economy, the decision-makers stand to gain from being right or lose from being wrong about investment and production; in a command economy, the decision-makers have no personal financial stake in their decisions. Moreover, in the absence of a price system (which, in turn, depends on private ownership), socialist planners have no way of knowing whether they are making efficient use of resources or not. The student is never led to consider those problems of socialism.

In presenting socialism as a "middle" economic system between the "extremes" of communism and capitalism, the authors mislead the student. As a matter of economic organization, either you have decision-making by private property owners or by government officials. In some countries, you find more pervasive government planning than in others, but socialism and communism are different in degree, not in kind. Finally, the book does not convey to the student the usual economic consequences of socialism—poor quality goods, shortages, technological backwardness, and black markets. With so much evidence piling up from hundreds of socialist failures the world over, there is no excuse for the authors to be ignorant on this point.

Criterion 4: The Distribution of Income and Poverty

The book’s section on income distribution begins with a breakdown of before-tax income. The authors fail to note that the data would look different if adjusted for taxes and non-cash benefits. They also need to discuss income mobility to show the student that "the rich" and "the poor" are not the same people over time. In fact, the text implies that there is little income mobility: "between the 1930s and 1980s, the distribution of income in the United States remained relatively constant" (p. 148). They mean that the percentages in each income quintile remained about the same; many students, however, will think it means that the rich stay rich and the poor stay poor.

In discussing the causes of poverty, the book says nothing about how government laws and programs can sometimes hinder poor people from bettering themselves. Instead, the authors assert the controversial conclusion that discrimination is a major cause of poverty. They are either utterly unaware of the volumes of theory and evidence to the contrary, or they want students to be ignorant of them so they won’t reach political conclusions the authors dislike.

The next section on "Fighting Poverty" is also flawed. The authors describe several government programs that are intended to alleviate poverty, but they fail to analyze them for their actual effects. Social Security has well-known perverse economic effects on rich and poor alike, but they are not mentioned. The text also repeats the mistaken notion that the employer pays half of the Social Security tax. Other programs—public assistance, unemployment insurance, job training—are treated the same way: description, but no analysis. Students may think that if a program has good intentions, that is enough; it doesn’t matter if programs generate poor or counterproductive results.

Criterion 5: The Role of Government

The authors’ treatment of government intervention rarely gets the student to think through the question of costs versus benefits of government action. They set the stage for their chapter with an "Analyzing Primary Sources" box devoted to Upton Sinclair’s The Jungle. Far from proving a need for government regulation of meat packing, Sinclair admitted the book was a polemical work of fiction—designed to promote socialism. Quoting from it may color the student’s thinking, but serves no purpose in teaching economic thinking.

In fact, there is excellent scholarship on the origins and effects of the Meat Inspection Act of 1906, arguing that it was sought by large packers as a way of eliminating smaller rivals who would have a hard time complying with its regulations. The student, however, never reads what President Theodore Roosevelt wrote of Sinclair: "He is hysterical, unbalanced, and untruthful. Three-fourths of the things he said were absolute falsehoods. For some of the remainder there was only a basis of truth."

Public goods are not well covered. Their definition, "goods and services made available by government to everyone" (p. 320) is inaccurate. When economists speak of public goods, they mean goods and services where non-payers cannot be kept from enjoying the good if it is produced. Garbage collection, golf courses, stadiums, schools and other things provided by government are not public goods at all. Furthermore, the authors fail to analyze the efficiency of governmental provision.

On subsidies, the book only considers their positive effects. Without the subsidy to Chrysler in 1981, supposedly the firm would have closed and thousands of workers would have been unemployed. Instead of looking exclusively at the benefits of the subsidy, however, the authors ought to encourage good economic thinking habits by considering the opportunity costs as well. They don’t.

Similarly, the authors defend agricultural subsidies on the grounds that without them, the incentive to remain in farming would be removed. But, the student may wonder, why did we have lots of farmers and no subsidies before 1929? Without subsidies, some farmers, the least efficient ones, might go out of business, but the book conveys the impression that there would be no farming if it were not subsidized. Their treatment of this subject does not teach sound economic thinking. It is tantamount to the notion that unless the king takes charge, the rest of the populace would starve because the people would be too stupid to understand that they should grow crops and raise animals to survive.

Consumer protection is also poorly handled. The FDA is a good example. Its objective of protecting the public against harmful drugs is emphasized, but there is no analysis of the actual effects of FDA regulation, many of which economists have argued do more harm than good. Safety regulation has a cost, but the student is not asked to think about this. Finally, the authors devote several pages to a weak discussion of "the farm problem" (pp. 160-66). They say that government needs to ensure that farmers receive "enough" income. However, the book never asks why there should be "parity" for agricultural prices and not for others, why we cannot let the market determine how much income farmers need, and what are the implications of allowing politics to affect the agriculture market.

Criterion 6: Public Choice

There is no discussion of public choice concepts in the book. Strangely, the authors include a page on James Buchanan and Public Choice theory (p. 305), but the material does not convey any of the key ingredients in public choice analysis. Only once is there a suggestion that "the government" consists of self-interested individuals who are inclined to do what is good for them (in the discussion of the problems of discretionary fiscal policy). When it comes to showing the student how to think critically about public decision-making, the book is very weak.

Criterion 7: The Role of the Entrepreneur

Little is said about entrepreneurship—just a definition and short description (p. 31). Some of the profiles and case studies succeed in giving the student some feel for the role of the entrepreneur, but they need to show more explicitly why entrepreneurs are important to economic progress and how hostile regulation and taxation can stifle them.

Criterion 8: Taxation

The authors describe the taxes levied in the U. S., but don’t engage in much analysis of the economic effects of taxation. They never discuss the direct costs of taxation (compliance and enforcement costs) or the opportunity costs of diverting resources from the market to the government.

The subject of tax incidence is not covered. In fact, the authors seem oblivious to the problem when they write, "Corporations are a very important source of income tax revenue for the government" (p. 298). Corporations do not ultimately pay taxes; people do. Economists debate exactly how the burden of this tax (and others) falls, but it is undisputed that businesses do not actually pay taxes. Sadly, this book leads the student to think that they do.

Criterion 9: The Business Cycle

Why does the economy go through cycles of business activity? The authors present several explanations, but without much analysis for the student. Most important, the authors do not include even the outlines of the critical debate between economists who believe that the market economy is unstable and needs frequent government "fine tuning," and economists who believe that the market economy is stable and that government policy is what causes our occasional ups and downs.

When discussing policies to promote economic stabilization, they omit the Monetarist prescription of adhering to a fixed rule for money creation. They say nothing at all about the Austrian School.

In presenting the Keynesian policy, the authors ask none of the probing questions that critics have been asking for decades. For example, they write, "When the government decides to fight a recession, it might spend an extra $50 billion for goods and services. This money is put directly into the economy" (p. 311). But where did this money come from? What other uses for the resources must be foregone? Will increased government spending in specific sectors lead to economic maladjustments? Unfortunately, the authors never raise questions like these, which leads the student to believe that government action is a simple matter.

Under "Economic Stabilization," the authors discuss various policies designed to "help guide the economy and keep it heading in the right direction." They include job training programs, but there is just a description of the intention of such programs, without any investigation of their actual effects. As for job discrimination, the student receives no critical analysis of job discrimination theories or affirmative action laws. The authors conclude with a weak discussion of "wage-price" policies. They concede that government tampering with the price system entails some problems (such as shortages), but go on to say, "Certainly there is some truth in that argument; however, there are also advantages in the use of wage-price controls" (p. 107). But they never explain what these "advantages" are, how they compare to the disadvantages, and what the alternatives are. None of this helps the student think through economic problems.

Supply-side economics is presented as a stabilization policy, when it is in fact aimed at growth. The authors explain the basic tenets of supply-side theory, but then offer a list of criticisms which many readers will take as proof that supply-side theory has been discredited. Such is not the case, but the student is pushed toward a negative view.

Criterion 10: Wages, Unions, and Unemployment

On wages the authors write, "Supply and demand can determine what happens in the labor market" (p. 196). They refer to this as the "traditional theory of wage determination," but they present no other theory. The book fails to explain labor market dynamics in any depth.

However, the student is informed that "other factors" affect the price of labor, including the worker’s degree of skill. But the worker’s degree of skill is an element of both the supply and the demand. Seemingly, the authors mean for the student to think of "skill" as somehow outside the "traditional theory," but that is misleading. Working conditions are set forth as another "factor" in wage determination, but supply and demand analysis easily encompasses differences in working conditions.

As to the minimum wage law, the book mentions it, but provides no analysis of its effects.

On labor unions, the book spends many pages describing unions, the various laws pertaining to labor-management relations, and the objectives of unions. The economic effects of unions are hardly considered at all. A good economic text will ask whether unions can raise the total pay for workers, under what conditions, and what impact their success has on productivity, prices, and job opportunities. In this text, however, the authors give the student "warm, fuzzy" sentences like: "A company must do its best for its workers. It should provide fair wages, good working conditions, and reasonable benefits" (pp. 213-14).

Criterion 11: Trade and Tariffs

When discussing international trade, the authors write as if it were a national phenomenon ("every country in the world trades with other nations to one degree or another") instead of explaining that "international trade" is just trade between individuals that crosses a national boundary. On comparative advantage, the authors continue this thinking: "A nation should concentrate its efforts on the production of those goods in which it has the greatest comparative advantage" (p.399). In a market economy, however, nations don’t concentrate on production, individuals do—and self-interest naturally drives them to find the best uses for whatever resources they possess.

The arguments about tariffs are not well analyzed. The authors present them in a format of "Some people say . . . but others argue." This does not help the student to learn to think through economic problems.

Criterion 12: Money and Banking

The book’s treatment of money is historically accurate, but never tells the student clearly that money is a market phenomenon. Moreover, it conveys the impression that the fall of the gold standard in the 1930s was inevitable and desirable. The authors say, "new banking regulations and restrictions on gold [in the 1930s] gradually led to recovery." On the Federal Reserve System, the student learns how it operates, but never reads about its track record.

Similarly, the authors describe how banks operate, but they only have a weak discussion of the effects of government regulation of financial institutions. On the S&L crisis, for example, the student receives no sense of the role of federal regulations in making the vast losses (and eventual taxpayer liabilities) possible.

This book is so poor and so misleading in so many places that students who read it may end up knowing less economics than they did before they saw the book.

Applying Economic Principles

Applying Economic Principles
by Sanford D. Gordon and Alan Stafford,
(New York: Glencoe, 1994), 480 pp.

Rating: F

General comments: This is an attractive book with many color photos and diagrams. In its 480 pages, however, it teaches little about economics. The book devotes so much space to photos, "personal narratives" that seldom have much instructive value, and to current issue "boxes" that are too sketchy to help the student understand the issue, that what is left is a very threadbare treatment of economic principles. At many important points, the authors provide the student with nothing but government solutions to policy issues. Its conclusions have sometimes been outdated for over two generations, and in one case for over two centuries. The book fails to teach the student how to think like an economist.

Criterion 1: Costs and Prices—How Production is Determined

The book begins with a limited definition of economics as "the study of the decisions involved in producing, distributing, and consuming goods and services" (p. 5). The authors then explain the role of prices and profits in the allocation of resources, but not always clearly. Consider, for example, this sentence: "The allocation of resources in capitalism is efficient because resources tend to be attracted to the most profitable firms." Unfortunately, the student is not told just what "efficient" means here, nor do the authors explain the process by which the price system channels resources away from the production of goods that don’t pass the test of the market. Students need a deeper investigation of the market process.

The treatment of consumer sovereignty and "the invisible hand" is satisfactory, as is the connection between profit and satisfying the wants of consumers. The problem of dangerous or defective products is raised in conjunction with consumer sovereignty. The authors make the important point that there is a trade-off between consumer protection laws and regulations on one hand, and the availability of products on the other. The book leaves the student with the impression that the only possibilities are government action or no protection at all. The authors never describe the ways in which the market provides consumers with information and tends to deter poor quality.

Criterion 2: Competition and Monopoly.

The authors’ treatment of competition and monopoly is weak. On the plus side, they do manage to dispel the idea that big businesses are always highly profitable; and they explain that "monopolistic competition" is not a wasteful, inefficient market structure.

However, they use some ill-chosen language that conveys the idea that it is dangerous to allow businesses to get "too big." They write, for example, "Government tries to prevent firms from getting so large and powerful that they can take advantage of the consumer." It is misleading to use the word "power" in conjunction with business. Businesses have no power to do anything but make offers to potential suppliers and consumers. The unfortunate implication of the term "market power" is that consumer sovereignty somehow vanishes once a business has reached a certain size.

To make matters worse, the book’s discussion of antitrust is lopsided. It gives the student no hint of the possibility that antitrust enforcement can actually be used to stifle vigorous competition. Instead of an economic analysis on the costs and benefits of antitrust, the student reads only the discredited opinion that antitrust laws protect competition. Are the authors utterly unaware of the solid critiques of antitrust?

Nor does the book consider the tendency for government itself to create monopolies and cartels. Although the breakup of AT&T is covered at some length, the student learns nothing about the early role government played in eliminating AT&T’s rivals in the telephone industry. Similarly, the authors discuss airline deregulation, but ignore the role of the federal government in cartelizing the airline industry—and the effect of this action on consumers.

Criterion 3: Comparative Economic Systems

The book’s coverage of comparative economic systems is threadbare. The authors write that "Communism seems to have failed as a political and economic system" (p. 424), but fail to give any analysis. Students should understand that central economic planning suffers from several inherent problems (among them, the limited knowledge of the planners, the lack of incentives for efficiency and good quality, and the tendency to put the interests of the state far above the interests of ordinary consumers). These problems occur in all government directed economic activity, not just under "communism." Instead of giving students a look at the process of central planning, the book gives them platitudes like this: "In exchange for security, the people have given up a degree of individual economic freedom."

Although the extreme backwardness and inefficiency of the Soviet-style economic system is well documented, the student reads that Lenin’s economic system, "worked reasonably well." Here again, dubious conclusions take the place of serious analysis. Another example: "As societies become more complex, the need for government power tends to increase" (p. 419). The book fails to explain what it means by "more complex," or why complexity necessarily calls for greater government power. Many economists would argue that although the products of our modern economy are far more complex than in the past, society—the network of human relationships—remains fundamentally the same.

Elsewhere in their discussion of comparative systems, the authors stumble into another cliché—that population growth is a major reason reason why many poor nations remain poor. Gordon and Stafford write that "population growth has made economic growth almost impossible in many developing nations" (p. 406). Nowhere do they acknowledge contrary views of population and economic development experts. In trying to account for persistent poverty, the authors point to government favoritism, militarism, and insufficient spending on education, but fail to mention government economic controls and taxes that hinder the growth of free enterprise.

Finally, the book’s treatment of foreign aid is vague, couched in muddy language. For example: "Because of the apparent lack of progress in many developing nations, people in developed nations questioned whether aid could ever solve the world’s economic problems" (pp. 400-01). This gives the book’s only hint that economic analysis has shown harmful effects of foreign aid.

Criterion 4: The Distribution of Income and Poverty

The section on income inequality is superficial. Rather than providing any real analysis of the effects of welfare programs, the student reads that "many people doubt there can be a solution to the problem of hunger without more government support" (p. 348). This simply pushes students toward a belief, rather than helping to develop their ability to think economically.

Furthermore, the book fails to mention the high degree of income mobility and is silent on the key role government policies play in hindering people from prospering on their own. Many economists advocate free markets and private charities to alleviate poverty, but that view is dismissed without any analysis.

Criterion 5: The Role of Government

The authors’ discussion of the role of government in the book is more opinion than economic analysis. Students are told, for example, that it is "necessary for our government to play a greater role in our economic system because consumers are no longer able to protect themselves from economic abuse" (p. 320). This statement reinforces the popular image of government in white hats, business people in black hats, and consumers as defenseless pawns. Here, as elsewhere, the writing is more like political rhetoric than serious economics.

On the subject of public goods, the authors substitute vague generalities and personal conclusions for economic analysis. Public education—which is not a "public good" as most economists use the term—is purportedly essential; without it, "only the children of the rich could become educated" (p. 329). Both theory and history strongly suggest that this conclusion is false; in the 1840s, before the rise of public education, the literacy rates in many Northern states were higher than they are today with universal public education. Students, however, read nothing of this evidence. Nor do the authors bother with an investigation of how an education marketplace might work without government sponsorship. They also write as if it were self-evident that the medical marketplace needs increased governmental interventiont: "Modern medicine has become so expensive that many people could not afford medical care unless the government helped them pay for it" (p. 239). There are Nobel Prize-winning economists who argue that the very reason many people cannot afford medical care is because government interference has distorted the market for this service.

The problem of negative externalities is also poorly treated. Instead of focusing on the different ways in which we might deal with the problem of pollution, the book devotes several pages to the Times Beach, Mo. fiasco, in which a federal overreaction caused the town to be abandoned and destroyed. But the authors draw no sensible conclusion from this event. After noting the financial loss to residents, they say that it was "corrected by government action" (p. 241). The loss was not "corrected," but paid by the taxpayers. The economics of environmental protection is an important subject, but receives feeble treatment here.

Criterion 6: Public Choice

Nowhere in this book do you find the term "public choice." Virtually nowhere do you find any references to public choice concepts. A fleeting mention that politicians desire to be re-elected is all there is on the key subject of the economics of government decision-making.

Rent seeking by special interest groups, political incentives for waste, the rational ignorance of voters—the book omits any discussion of such topics. Rather than painting government "warts and all," the authors almost invariably depict it as a wise and kindly uncle who can be counted on to do the right thing. History and economics show this to be far from true.

Criterion 7: The Role of the Entrepreneur

Entrepreneurship is barely mentioned. The authors never try to explain its importance to the economy, or how it can be stifled by taxes and regulations.

Criterion 8: Taxation

The authors devote several pages to describing the different kinds of taxes that are collected, and also to the normative "principles" of taxation. But on the economic effects of taxation, where the student would get some practice in thinking about costs and benefits, incentive changes, misallocation of resources, and other elements of economic analysis, the book is silent. Also, the question of tax incidence is never raised.

Criterion 9: The Business Cycle

Gordon and Stafford leave the student with the impression that the Depression was a natural phenomenon of the free market that discredited clasical economics. "Classical economists believed there was no need for government intervention in the economy. But when the Great Depression did not automatically come to an end, it became clear that other theories would have to be found to explain how economies worked" (p. 324). The reader finds no hint, even in the page-long profile of Milton Friedman, that many economists blame bad government policy for causing and prolonging the Depression. The book focuses entirely on the Keynesian aggregate demand theory to the exclusion of all others. The authors ignore the destructive policies of the Federal Reserve in the 1920s and 1930s, the dramatic boost in tariff rates in 1930, the doubling of income tax rates in 1932, and most of the New Deal interventions from 1933 until World War II.

There is nothing here on the important debate between economists who see a market economy as being a stable, self-correcting mechanism and those who see it as inherently unstable, in need of frequent government adjustment. The book does include some discussion of the difficulties with federal "fine tuning" policies, but does not tell the student that many economists argue against the need for such policies at all.

Criterion 10: Wages, Unions, and Unemployment

The authors correctly explain that wages, like other prices, are established by the interplay of supply and demand in the market. They also needed to make the important point that in a competitive market, wages and productivity are necessarily linked. Their discussion of the effects of minimum wage laws is accurate, but not very deep.

The book’s treatment of unions is not good. Again, the student is given very dubious conclusions, not serious analysis. For example: "It is clear that unions have helped to improve working conditions, wages and benefits for many Americans" (p. 183). To some economists who study labor economics, the above conclusion is not at all "clear." The book lacks economic analysis of the effects of unions on efficiency, employment, and wages (both for unionized workers and non-unionized workers). It also implicitly assumes that union leaders have interests identical to the interests of the workers they represent, even though this is not always the case.

Last, the authors correctly identify the different types of unemployment, but are weak on analysis of the impact of policies crafted to deal with it.

Criterion 11: Trade and Tariffs

Gordon and Stafford start by failing to make it clear to the student that all trade is an individual phenomenon. People, wherever located, seek to improve themselves by purchasing from or selling to others. Instead, the book employs language that casts trade as a group phenomenon: "countries trade because they want to" (p. 370). Writing like this perpetuates the erroneous notion that "international" trade is fundamentally different from "ordinary" trade.

To make matters worse, the book argues in favor of trade restrictions—using the infant industry argument, the protection of wages argument, and others. Margin notes to the instructor suggest that he or she question these arguments, but the student reads (and will probably hear) nothing to cast doubt on the virtues of trade restrictions.

Finally, the authors include a preposterous discussion of the balance of trade. They say that having a "negative balance of trade" reduces employment, decreases profitability and slows economic growth. A repetition of mercantilist fallacies refuted over two centuries ago is not what you want in a book designed to teach young people how to think economically.

Criterion 12: Money and Banking

The book provides a good explanation of the functions and characteristics of money. It also explains correctly that inflation is caused by excessive money creation. Nothing, however, leads the student to understand that money is a market phenomenon, how and why the gold standard arose, or the drawbacks to having a fiat money system under government control.

The explanation of the Federal Reserve System and its operations is reasonably good, but the chapter does not say anything about the Fed’s track record. Nor does it go into the debate over the right target for Fed action (interest rates, money supply, or something else).

The book’s discussion of banks is superficial; it fails to give the student an appreciation for their importance. Also, the authors never discuss the impact of government regulations (such as deposit insurance). The coverage of the S&L bailout is minimal, and the student does not learn of the government’s role in that problem.