by Timothy Tregarthen
(New York: Worth Publishers, 1996), 859 pp.
General comments: Tregarthens 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 books 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 pricesHow Production is Determined
Tregarthen begins with a broad definition of economics: "The study of how people choose among the alternatives available to them. Its 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?). Its 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.
Tregarthens 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 implicitan important point that should be made very explicit.
The books 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, Smiths 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 authors 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 monopolys 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 processesapproval 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, Marxs 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 arent 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 questionsseeking 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 books 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 dont. 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. Tregarthens 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 Americas frontier days.
Tregarthen also discusses governments 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 Departmentand 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 books 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 Jerseys 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 books 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 its 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 textsthe 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 governments 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).