Economics in Our Times
by Roger A. Arnold
(St. Paul, West Publishing Co., 1995), 539 pp.
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
Arnolds book is clearteaching 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
Criterion 1: Costs and PricesHow Production is Determined
Arnolds 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
economists mental toolkit.
The books presentation and its chief implication (the need to make choices) is
very clear. Arnold shows very nicely the connection between scarcity, choice, and
Similarly, the books 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 Smiths 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). Fultons story makes
the point nicely, but more analysis would have strengthened it. Except for Fultons
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 Sowells 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
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
motiveone 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 economists questioning of the popular notion
that some government planning (as in the case of Japans 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 shouldnt try to impose their uninformed guesses about
the future on society" (p. 459). The recent collapse of Asias state-managed
markets and industrial policy provides ample evidence that Arnolds perspective is
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 books 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
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
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
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 sayfor 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 Keyneswho
believed that during a depression, government was needed to intervene to create
jobsand the classical economists over Says Law, which said that supply created
its own demand without government involvement. Arnolds 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 workers 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
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
Arnolds 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 books 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 Greshams Law. What is missing is a discussion of the reasons for
and consequences of the nations 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.