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 21st 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.