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
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
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
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
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).