Economics: An Integrated Approach
by Benjamin Davis
(Upper Saddle River, N. J.: Prentice Hall, 1997), 329 pp.
General comments: This textbook is for the most part good at teaching
students how to think economically and encouraging them to use the economists 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 unevensometimes 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
Criterion 1: Cost and PricesHow 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 dotrain 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 ones self or give to charity" (p.
9). He also draws a useful distinction between self-interested behavior and selfish
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 authors 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 students 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
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 books 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 books treatment of governments 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 monopolys hold on the marketplace" (p.
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 discriminationaffirmative action
lawsis 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
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
dont 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 employers
"contribution" comes from than simply writing, "guess where it comes
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 books 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
Daviss 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 authors 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 books 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
To justify his original statement, Davis shows the effects of pushing wages above their
market equilibriuma surplus of workers, i.e., unemployment. He concludes that
"It is not in the unions 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 firms 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
When it comes to the standard arguments in favor of trade restrictions, the book deals
with only twonational 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 doesnt 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 worlds 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
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 Feds
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.