Principles of Economics
by Karl Case and Ray Fair
(Upper Saddle River, N. J.: Prentice Hall, 1996), fourth edition, 1014 pp.
General Comments: This is a densely-packed textbook. Wasted space is
at a minimum and the authors discussions are often very extensive. It does a good
job of developing the students ability to employ economic thinking, but is not
always well balanced on disputed policy issues. Case and Fair lean heavily toward the
mathematical approach, and the book is mainly a college text and should only be used with
advanced high school students.
Criterion 1: Costs and PricesHow Production is Determined
The authors begin with a broad definition of economics, then devote several pages to
the question, Why study economics? They provide persuasive answers, developed at length.
They also include a section on the scope of economics, making the point that economics
encompasses not just business and consumer behavior, but virtually all human
The book gets the student off to a good start in understanding the essentials of
economic thinkingscarcity, cost, specialization and exchange, the production
possibilities curve, and so on. It does a good job explaining market dynamics and the
importance of the price system in allocating resources for satisfying consumer wants. The
vital point that free markets allocate resources efficiently without any central direction
(the "invisible hand") is driven homeso is the role of profits and losses.
The book has many good "Issues and Controversies" boxes to put "real
life" emphasis on theory. The box on ticket scalping (p. 111) makes the point that
underpricing leads to shortages and that the actions of ticket scalpers actually have
beneficial economic consequences. That analysis helps show the student that with economic
thinking, you will often see much more than first meets the eye.
Criterion 2: Competition and Monopoly
The authors provide a sound, analytical look at the various market structures from
perfect competition to monopoly. They include several pages on the debate over the
efficiency of monopolistic competition (pp. 353-56) in which they give "both
sides." But they omit one of the strongest arguments for adopting a laissez-faire
approach: the high cost of government regulation itself.
Regarding monopolies, the authors note how government barriers to entry often encourage
monopolies. They then say that governments often create monopolies where morally
questionable activities such as drinking and gambling are involved so that they can tax
them. They pose this strange, uneconomic question: "How can anyone criticize the
state-licensed, implicit taxation of drinking and gambling?" (p. 325). They seem to
imply that "sin taxes" cant be criticized, but they certainly have been.
Rather than exploring the question further, the authors leave the reader dangling.
The book has a lengthy discussion of antitrust laws, but it omits a vital argument in
the case against antitrust lawsthat they often do more to protect competitors than
to protection competition, an observation made by many scholars. Also, antitrust officials
have their own incentives that dont necessarily coincide with the "public
Criterion 3: Comparative Economic Systems
Case and Fair seem unequivocal on the inefficiency of centrally-planned economic
systems, writing, "It is an understatement to say that the planned economies of
Eastern Europe and the former Soviet Union . . . have completely collapsed" (p. 41).
However, in the later chapter on comparative systems, they cite dubious statistics
purporting to show a very fast rate of economic growth in the Soviet Union. It would have
been more instructive to explore the realities of life for ordinary Soviet citizens: long
lines, shortages, poor quality goods. Even better would have been an analysis of the
inherent problems of planning an economy without a price system and profits. The book
lacks a theoretical discussion of the well-known difficulties of central planning.
The book also devotes much more space to discredited Marxian theory than it does to the
arguments of the classical economists. Students might conclude that there is something to
be said for the Marxian idea that labor is exploited by capitalists because it (and other
tenets of Marxist thought) is not held up to scrutiny.
The book gives no analysis of the economic implications of the welfare states of
Europe. Also, the discussion of the Japanese economy is marred by its enthusiasm for MITI,
which many economists believe has done the Japanese more harm than good, citing the recent
collapse of the Japanese economy and that of other Asian nations which practiced
MITI-style "industrial policy." In any case, the authors need to address the
central question: Can government planners produce better results than investors and
managers operating in the market?
Criterion 4: The Distribution of Income and Poverty
Case and Fair make several excellent points about income disparities. First, they note
that "Income and wealth are imperfect measures of well-being. Someone with a profound
love of the outdoors may choose to work in a national park for a low wage rather than to
work for a consulting firm in a big city for a high wage" (p. 436). That is an
important point. People often assume that low income means unhappiness, which is not
necessarily true. Second, they point out that exchange among individuals will certainly
create inequalities in wealth, but since voluntary transactions leave both parties better
off, there is no reason to condemn differences in wealth when they arise from free
exchange and the natural differences between individuals talents, savings rates,
investment inclinations, and willingness to work.
However, when the authors analyze the distribution of income, they ignore the high
degree of income mobility in the U. S., or that the "rich" and the
"poor" are not the same people over time. Furthermore, the book quotes socialist
Michael Harrington, who engages in tired bromides of class warfare, blames capitalism for
poverty and calls for a government "war on poverty." The authors could have
subjected Harringtons rhetoric to some economic analysis, but decline to do so.
Indeed, the section favoring income redistribution receives about three times as much
space as any opposing view. Since the discussion centers on such non-economic matters as
utilitarian justice and social contract theory, it teaches little about economic thinking.
Case and Fair also include a short presentation of the "comparable worth"
controversy, but fail to give the student much insight into the economic problems and
unintended consequences that would arise from having government officials decide what
compensation must be paid for jobs.
Finally, the books treatment of the various redistribution programs is mostly
descriptive, with little or no economic analysis. Of Social Security, for example, the
authors write, "Currently, the system is collecting more than it is paying out, and
the excess is accumulating in the trust funds. This is necessary to keep the system
solvent" (p. 452). This is extremely misleadingall that is
"accumulating" in the trust funds is debt in the form of federal bonds. Many
scholars have concluded that it is impossible to keep such a system "solvent."
In any case, the student is not informed that Social Security is headed for bankruptcy
early in the 21st Century without either massive tax hikes, massive cuts in the
level of benefits, or some form of privatization.
Criterion 5: The Role of Government
Case and Fair begin their chapter on the role of government with the problem of
externalities, and observe correctly that negative externalities are not exclusive to free
market economies. They write, "Many were shocked at the disastrous condition of the
environment in virtually all of Eastern Europe" (p. 403). That is a good point, but
the authors need to make the connection between the absence of private property and
The problem of providing public goods is explained clearly and the authors note that it
may be more efficient for government to pay private enterprises to produce public goods, a
possibility that is frequently overlooked. Unfortunately, the authors push the student
toward the belief that there are many public goods. For example, the book devotes four
paragraphs to the dubious argument that income redistribution is a public good. This has
been contested by many economists, but the authors never give any counter-argument.
Another area the authors discuss is imperfect information. They give a good explanation
of the problems of adverse selection and moral hazard, and make the point that the market
often finds solutions to problems of asymmetrical information. But the book fails to point
out that government action can also make things worse.
Criterion 6: Public Choice
The book has a good section on public choice, or "social choice" as the
authors prefer to call it. They devote nearly a page to the voting paradox, but barely
explore the problem of rational voter ignorance. The authors do recognize that public
officials have their own personal incentives, writing, "To understand the way
government functions, we need to look less at the preferences of individual members of
society and more at the incentive structures that exist around public officials" (p.
The ensuing discussion of government inefficiency is good. The authors note that
government officials have an incentive to provide visible benefits, while hiding the costs
or spreading them widely. More concrete discussion of actual cases, however, would have
made this section more beneficial to the student.
Case and Fair introduce the concept of "rent-seeking." They state that,
"Some have argued that favorable legislation is, in effect, for sale in the
marketplace" (p. 429). This idea is good as far as it goes, but the authors
dont explain why interest groups are often able to buy the favorable laws they want.
Criterion 7: The Role of the Entrepreneur
Entrepreneurship is almost ignored in the book. It is defined and briefly discussed on
p. 73, but hardly ever comes up again. There are no features on successful entrepreneurs
and no discussion on the link between risk and reward. The authors do ask whether there is
an entrepreneurial spirit in the formerly communist nations in Eastern Europe, but do not
consider how it is stifled by onerous taxes and regulationsin Eastern Europe or
Criterion 8: Taxation
The books chapter on taxation devotes several pages to the different kinds of
taxes, their classification, and the normative issues of tax equity and "the
best" tax base. After that, they come to the analytical issue of tax incidence and
they correctly conclude that, with regard to payroll taxes, "Most of the payroll tax
in the United States is probably borne by workers"(p. 474). This is a sound
conclusion. The authors also consider the incidence of the corporate income tax and write,
"Because it is levied on an institution, the corporate profit tax is indirect, and
therefore it is always shifted. . . . It is difficult to argue that a tax is a good tax if
we cant be sure who ultimately winds up paying it" (p. 476). Students benefit
from this kind of analysis.
Where the book is weak is on the costs of tax enforcement, compliance, and the
opportunity costs of transferring resources from the private sector to the government.
Contemplating those points is part of good economic thinking.
Criterion 9: The Business Cycle
Students looking for an explanation of what causes business cycles will find this book
frustrating. Whereas many texts present the main contending theories in one section, this
one scatters them in different places. Moreover, it never gets to the crucial question: Is
the market inherently unstable, prone to recurring cycles that only government action can
deal with, or is the market stable if left alone, and only thrown into cycles because of
poor government policy? They omit the big debate over Says Law, even though it is an
important topic in the economics profession.
Students learn the controversial Keynesian aggregate demand-aggregate supply model,
along with the Keynesian policy prescriptions. However, little critical analysis follows.
The authors do discuss the shape of the aggregate supply curve in a number of places in
the text and in ways that raise questions about Keynesian assumptions, but much more could
have been done to inform the student of recent critiques of Keynes. For decades, some
economists have been asking whether "the multiplier" really multiplies at all
and whether government spending ever really "stimulates" the economy, but the
student is given the Keynesian approach almost straight up as if it were gospel.
In discussing Monetarism, the authors fail to point out what many economists believe,
namely, that bad monetary policy during the 1920s was a cause of the Depression. They also
fail to describe the history of the Depression to show the many policy errors (huge tax
increases, increases in tariffs, attempts to keep wages and prices from falling, among
others) that deepened and prolonged it. Students never read arguments against government
Case and Fair include a discussion of the Marxist theory of the business cycle, but say
nothing about the Austrian theory.
Criterion 10: Wages, Unions, and Unemployment
The authors provide a good analysis of what determines wages in the market;
unfortunately they do not make explicit the link between productivity and compensation.
On the policy issues relating to labor markets, the book tends to be one-sided. The
occupational segregation hypothesis is presented as the explanation for the lower average
earnings of women, but there is much debate over this question. Many prominent economists
argue that rational decisions married women make with regard to family responsibilities
better explain lower average earnings for women. Nonetheless, the authors write,
"Those in positions of power (often white men) have both the incentive and the
ability to maintain discriminatory practices over long periods of time" (p. 503).
This idea has also been subjected to considerable attack by economists who argue that
irrational discrimination tends to be rare because it is harmful to people and
institutions that practice it. The student, however, is given the impression that it is a
The minimum wage dispute is marred by the uncritical acceptance of recent studies
purporting to show that increasing the minimum wage has "virtually no effect at all
on unemployment." The Card/Krueger studies cited by the authors support no such broad
conclusion, and many economists have criticized them as methodologically unsound.
The book has several pages on the history of labor unions, including their decline,
which the authors suggest is mainly a result of increasing competition. The authors
understand that unions operate as monopolies of labor, although they fail to make the
point that those who organize and run unions are just as self-interested as are business
monopolists. They tell the student that unions can cause higher unemployment and reduce
The authors discussion of the causes of unemployment is good, but they do not go
into an analysis of the true economic effects of various government programs to deal with
Criterion 11: Trade and Tariffs
Case and Fair capably explain the reasons for trade and how it follows the law of
comparative advantage. Their only shortcoming is that they fall into the common pattern of
discussing international trade in nationalistic terms. Students should understand that nations
do not specialize and trade, people do.
The authors clearly explain the effects of tariffs and quotas. Unfortunately, the
presentation too often looks to government programs to solve problems. Why not leave the
investment decisions to entrepreneurs, who stand to lose their own money if they are
wrong? Students should think about this key point. There is little evidence to suggest
that politicians spending other peoples money are smarter at picking winners and
losers than are private entrepreneurs.
Finally, the authors endorse too readily the argument that "dumping" and
other "unfair trade practices" must be met with government policies. Many
economists believe predatory pricing is an overblown worry, both domestically and
internationally, and that if we establish laws against it, many domestic producers will
try to use those laws to stifle competitors. Unfortunately, the student is not encouraged
to think about such unintended consequences of laws.
Criterion 12: Money and Banking
The book capably shows the functions of money, but it fails to connect its origins to
the marketplace. Little is said about the advantages and disadvantages of commodity money
versus fiat money. There is a brief discussion of the gold standard in an appendix, but it
understates the benefits of the gold standard (that it facilitated international trade and
imposed monetary discipline on governments) and overstates its problems.
The historical development of banking is covered well, as is modern banking and
regulation. However, there is a serious omission: Very little is said about federal
deposit insurance, so important in the savings and loan crisis.
The Federal Reserve System is given almost no historical treatment. Why was it begun?
How well has it done its job? The authors avoid these questions and concentrate instead on
the functions of the Fed, which are clearly explained. What the student needs here is at
least a hint of skepticism. Some economists, for example, have argued strongly that a
governmental agency should not be a "lender of last resort." But Case and Fair
make it sound as if it were incontestably good that the Fed can bail out troubled banks.
The fact that the U.S. has suffered a Great Depression, at least nine recessions and a
vastly depreciated currency since the Fed was created should at least raise a question.
On the subject of inflation, the authors may confuse the student. At one point, they
present the very dubious idea of "cost-push" inflation; later they state the
sound and proven principle that sustained inflation is a purely monetary phenomenon.