Economics (South-Western)

by J. Holton Wilson and J.R. Clark
(Cincinnati, South-Western Educational Publishing, 1997), 748 pp.

Rating: C

General Comments: This is a colorful, hardbound textbook that is written at a level appropriate for most high school students. Its chief drawback is that it gives too much space to description and too little to analysis to show students how economists think. For example, the book includes biographies on people as diverse as Alan Greenspan, Arnold Schwarzenegger and Donna Shalala. Interesting as these may be, the information does nothing to help the student develop the ability to think like an economist.

Criterion 1: Costs and Prices—How Production is Determined

Wilson and Clark begin by telling the student that "economics is the science that deals with how society allocates its scarce resources among its unlimited wants and needs" (p. 7). It is unfortunate to use a macroeconomic definition. Students are more likely to understand what economics is about (and take an interest in it) if it is presented in microeconomic terms—the study of purposeful human decision-making. In the aggregate, millions of human decisions do "allocate society’s resources," but it is best to start with the individual as the unit of analysis. Other than that, the book is very good in its explanation of the fundamentals of economics—scarcity, choice, opportunity cost, and so on.

Wilson and Clark are very clear in their treatment of the three basic economic questions and the ways in which the organization of a nation’s economic system will give different answers to those questions. Unfortunately, they waste a page describing the "Goals 2000" program (p. 27). This reinforces the tendency to focus on noble objectives and intentions rather than thinking economically about costs and benefits, means and ends.

The book’s treatment of the way in which the pursuit of self-interest leads to prosperity and harmony (Adam Smith’s "invisible hand") was too brief to convey to the student the nature and efficiency of free markets.

The book capably covers supply, demand, price, and market dynamics, but not until after the discussion of market failure and other intervening material. It would be better to cover how markets work much earlier. The authors describe the effects of mandatory price floors and ceilings, including the minimum wage, and the authors correctly draw out their implications. However, a more complete analysis of the ways businesses react to a mandatory increase in the cost of labor would have done more to stock the student’s mental toolbox.

Criterion 2: Competition and Monopoly

Wilson and Clark do a good job of describing the different types of market structures from perfect competition to monopoly, and how they affect a firm’s decision-making. The authors make it clear to students that monopolies are not immune to the laws of economics.

One important omission, however, is the significance of potential competition. The book briefly mentions Alcoa to make the point that control over a necessary resource can confer monopoly status upon a firm. The authors fail to note that Alcoa’s history is one of continuing improvements and efficiency. The firm has behaved in a very competitive manner, fearing that it might attract competition if it does otherwise. The disciplining force of potential competition in a free market is a point that ought to be discussed.

The authors also need to explain how hard it is to keep a monopoly or cartel when there is free entry into the market. One of the widely held beliefs regarding monopolies is that big firms can easily kill off smaller rivals to create a monopoly. The book reinforces this idea, saying, "If one company grows so strong in the market that it pushes out all other products, there will be no competition" (pp. 104-05). That "if" calls for much more analysis.

Finally, the book says little about antitrust. The Sherman Act is mentioned only once, in conjunction with labor unions. Students ought to learn why the government’s attempts to maintain market competition have often produced more cost than benefit.

Criterion 3: Comparative Economic Systems

Wilson and Clark explain that in a command economy, "The varieties and choices of goods and services in the market are limited to what the central planning committee decides will benefit the whole society. The goods and services produced do not have to pass the difficult test of individual market choice" (p. 53). This is true, but it gives the student only a superficial idea of the great problems that central planning entails. The conclusion that the consumer suffers in a command economy comes through clearly enough, but students need a detailed case study of the economic problems that have arisen when government planners have tried to run economies. Also, the book needs some discussion of the problems involved in making the transition from a command to a market economy.

Criterion 4: The Distribution of Income and Poverty

The book devotes many pages to a description of poverty (some history, breakdown of poverty by age and race, how the poverty line is calculated and more) before getting down to an analysis of its causes. The authors break them down to three: unemployment, low productivity, and restrictions on job entry. The authors’ case for the first is weak. The average duration of unemployment is only about 10 weeks (the fact is not mentioned) and rarely do workers who have been in the labor force but lost their jobs fall below the poverty line before finding new employment. The discussion of low productivity is excellent. Pay is inevitably linked to productivity and people who, for whatever reason, cannot produce much cannot earn much. As to restrictions on job entry, the authors confine their analysis to labor union practices that keep people from pursuing certain kinds of work. A more thorough analysis would have gone into the various laws and regulations that pose even greater obstacles to entry into the labor market.

The authors only briefly discuss job discrimination as a form of labor market restriction. Many economists, however, doubt that job discrimination is widespread in the free market or that it has much actual impact on the poverty rate.

A key omission in the book is the high degree of income mobility in the U. S. (or any free economy). Despite the various union and government impediments, there are many ways for people who begin life poor to become wealthy, and many do. There is also considerable downward income mobility. Students should understand that the rich do not necessarily stay rich and the poor do not necessarily stay poor.

Finally, the book’s analysis of government anti-poverty programs focuses more on intentions than on results; it is in the latter where the student learns to apply economic thinking.

Criterion 5: The Role of Government

The authors define public goods as "goods and services available to the whole society" (p. 57). Just because government makes a good or service available to everyone does not mean that it is a "public good." Public goods are those that the market would under-provide because of the inability to require that all who benefit pay. Sound economic teaching would show students why national defense, for example, is a public good, but why schools, libraries, stadiums, and many other government-provided goods are not.

Wilson and Clark make a weak argument that education is a public good because it produces positive externalities for the entire society (p. 88). It does, but it does not logically follow that education is a public good and ought to be produced by government. Education is a human capital investment that improves the individual’s earning capacity; others who wish to benefit from that productivity must pay for it. There is no free rider problem and no reason to believe that there would be general under-investment in education in the absence of government provision.

Also weak is the book’s contention that government provision of passenger rail service (Amtrak) is a public good. After acknowledging that many economists view Amtrak as a waste of resources (it incurs substantial losses on virtually every route), they write, "keeping the trains running does provide train service in places where it is vital to our nation’s interest" (p. 108). The student who wants serious economic analysis is bound to ask why it is in "the national interest" to keep passenger trains running where there are alternate, less costly means of transportation available.

The book also explains that government action may be necessary to deal with the problem of negative externalities, such as pollution. But when it comes to discussing the means by which government does this, Wilson and Clark fail to address the efficiencies of the various approaches to pollution control.

Finally, with regard to government income distribution, the authors state that "the public sector can redistribute income more efficiently than the private sector" (p. 111). This, however, is a highly disputed opinion, not economic analysis. Government redistribution programs are riddled with unintended consequences—and students ought to think about results more than intentions.

Criterion 6: Public Choice

The book contains a short summation of the main tenets of public choice theory in a box on p. 102: the rational ignorance of voters, the interest group effect, and political shortsightedness. The interest group problem is discussed more fully on p. 115. The student is informed that "Special interest groups are very powerful politically," but the authors never explain why this is the case, or its impact on economics.

There is only a fleeting reference to "rent-seeking" when the authors write, "There will always be individuals and groups who try to use the public sector to their advantage. There will always be situations where smaller groups and individuals benefit at a cost passed on to everyone in the society" (p. 116). But that shouldn’t end the discussion. What’s needed next is an analysis of the great waste and inefficiency that can occur when those efforts succeed.

Criterion 7: The Role of the Entrepreneur

The treatment of entrepreneurship is good. Entrepreneurs, Wilson and Clark write, "must take the risk that their finished products can satisfy a need, be attractive to consumers, and sell at a price that covers the cost of production. Entrepreneurs take the risk that the product will produce profits" (p. 84). True, but the section would have been stronger if they had stressed that most new ventures fail; the occasional, successful entrepreneur who produces enormous wealth is the needed incentive that keeps people searching for new and improved products and services.

Criterion 8: Taxation

The book’s section on taxation has too much description and too little analysis. Many pages are devoted to telling the student why the government collects taxes, how it spends the tax revenue, how state spending differs from federal, what the "principles" of fairness are, and how taxes are classified. Finally, we come to tax incidence. The authors explain that the entity paying the tax does not always bear the real burden. They illustrate this point with the corporate income tax, writing, "Economists generally agree that the combination of stockholders, employees, consumers and the corporation itself all bear some part of the corporate tax burden" (p. 548). But since all wealth is ultimately owned by people, "the corporation itself" cannot bear any part of the tax. Instead of showing the student that taxing corporations is simply a means of disguising taxes that must be paid by others, this sentence may encourage them to believe that tax authorities just haven’t come up with the right formula for making "the corporation itself" bear the whole tax.

The authors include a fairly lengthy discussion of Social Security, and consider the tax incidence problem, writing that "the employer’s share of the Social Security tax can be shifted" (p. 552). This is too vague. Economists widely accept the argument that the employer’s "contribution" to Social Security comes entirely at the expense of lower gross earnings for employees. Unfortunately, the authors do not tell the student that Social Security currently reduces the pay of workers by 15.3%; nor are they enlightened as to any of the financial problems that confront the program or of the costs it imposes on the economy. Indeed, the book paints an indefensibly reassuring picture: "Social Security payments have, on the average, amounted to more than the amount paid in by each taxpayer (including the employer’s contributions)" (p. 551). That has been true in the past, but many analysts insist that it cannot continue that way.

Finally, missing from the entire discussion of taxation is its cost—the diversion of resources away from the private sector, the collection and enforcement costs, the tax code’s creation of artificial incentives and so on.

Criterion 9: The Business Cycle

There is no concentrated discussion of the business cycle in the book. The student learns that we occasionally suffer from recessions and depressions, but never learns why. When Wilson and Clark mention the Depression, they blame it on insufficient demand, which gives the student only the outdated and much-criticized Keynesian view. One of the most important of economic controversies is between those economists who argue that the market economy is unstable and needs frequent government intervention to avoid booms and busts, and those who argue that the market economy is inherently stable, but is thrown into disequilibrium when government tinkers with it. The student learns very little of this crucial debate.

The authors discuss the problems with "fine tuning" the economy through fiscal policy (the time lag problem, the difficulty in getting accurate economic forecasts and the political bias towards over-spending). They note that there are economists (the term "Monetarist" is correct, but they do not use it) who favor relying upon a fixed rule for monetary policy instead of discretionary policies. Those points need fuller development.

Criterion 10: Wages, Unions and Unemployment

The book correctly explains wages in the market as a matter of supply and demand, no different from the determination of other prices. Then comes a good analysis of the effects of minimum-wage laws. Unfortunately, the next step is a misleading discussion of "comparable worth" legislation. The costs and inefficiencies of having government officials decide upon the price of many different kinds of labor in an effort to make things "fair" have been analyzed at great length by economists. But the authors write, "While it is difficult to quantify these aspects of a job, doing so is seen as a step in the right direction" (p. 337). While a few people think "comparable worth" is a "step in the right direction," most economists do not—in any case, merely presenting this normative conclusion does not help the student learn how to think like an economist.

The treatment of labor unions is also unsatisfactory, repeating the long-disproven idea that legal injunctions were frequently used to stop strikes and conveying the mistaken impression that non-union ("yellow dog") contracts were only a management tool to thwart unions.. The authors fail to provide any economic analysis of the impact of unions. They merely write, "unions helped to balance out the bargaining power between labor and management" (p. 339). The phrase "bargaining power" has been criticized by economists as empty and misleading, since economic relationships are not based on power, but on voluntary exchanges for mutual benefit. The economic effects of unions on prices, employment, and productive efficiency are important, but the authors do not explore them.

Criterion 11: Trade and Tariffs

The authors write about international trade as if it were a macro phenomenon ("Nations trade with each other because . . .) rather than a micro phenomenon of individual action. The law of comparative advantage is also explained in this way: "Germany" produces steel, "England" produces cloth, and then they trade so that "both countries will be ahead" (p. 632). National considerations are not irrelevant, but the students need to remember that individual Germans and individual Englishmen do the producing, trading, and benefiting.

The book correctly states that tariffs and quotas make imports more costly for consumers, but neglects to say that prices of domestic goods usually rise also. The arguments for and against tariffs are accurate, but too brief to really inform the students.

The section on international payments begins with a discussion of the gold standard that misses its paramount advantage—a disciplining effect upon the natural tendency of governments to inflate—and instead concentrates on the temporary disadvantages a nation’s economy would suffer from a trade imbalance. The fact that inflation would lead to a trade imbalance and economic pain was one of the disciplining virtues of the gold standard.

To make matters worse, the authors mention "favorable" and "unfavorable" balances of trade at the end of the chapter, leaving the student with the impression that "unfavorable" trade balances must be harmful. This is the central fallacy of mercantilism, and the book does nothing to ensure that the student does not fall into it.

Criterion 12: Money and Banking

Wilson and Clark explain the functions and benefits of money, but the student gets no sense of the market origins of money. When they come to the monetary system of the U. S., they leap right into a discussion of the Federal Reserve, its structure and functions, without explaining why and how the nation went from commodity-based money to fiat money under the control of a central bank.

The book says nothing about the Fed’s track record and especially its role in the Great Depression. Also, the connection between the actions of the Fed and inflation is not clear. When considering inflation, the authors discuss "demand-pull" inflation without saying anything about where all the dollars come from. They also present the "cost-push" theory to the student as economic truth ("a rise in the general level of prices that is caused by increased costs of making and selling goods"—p. 460). Many economists, however, deny that you can have a general increase in prices without an increase in the supply of money.

The discussion of banking is accurate as far as it goes, but there is no analysis of the effects of regulation in the banking industry, most notably the Savings and Loan fiasco and how unsound government insurance policies contributed to the problem.