Introduction to Economics

Introduction to Economics
by Henry F. Billings
(St. Paul, EMC Publishing, 1991), 432 pp.

Rating: D+

General Comments: An Introduction to Economics is well-organized and follows a systematic progression from foundational issues, through microeconomics, to macroeconomics. In content, however, there are serious problems. Billings assumes that massive government intervention is needed to make an economy run smoothly. In fact, he argues that without government intervention, wild swings will occur in economic development. He adopts the outdated and discredited Keynesian prescriptions developed in the 1930s and 1940s, and avoids recent research on the unintended consequences of government action.

Criterion 1: Costs and Prices—How Production is Determined

Billings begins by explaining the central role of scarcity and the need for individuals to make choices. Next, he develops the notion of opportunity costs as a means of determining which choices make the most sense. Finally, he closes by presenting the basic economic questions: What should be produced? How much should be produced? How should products be produced? Who gets what and how much? This approach is an excellent means of focusing student attention on questions which will be addressed throughout the text.

These questions are further developed through the introduction of the four factors of production: land, labor, capital, and entrepreneurship. Billings presents a short biography of Steven Jobs, cofounder of Apple Computer, and nicely explains the interplay between labor and capital.

Definitions are interspersed throughout, and this helps to make the text accessible for the young reader. For instance, Billings presents the law of diminishing returns, specialization and technology as mechanisms that help to determine or increase the level of production. He also includes a useful discussion of the issues involved in starting your own business.

Also, Billings describes the interdependence of producers and buyers and uses a circular flow diagram to map out the specific relationships among households, businesses and government. All in all, this approach is successful at distilling the basic processes behind consumer choice and economic interdependence.

The author explains the central role of prices as a rationing mechanism. He also has instructive sections that highlight the role of the market in providing the consumer with information and motivation.

The text does an adequate job of examining the relationship between demand and supply. Demand is developed first. The book traces the inverse relationship between the amount demanded and the price of the product, factors which shift the demand curve and determine elasticity. The approach is simple, straightforward, and unencumbered by excessive terminology. Next, Billings examines the supply schedule and discusses the related details. This analysis is also quite solid. Finally, demand and supply are brought together and the market clearing equilibrium developed. The entire chapter concludes with a clear and informative capsule on the "Wonders of Free Enterprise."

Criterion 2: Competition and Monopoly

The section on competition and monopoly is misleading in many respects. In an effort to make the material accessible to students, Billings goes too far by suggesting that "monopolies are called ‘natural’ because they seem common sense to almost everyone" (p. 43). He does not mention that natural monopolies are a result of economies of scale—the more you make, the lower the costs for each unit of production. Then, Billings discusses what he considers to be basic government services such as libraries, schools, and the police department—but he never raises the possibility that the private sector could supply many of these functions more efficiently than the public sector. He concludes with a discussion of consumer protection, which strongly suggests that the principle of "let the buyer beware" be replaced with federal agencies such as the FTC, Department of Agriculture, and NHTSA. He discusses federal regulation without mentioning that these agencies greatly reduce consumer choice.

Next, the text addresses competition through the use of the pure competition model. The concern here is that students will come to identify competition as largely imperfect and therefore in need of corrective action. A better approach would be for the text to develop a stronger analysis of supply and demand to avoid this confusion. However, the chapter concludes smartly with a biography on entrepreneur Debbi Fields, of Mrs. Fields Chocolate Chip Cookie fame.

Criterion 3: Comparative Economic Systems

The free enterprise system is presented first. The chapter opens with the ideas of Adam Smith on laissez-faire and "the invisible hand" principle. Both of these concepts are clearly developed. However, he suggests that the invisible hand "works fine for doughnuts and bagels" (p.52), but not for other goods and services. This is the first time the idea of market failure is presented; yet Billings never mentions the many failures that can be laid at the doorstep of government. Presumably, he thinks markets fail but government rarely does. In a flippant and unscholarly fashion, Billings suggests that when Adam Smith’s invisible hand does not hold (which is almost always, in his view), government should intervene.

Billings uses an example of John D. Rockefeller to show that competition may result in monopoly through unfair business practices. But Rockefeller never had a monopoly; his 90% percent share of the kerosene market was achieved in the face of intense competition and was quickly chipped away by that very competition, long before the Supreme Court intervened (See the review of Economics: Institutions and Analysis by Antell and Harris). Billings needs to consider the more recent scholarship, especially the work of John S. McGee and Robert Bradley, which defends Rockefeller’s business practices. Billings presents no counter example that shows how competition can help consumers.

Billings discusses socialism next. He argues that the average worker is much better off today than 100 years ago, in part, because of reforms brought about by the influence of socialism. Sweden is then used as an example of socialism at its best. He describes Swedish society in glowing terms with few criticisms. Anyone even remotely acquainted with Sweden’s economic malaise and today’s overwhelming consensus that the Swedish socialist model has failed would find Billings’s presentation here woefully inadequate.

The ideas of Karl Marx are presented last. Billings devotes a great deal of space to Marx’s Communist Manifesto, his views on the proletariat, and the bourgeoisie. Billings also discusses the Russian Revolution and the application of his ideas in the Soviet economy. Not all of the discussion is favorable but a sizable portion is sympathetic to what Marx tried to accomplish. All told, the text spends more time discussing Marx (whose ideas are largely discredited) than Smith (whose ideas continue to undergird most economic analysis).

Criterion 4: The Distribution of Income and Poverty

Billings gives the impression that the best distribution of income is one which minimizes the difference between the affluent and the impoverished. When discussing the Swedish experience he writes, "the gap between rich and the poor is relatively small" (p. 63), as if this should be a goal of policy.

It apparently does not occur to him that this income gap encourages productivity, or that if the rich and poor received the same wage production would fall to near zero. Moreover, as the income gap narrows because of coercive redistribution by government, incentives collapse and total production falls. A society with an egalitarian distribution of income is likely to have slower economic growth than a society with meaningful differences in income. A society with an income structure that rewards innovation, productivity, and the entrepreneur through higher wages will eventually create more wealth and even the poorest members will see their incomes advance.

Billings, thus, displays a negative bias toward material inequality. His statistics are misleading because they are not corrected for differences in education and experience in the workforce. Also, the text fails to include longitudinal studies of income, which demonstrate the transitory nature of poverty for most people. His chief suggestion is that people need to improve their education and training to avoid poverty. This point is well taken.

However, Billings also strongly argues that the minimum wage is a useful tool for reducing economic inequality, without presenting an opposing view. Many economists point out that the minimum wage is a political tool and rarely is set above the market wage. Billings makes an error when he states, "Usually the minimum wage is higher than the wage would be if it were set by the free market. Otherwise it would serve no purpose" (p. 197). Here, Billings fails to take into account the political advantage politicians derive from promoting a minimum wage and taking advantage of the poor economic understanding of their constituents. Considerable economic research suggests that the minimum wage law creates unemployment, encourages discrimination, and prevents newcomers from acquiring on-the-job training, but Billings only acknowledges that the issue is "up for debate." What is not debateable is that the minimum wage is partly to blame for high rates of unemployment among blacks and Hispanics.

Criterion 5: The Role of Government

The economic role of government is explored in the last chapter in the unit on microeconomics. This is a curious assignment since the economic role of government is usually treated under macroeconomics. Billings apparently wishes to treat government as just another institution which is part of the economy. However, government also attempts to directly manage the economy, so this approach is deceptive.

Billings directs the student to the "four reasons for market failures and what the government does to correct them" (p. 222). Nowhere is it mentioned that government failure is also a serious issue. Two pages later the text discusses spillovers without noting that under the Coase Theorem the market might solve this "failure" so long as property rights are clearly defined and enforced. Next Billings defines public goods in such a way to include public schools. Billings’ definition of a public good is, "outputs provided by governments and not allocated by the market’s pricing mechanism." The proper definition would distinguish between pure public goods, those goods that cannot be adequately supplied by the private sector, and impure public goods, those goods which the market could provide if encouraged to do so. Public schools are demonstrably an impure public good because private schools exist alongside their public counterparts. Billings’ definition is so broad that almost anything the government does falls under the category of a public good—a view that would be disputed by most economists. This approach encourages students to view government activity without cautionary restraint.

Billings also blames economic instability on the market. He writes, "Without government involvement, there is nothing to prevent wild fluctuations in the overall economy" (pp. 226-27). Nowhere does Billings mention that the Fed, through manipulating interest rates, has created wild fluctuations in the overall economy, especially when it raised interest rates and helped trigger the Great Depression in 1929. This section is so biased that it alone is an excellent reason to choose another textbook. He writes that "public schooling seems a bargain at almost any price," which is not only bad economics since it does not consider the costs and benefits of public schooling compared with the alternatives, but it is also ideologically designed to influence student’s opinions in favor of public schools. It betrays an appalling and perhaps deliberate ignorance of the devastating documentation of many public school failures in our inner cities.

The text also includes the story of the Tennessee Valley Authority and titles the discussion, "The Federal Government as Entrepreneur" ( p. 72). The discussion focuses on the many projects that the TVA has built and the social welfare created through this process. Never is it mentioned that the TVA competes with other private power firms. Nor is it ever mentioned that the TVA could be sold by the federal government and the services could be provided privately. Back in the 1920s, in fact, Henry Ford offered to buy TVA and run it as a business to build up the South. A well-designed economic argument would consider the opportunity costs of the TVA and try to analyze the welfare created by the TVA.

Criterion 6: Public Choice

There is no separate section on public choice in this text. Billings’ textbook would have benefited from a section on this topic, which examines government actions by many of the same standards he applies to those of the free market. Politicians and bureaucrats often have agendas far removed from any public interest; analyzing this issue would have provided needed balance.

Criterion 7: The Role of the Entrepreneur

Billings highlights entrepreneurs and he correctly identifies profits as a motive for risk-taking. Then he asks whether or not profits are too big. This subjective question is nicely handled through a discussion of the proper use of statistics. When profits are compared over time and adjusted for changes in inflation the net result is that the size of corporate profits makes greater sense than appears at first glance. They are not the result of the exploitation of consumers, as Marx had argued. Billings also distinguishes economic profits from accounting profits. This section ends with a capsule on the "Economy versus the Environment," which is surprisingly balanced and concludes that the "debate is bound to turn to the issue of costs versus benefits" (pp. 160-61).

Criterion 8: Taxation

Billings describes "wild swings" in the business cycle and argues that "government spending helps to create lots of jobs" (p. 339). However, what the government spends, it first must take away from citizens through taxation. So it is not accurate to write merely that the government creates jobs without mentioning that it transfers employment from the private sector to public sector.

The text opposes the Reagan tax cuts of the 1980s. Billings correctly notes that the tax cuts ended the recession of 1981-82 and helped to produce an economic boom in the mid-1980s. But he also blames the tax cuts for the runaway deficits that followed. He offers no explanation—or mention—of the fact that tax revenue actually doubled between 1980 and 1990. Then Billings presents a series of startling statistics designed to create the impression that the economy is on the verge of collapse due to the size of the national debt. This approach is very misleading. In real terms, the national debt was higher in the years immediately following World War II than it is today. Nowhere is this mentioned.

The supply-side position is also presented negatively. Billings writes, "Supply-siders gave economists something they didn’t need—another issue to debate" (pp. 349-50). He even makes a serious factual error when he describes an "increase in corporate taxes" as a supply-side solution. It would be impossible for a student reading this material to get an objective understanding what "supply-side" economists believe. For instance, we read that the "poor have been hurt by the spending cuts" (p. 367) brought about by "Reaganomics." No statistics are given to back this assertion and what evidence is now available suggests that while we still have rich and poor, the growth of income of the poor has paralleled the growth of the rich over the last 15 years.

Next, Billings outlines and justifies the causes for government spending increases. He does point out that increases in government expenditures crowd out private investment. He points out that legislative efforts have been made to reduce the ongoing problem by mandating ceilings on the yearly deficits. However, he also notes that the federal government’s budget is different from the average citizen’s since the government can print money to pay its bills. He discusses balanced budget amendments and laments that under a balanced budget the government would "not be able to do things that many people think it should do, like building roads and providing for the needy" (p. 366). That, of course, is incorrect. A balanced budget simply means that whatever government wants to do, it must pay for through current taxation and not through borrowing or printing money.

Billings also misses the mark by failing to note that an amendment to limit spending would encourage private sector growth without the need to balance the budget. The obvious solution to the problem of deficits, namely less government spending , is never mentioned. Smaller government spending would place dollars back in the hands of consumers, who would then be able to decide how best to spend the money. This would make more capital available for investment and entrepreneurial activities and promote economic growth.

Criterion 9: The Business Cycle

Students are presented with basic terms and the recent history of economic expansions and contractions. However, Billings uses the word "uncontrollable" to describe the business cycle. He explains the external causes and internal causes for the business cycle without suggesting that government actions—tariff manipulation, tax hikes, and the Fed tinkering with interest rates and money supply—played a role in the Great Depression. Instead, Billings ends the discussion of the business cycle with an extended development of the Keynesian multiplier, a largely discredited notion.

The author defines inflation, explains how it erodes the value of money and income over time, discusses how it is measured, and provides historical examples of rapid inflation. Inflation is presented as a serious economic problem and Billings rightly sees any attempt by government to fight inflation through mandatory price controls as involving "high costs" ( p. 296).

Criterion 10: Wages, Unions, and Unemployment

Billings studies labor unions and the collective bargaining process at length. He empasizes two key facts: (1) that unions are less influential today than a generation ago and (2) that strikes are almost never carried out. The text does a nice job of balancing the need to explain union operations and benefits alongside the costs of union activity. After reading this section, students will better understand that unions have had a stormy history, have helped some workers at times, but through it all have had a hard time sustaining membership because workers have been able to achieve many of the same benefits on their own without unions.

The twin issues of wages and unemployment are developed, as well as the reasons for unemployment. Billings correctly identifies unemployment as arising from inadequate training—and he also notes that the main component of wage differences is a worker’s productivity. He lists lesser factors contributing to wage differences as job characteristics, benefits, location, and discrimination.

Criterion 11: Trade and Tariffs

Central to economic analysis are the laws of comparative advantage and free trade. Billings covers the arguments in favor of protectionism and then explores the benefits of free trade. The treatment of the GATT and the EEU is fair and unbiased. He discusses exchange rates and defines the balance of payments. Overall, the text presents free trade favorably and criticizes protectionism.

Finally, Billings describes the problems of developing countries. Unfortunately, he understates market forces in his description and focuses on the level of natural resources, population, and credit—none of which prevent economic development. The key to developing a country is providing services that others wish to buy. Therefore, creating a literate workforce, providing a stable political climate, and promoting production through markets are the key mechanisms for escaping third world status. Billings perceptively notes that "prosperity loves company" (p. 401). If, through free trade, we can encourage underdeveloped countries to expand their economies this will have a beneficial effect on us as well.

Criterion 12: Money and Banking

Billings describes barter exchange, the functions of money, and the transformation of the money supply from gold to paper currency. He then points out that our currency today is "backed only by the good faith people have in their government." But he errs when he states that, "people had to accept the paper money issued by their government" (pp. 304-305). The error can be seen internationally in the way people avoid the Russian ruble and instead transact in U. S. dollars in many locations in the former Soviet Union. The ruble is legal tender but not a very desirable commodity.

The text then examines the role of banks in supplying money and the relationship between deposits, loans, and interest rates is brought out as are the types of financial institutions. The thrust of the presentation involves the S&L crisis of the 1980s. Here it is clear that Billings believes that added regulations on the industry will prevent a similar crisis in the future. No mention is made of the alternative view that industry regulations could be removed and consumers would benefit from greater competition. The student will not learn from Billings that the major reasons for the S&L crisis were the unsound insurance policies of the federal government (charging poorly managed S&Ls the same insurance premium as the well-managed ones, and doubling the amount of deposits Washington would cover if reckless managers lost them through bad investments).

Billings goes on to detail why the Federal Reserve system was created, how it is organized, and the tools the Fed uses for monetary policy. Billings takes the time to develop both the arguments for and against monetary policy. He discusses the dangers of loose money and the "problem of choosing the right medicine for the right disease at the right time"(p. 333). He also gives space to the monetarist critique of Fed efforts to control the business cycle.