Economics: Institutions and Analysis
by Gerson Antell and Walter Harris
(New York: Amsco School Publications, 1997), third edition, 649 pp.
General comments: This book (EIA) is a hefty paperback, printed in
black and white with few pictures. It is sober both in tone and appearance. The writing is
generally clear and neither too advanced nor too simple for most students. On some topics,
the book is very good, concentrating on teaching the economic way of thinking.
Unfortunately, on many controversial policy issues, the authors stop being even-handed and
provide their own conclusions as unchallenged truth. On some issues, such as antitrust
laws, the authors seem confused and unaware how history affects their argument.
Criterion 1: Costs and PricesHow Production is Determined
In its treatment of "the basics," EIA is very good. The authors take the
student carefully through scarcity, choice, opportunity cost, the price system, allocation
of resources, consumer sovereignty, marginal analysis, and other foundational matters. The
early chapters are solid and get the student off to an excellent start.
Criterion 2: Competition and Monopoly
On the subjects of competition and monopoly, the book begins to falter. While the
authors do not themselves disparage market structures that are not purely competitive,
they present a feature on Joan Robinson [xxwho?] that does. Readers are told that
"many economists disagree with her conclusions"(which call for government
intervention to correct markets that are not perfectly competitive). After reading
Robinsons call for vigorous national regulation to prevent the "abuses" of
the free market, students ought to read some counter-arguments, but sadly none are
EIA properly analyzes the economic effects of monopoly, explaining that monopolists
rationally find their profit-maximizing price (a point the authors later forget when
discussing inflation). The weakness in the books treatment of monopolies and cartels
is that it fails to consider how hard it is to establish a monopoly or cartel in a
genuinely free market. The authors repeat the conventional wisdom that Standard Oil
secured a virtual monopoly by driving competitors out of business through predatory
pricing, but this charge was thoroughly disproven in a celebrated October 1958 article in
the Journal of Law and Economics by John McGee. More recent scholarship (e.g., the
1996 book by Robert Bradley, Oil, Gas, & Government) has confirmed McGees
conclusions. Even socialist historian Gabriel Kolko in the 1985 reissue of his classic, The
Triumph of Conservatism, paints a very different picture of Rockefeller and Standard
Oil from EIA.
The authors also charge Standard Oil with securing low railroad rates. Here, they could
have encouraged the economic way of thinking by asking students to think about the
economic reasons for and consequences of Standards ability to negotiate low freight
rates. Several noted scholars, including D. T. Armentano in his 1996 book, Antitrust
Policy: Anatomy of a Policy Failure, have written extensively on these points, but the
book shows no awareness of their work. Nor do the authors note that Standard Oil (which
always had dozens of competitors in the U.S. and abroad) steadily lowered its prices and
improved the quality of its product over a span of decades.
The books treatment of antitrust is, overall, quite poor. The student reads the
familiar arguments for antitrust action by the government (e. g. monopolies are wasteful,
insensitive to consumers, and they threaten our political institutions). The authors
portray antitrust laws as an easy, effective remedy. The benefits of antitrust are simply
assumed, and the costsuseless litigation, the deterring of competitive
behaviorare ignored. The economics of antitrust is a hotly debated field, but one
would scarcely know it from this book.
The authors say nothing about the role of the government in creating and protecting
monopolies and stifling competition, which is where many economists think the real problem
On the subject of mergers, however, the book is sound, and even makes the important
point that much of the corporate downsizing of recent years has occurred because of
previous mergers that had produced inefficient economic combinations.
Criterion 3: Comparative Economic Systems
EIAs section on comparative economic systems begins with several pages on the
theories of Karl Marx, presented without criticism. For instance, are there reasons to
disbelieve his contention that profits are really value stolen from the workers? Yes, and
discussing them would sharpen the students economic thinking ability. When the
authors finally get around to asking, "Why was Marx wrong?" the answer they give
is that governments passed laws to help consumers and workers. That answer says nothing
about the internal logic of Marxism and greatly overstates the role of the state in
quelling revolutionary fervor. Contrary to Marx, real wages rose steadily long before the
passage of any "pro-labor" legislation in nations with free economies. One
reason Marx was wrong was that he did not understand that the benefits of rising
productivity cannot be confined just to the owners of capital.
In discussing the failure of the Soviet economic system, the authors point out that the
absence of a price system made it impossible for economic planners to allocate resources
efficiently, leading to shortages and surpluses. That is a vital point. They should also
have discussed the problems of poor quality goods when competition and profits are not
allowed. The student learns that people living under socialist regimes had to wait in long
queues to make purchases, but does not get a full idea of the privation suffered by
ordinary people and the low standard of living they had compared with ordinary people
living in market economies.
The Swedish "middle way" is given a very favorable presentation ("highly
successful from the 1930s to the 1990s," they write), but this conveys the misleading
impression that Sweden has enjoyed a prosperous economy because of its welfare system.
Swedens stagnating economy, its high level of unemployment, its alcoholism and
suicide, and its highly authoritarian state contrast sharply with the books glowing
picture of that country. Students would have been better served by a serious analysis of
the economic effects of welfare and government economic control.
Criterion 4: The Distribution of Income and Poverty
The books section on income inequality and poverty is weak because it focuses on
polemics, not economic analysis.
The discussion of poverty begins with the Census Bureau data on the percentage of the
population living below the poverty line. The authors do not mention that these figures
are not adjusted for in-kind transfers [xxsuch as food stamps?]. Nor do they mention
that there is a high degree of income mobility in the U.S. Those who are in the lowest
quintile while young often advance by the time they have reached middle age. Failing to
bring out these points makes the "poverty problem" seem much greater than it is.
An accompanying "mini-reading" entitled "The Growing Problem of
Homelessness" on p. 469 reinforces the impression that the authors are interested
more in proselytizing than in instilling an economic way of thinking. Despite the title,
nothing in the reading says that homelessness is, in fact, growing. The books
discussion of public assistance programs fails to go into the effects of those
programs; nor is there any analysis of the costs and benefits of government job training
and public works programs.
Worse still is the books assertion that "discrimination has been a major
cause of poverty" (p. 476). This gives the authors a springboard for a brief
discussion of affirmative action programs that considers intentions rather than results.
Both the premise that labor market discrimination is "a major cause of poverty"
and the conclusion that affirmative action is the solution are highly contested points in
the economics literature. But the student only hears one side of the issue.
The treatment of minimum wage laws is only slightly better. The student at least learns
that there is debate over the impact of minimum wage laws, but the arguments are
The book proceeds to a lengthy discussion of health care reform. The analysis is not
bad, pointing out that health insurance encourages unnecessary spending on health care.
Unfortunately, the possible reforms that are then discussed are all interventionist. One
is to mandate that insurance companies cover everyone who applies. The authors say,
"Insurance companies warn that forcing them to insure poor-risk individuals will
cause insurance premiums in general to increase dramatically. Supporters reply that
insurance companies overestimate the added costs. Moreover, they say, the moral issue (the
belief that it is unfair to deny any individual insurance protection) overrides economics
of costs: Consumers should be willing to pay higher premiums so that more people are
covered" (p. 489). Such polemical discussion does little to improve the
students ability to analyze.
The section continues on through "Play-or-Pay," compulsory health insurance
and nationalization. Tellingly, there is no discussion at all of reforms that move toward
the market and individual choice, such as medical savings accounts. Even though government
intervention in medical care is already substantial and has been shown to have fostered
many costly distortions in the market for health care, the authors would have the student
believe that problems that exist must be due to free markets. The message to students in
this book is that improvements in our vastly complicated health care system can only come
through more government intervention.
Criterion 5: The Role of Government
Antell and Harris explain the "public goods" problem very briefly, giving
police services and street lamps as examples. They correctly state that many things that
government provides are not public goods, but fail to explore the well-known
inefficiencies associated with government-provided goods and services, except to note that
"some people argue that the government already provides too much." This does not
help the student understand the economics of government-provided goods and services.
The authors give more space to the problem of externalities, but still do not engage
the student in any economic analysis. They deal with the issue of pollution without
examining the economic trade-offs that are always involved in such issues. Economic
thinking is largely a matter of analyzing competing options, but here the authors fail to
encourage the student to look at the problem this way.
In similar fashion, EIA argues that government should redistribute income and maintain
economic stability. The authors devote several pages to a section discussing
"changing attitudes toward the role of government" (p. 257), which posits that
the vast expansion of government since the 1930s has been due to public demand. The
authors fail to note that interest group politics is almost always behind new laws and
programs. The authors then present a list of programs created during President Lyndon
Johnsons "Great Society" of the 1960s. Again, the student reads only about
the good intentions of these programs, and nothing about their actual results. Failure to
acknowledge the mountain of scholarly criticism of these programs suggests that the
authors are more interested in advancing their personal ideology than sound economics.
Finally, the discussion of Social Security is weak and outdated. The student does not
learn about the incidence of Social Security taxes; that the Social Security Trust Fund
contains no actual wealth, but only government debt obligations; that Social Security has
any adverse impact on capital formation; or that it deters many older people who might
otherwise choose to work from doing so. The discussion of reform proposals is limited to
those that would raise Social Security taxes or lower the level of benefits it bestows.
There is nothing on the widespread debate over privatization through individual investment
accounts. The student, in short, will learn almost nothing from this books treatment
of Social Security that will equip him to deal with one of the most important policy
debates of our day.
Criterion 6: Public Choice
In yet another glaring omission, the concepts of public choice theory never appear in
this book. The closest the authors come to mentioning the incentives of political
decision-makers is to say that "political considerations" may make it difficult
to implement fiscal policy in an ideal way. Students learn nothing about the impact of
voter ignorance, interest group pressures, or the self-interest of politicians and
bureaucrats. This omission leads to a persistent bias toward government action.
Criterion 7: Entrepreneurship
EIA includes a brief discussion of entrepreneurship, defining the term and explaining
that the motivation for entrepreneurial activity is profit. There is also a short case
study on one successful entrepreneur. What is missing is any sense that entrepreneurs are
important in promoting prosperity, or how government policy can deter it.
Criterion 8: Taxation
The authors provide an extensive discussion of the various reasons why taxes are levied
and the different types of taxes. Their treatment of the economics of taxation, however,
Readers are reminded that, like all other activities, there is an opportunity cost to
taxationthe funds collected by the government cannot then be used by individuals and
firms for their purposes. However, the book leaves the impression, especially in its
discussion of estate and gift taxes, that money that isnt taxed is somehow lost to
society. Yet, this is the money that starts businesses, builds buildings and homes and
pays for education. The correct point to emphasize is that the government uses money in
certain ways, and the general economy puts money to use in other ways.
The books treatment of the personal income tax only lightly criticizes the
current system. "Some critics of the personal income tax say that it is harmful to
the economy because it lacks enough deductions, exemptions, and credits that would promote
individual investments in private enterprise" (p. 283). The major criticism of the
income tax, however, is not that it needs more deductions, exemptions and credits, but
that its enormous compliance costs and high rates waste resources and deter saving and
investment at the margin.
The discussion of the corporate income tax is also weak. The authors do note as a
"criticism" of this tax that "Money taken by government might have been
used by corporations to expand their production" (p. 283). This, however, is not
merely a "criticism." It is an economic fact, one whose implications the
authors fail to explore. They also call attention to the incidence problem [xx], saying
that some or all of the corporate income tax is passed on to consumers. But this
oversimplifies the problem. Economists have been arguing for decades over the distribution
of the corporate income tax and the extent to which it is passed on to consumers. A key
point the authors fail to make is that businesses cannot be taxedthat all
taxes on business ultimately are borne by workers and consumers. A very dubious point they
make instead is that corporate taxes are linked to inflation, though inflation is a monetary
not a taxation phenomenon.
When it comes to discussion of the Social Security tax, the authors are silent on the
incidence problem [??xx]. They repeat the often-criticized view that "Wage earners
and their employers both pay the same percentage of the workers salary into the
Social Security system" (p. 285). Economists who have studied the matter argue that
employers factor the cost of payroll taxes into the gross compensation paid to workers.
Workers do not see the full impact of the Social Security tax, but it is one that they
bear entirely. Unfortunately, readers of this book do not learn this, nor do they learn
the more general point that businesses make marginal adjustments to offset costs mandated
Finally, the issue box on the underground economy misses the vital point that much of
the economic activity conducted "underground" would not take place but for the
impact of taxation on prices. The authors mention the possibility of "much
lower" taxes for the populace if only the underground economy could be taxed. Instead
of engaging in real economic analysis of the costs and benefits of attempting to tax
"off the books" transactions, the authors merely say to the student, "What
do you think should be done?"
Criterion 9: The Business Cycle
Perhaps the worst of all the major sections of the book is its treatment of the
business cycle. The students are presented with the discredited Keynesian view with almost
no hint of skepticism. They never learn any of the devastating criticism to which it has
been subjected for more than fifty years.
First, on the causes of economic fluctuations, the authors squander space on the
long-refuted notion that innovation can cause business cycles. They ignore the Austrian
and Monetarist arguments that erratic management of the money supply leads to economic
maladjustments that must later be rectified in a period of recession. In analyzing the
reasons for cycles, the authors have tunnel vision. Their ignorance of more reliable and
modern scholarship is appalling.
The Great Depression is given a brief discussion that asks many questions, but fails to
describe the government blunders that helped create and perpetuate the crisis.
Furthermore, the authors present the Keynesian aggregate demand analysis [xx?] in an
uncritical way. Many economists have ridiculed the components of this analysis (the
"multiplier," the "accelerator," the "paradox of thrift,"
and the idea that spending determines national income), but the reader is led to believe
that the Keynesian theory is just as true as the law of demand. The debate over Says
Law is breezily dismissed in a single sentence: "In the 1930s, however, many people
concluded that Says Law simply did not work" (p. 405). But was that conclusion
correct? Many economists have argued that it was notsee, for example, Thomas
Sowells The Rehabilitation of Says Law.
Supply-side theory is presented as a form of economic stabilization policy, but
supply-siders have argued that their policies will increase economic growth over
the long-run. Whats worse is that the authors repeat some of the emotional attacks
against supply-side theory ("would only enrich the wealthy," "indifferent
to the needs of millions sorely in need of government assistance") without any
rebuttal or analysis for the students. Some students may wonder if the authors
attachment to warfare slogans has blinded them from seeing evidence that doesnt fit
their particular point of view.
Criterion 10: Wages, Unions, and Unemployment
Much of the material on the labor market in the book is descriptive rather than
analytical, with several pages devoted to labor force trends. When the authors finally get
to wages and the market for labor, they competently explain that worker compensation is
determined by supply and demand.
Unfortunately, EIA says nothing on the effects of minimum wage laws or labor market
restrictions. It correctly explains the different kinds of unemployment, but does not go
into the effects of government programs on unemployment.
Regarding labor unions, the book correctly notes that unions cannot repeal the laws of
economics. Unions, therefore, can affect worker compensation only marginally. Many pages
are spent in describing the goals of unions, but there is little economic analysis of the
effects of unions. Moreover, the union objectives are presented as if the welfare of
workers was their sole concern. The authors never raise the possibility that union
officials have interests that differ from the interests of all the workers they represent;
nor do they analyze the adverse effects that the realization of union aims can have on
other workers and on productivity.
Criterion 11: Trade and Tariffs
The authors accurately explain the fundamentals of international trade. Missing,
however, is a discussion of the erroneous belief that dire economic consequences arise
from trade deficits. The arguments for and against trade restrictions are presented, but
not critically examined. It would be better to consider each protectionist argument, and
show the student how a good economist thinks through the problem.
Criterion 12: Money and Banking
EIA provides a good explanation of the function of money and implies that money is a
creation of the market, not the state. The chapter, however, assumes that government
provision and regulation of money is the only imaginable state of affairs. Nothing
encourages the student to think about the possibility that problems can arise as a result
of government officials being in charge of the monetary system.
The book does include a section on the gold standard, but the authors make the dubious
statement that it failed because of the "inability of nations to manage their money
supply" (p. 543). However, a major virtue of the gold standard was that it imposed an
automatic discipline on national monetary policy. Students ought to learn that the gold
standard facilitated price stability and international trade. Since a strict gold standard
was largely abandoned with the creation of the Federal Reserve System in 1913, the U. S.
has fallen victim to a great depression, at least nine recessions, and an uninterrupted
erosion of the value of the dollarhardly a compelling case for governments
In discussing the causes of inflation, EIA covers both demand-pull and cost-push as if
they were equally valid theories [xx]. Many economists maintain that cost-push inflation
is an impossibility because there cannot be a sustained, general increase in prices in the
absence of an increase in the money supply. As Milton Friedman says, inflation is always
and everywhere a monetary phenomenon. The cost-push inflation idea is rooted in one of the
most widespread of economic misconceptions, namely that costs determine prices.
The books treatment of banks correctly explains their purposes and operations,
but is weak on the effects of government regulation of capital markets and financial
institutions. The reader hears nothing on the tendency of federal deposit insurance to
encourage unsound lending. The discussion of the S&L crisis is similarly deficient
because the authors never make the link between the vast losses and federal policy.
The functions of the Federal Reserve are accurately described, but the authors do not
delve into such interesting questions as the responsibility of the Fed for the Great
Depression and subsequent economic downturns, and whether a fixed rule or discretionary
monetary policy is preferable.