Dollars and Sense: An Introduction to Economics
by Marilu H. McCarty
(New York: Harper Collins 1994), seventh edition, 372 pp.
General Comments: This paperback text is written at a fairly
sophisticated level and some students will probably struggle with it. The amount of space
devoted to photographs and filler is low, which leaves a lot of space for teaching
economics. Unfortunately, that space is not used well. Too often, the book labors to
inculcate government solutions rather than instruct the student in the economic way of
thinking. She also has errors and confused analysis on key economic issues.
Criterion 1: Costs and PricesHow Production is Determined
McCartys treatment of the economic fundamentals is generally good. She clearly
explains the concepts of scarcity, specialization, opportunity cost, and profit and loss.
One omission, however, is a definition of economics itself. Students ought to understand
that the study of economics encompasses the whole range of purposeful human action and has
applications not just to business and consumer decisions, but to all rational choices.
The authors explanation of the "invisible hand" is much too limited. It
fails to give the student a true understanding of the markets ability to coordinate
economic activity. Moreover, she accepts the outdated idea that if the free market is to
work, "there must be perfect competition in the marketplace" (p. 32). That idea
was popular 50 years ago, but few economists accept it today.
McCartys discussion of the price system is capable, but does not impress strongly
on the student that economic efficiency begins with the markets spontaneous
adjustments to price changes. "So what if the market gets rid of surpluses
quickly?" the students may wonder. They should learn that price is the key to helping
us get the maximum benefit from limited resources.
The discussion of price controls is weak. McCarty writes that price controls "can
prevent markets from movng to equilibrium." Sooner or later, price controls must
interfere with market equilibrium and when that happens, there must be economically
wasteful shortages or surpluses. Furthermore, she writes of natural gas price controls
that they were occasioned by "voters preferences for fairness." This is
economically naïve. Natural gas price controls were a means by which non-gas state
politicians tried to curry favor with voters who naturally preferred cheaper fuel.
Criterion 2: Competition and Monopoly
McCarthy sets up perfect competition as the ideal market structure and criticizes
"imperfectly competitive" markets as inefficient. She writes, "Resources
allocated to packaging, advertising, and designing . . . might better be allocated to real
production." This attack is nowhere balanced by any discussion of how consumers
benefit from product variety, packaging and advertising. Everyone could choose to
buy generic cereal, for example, and save money; since most consumers dont, they
must see some value in variety, advertising, and colorful packaging.
She also asserts that "gentlemans agreements" often lead to
"shared monopolies." That belief is common, but overlooks how hard it is to make
such agreements last. Often these agreements are broken as soon as one of the
"gentlemen" reaches a phone. The book also implies that it is easy to drive
rivals out of business and form a monopoly. Many economists argue that it is competition
that is durable and easy to maintain, and monopoly that is fragile, not the other way
The books antitrust section is poor. To say that the Sherman Act "has been
primarily used against labor unions" (p. 102) is wildly untrue. A few, very early
cases involved unions, but there have been none since 1914 when the Clayton Act exempted
unions from antitrust actions. Worse is McCartys failure to consider the costs of
antitrust. Scholars have long noted how the governments Antitrust Division sees
competition under constant threat and brings many suits that merely waste resources. Many
economists now argue that both government and private antitrust suits often inhibit
rather than protect competition. Unfortunately, the book conveys the impression
that antitrust is all benefit and no cost. Finally, McCarty describes Standard Oil as a
case of monopoly, even though the company always had many competitors.
Criterion 3: Comparative Economic Systems
McCarty almost ignores the subject of comparative systems. Only in the introduction,
briefly, does the reader find any discussion of the economic problems with central
planning. She writes, "You can imagine how difficult a command economic system would
be in a modern, complex economy. It would be particularly difficult without computers for
planning production and without rapid communication and transportation facilities for
carrying out the production plan" (p. 10). This is very misleading. The Soviet Union
had computers and fairly modern communication and transportation facilities, but suffered
from massive inefficiency. Students never read a serious explanation of why central
planning fails whenever and wherever it is tried.
Criterion 4: The Distribution of Income and Poverty
The books discussion of poverty and income distribution issues is marred by
overblown rhetoric. For example, McCarty writes, "If a nation guarantees absolute
freedom to pursue individual gain, it will ensure misery for those who are least able to
succeed" (p. 292). This implies that the only way to assist people who cannot provide
for themselves is through restrictions on the economic freedom of others, an idea that
many economists would find debateable, if not absurd. The nearly absolute economic freedom
of early America did not "ensure misery" for anyone. Statements like that,
redolent of political campaign oratory, should be left out of teaching materials. They
smack of propaganda, not honest presentation of fact.
McCarty makes much of the fact that income is very unequally distributed, but students
cannot know what to think about that unless they learn that many people who begin life
poor advance far up the income ladder, and that many other people fall in income. The rich
dont necessarily stay rich and the poor dont necessarily stay poor. On the
subject of poverty, McCarty seeks to pin the blame on discrimination: "A major cause
of poverty is discrimination" (p. 295). This is a controversial theory that many
economists reject. In competitive markets, employers, landlords, or other business
decision-makers who decide to discriminate put themselves at a disadvantage with
non-discriminators. Instead of a penetrating analysis of the economics of discrimination,
the student gets only a blanket conclusion of doubtful accuracy.
The book discusses the Social Security system in conjunction with the distribution of
income. McCartys presentation of the financial problems confronting Social Security
is clear and correct, but when it comes to solutions, she looks only at adjustments to the
status quo. She does not consider the possibility of phasing out Social Security
and relying on individual savingsa major element of the current discussion about the
possibility of following the lead of more than a dozen countries and privatizing
government-sponsored retirement programs. Nor does she bring out any of the important
economic consequences of Social Security.
Finally, the discussion of urban poverty is incomplete. She never explains that many
cities have created climates that are very hostile to enterprise through high taxes,
zoning, burdensome regulations, occupational licenses, and poor services.
Criterion 5: The Role of Government
McCartys book does not have a section specifically devoted to the role of
government in the economy, but discussions of the major issues are included throughout the
text. The subject of public goods is hardly raised at all. The closest the book comes to
it is a box entitled "Letting Government Do It." She asserts: "We ask
government to do for us what we cannot do for ourselves" (p. 210). Unfortunately,
there is no discussion of what public goods are, why they pose a problem for the market,
and what are the costs and trade-offs in government intervention.
Negative externalities are discussed under the section on economic growth, although
this problem is certainly not confined to growing economies. This section is badly flawed
with dubious pronouncements on the environment such as, "The world as a whole is
threatened by the greenhouse effect. . . ." (p. 325). There is much dispute among
scientists over the existence of the greenhouse effect, and what its impact is if it
The book treats the problem of economic instability in Keynesian fashion: The reason
for economic cycles is that spending is sometimes inadequate to maintain full employment.
McCarty presents Keynesian theory in much detail, but with no critical analysis. She also
gives no alternative explanations for the business cycle. There is a brief discussion of
supply-side theory, but not so much as an alternative theory of the business cycle as a
critique of the exclusive focus on demand management policies. Even here, she gives the
false impression that supply-side tax cuts were harmful, and that the nations
economic recovery was the result of later tax increases. Many economists dispute this
notion, but you wouldnt know it from the text.
The book leaves the student with the belief that market economies are inherently
unstable and that government must solve that problem in some way. Students never learn
that many economists regard this conclusion as erroneous and contend that the government
itself is the source of economic instability. Not only does McCarty fail to teach economic
analysis, she propounds as truth ideas that have been vigorously attacked for decades.
Criterion 6: Public Choice
"Public Choice" does not appear in the index, nor do the basic public choice
concepts appear much in the book. The problem of special interest groups is adverted to
when the author says, "What is politically desirable for a particular group may be
undesirable for the economy as a whole" (p. 208). This statement, however,
doesnt help the student see why interest groups are so successful in their quest for
special favors from government. Generally, the book presents "government" as an
abstraction that pursues "the public interest" rather than as a collection of
individuals who are as self-interested as people in the private sector.
Criterion 7: The Role of the Entrepreneur
Entrepreneurship is barely touched upon. McCarty only briefly mentions in the
introduction the role of the entrepreneur and the need and reward for risk-taking. Nowhere
does she describe how important entrepreneurs are to economic progress. Nor does the
student learn how entrepreneurship can be stifled by taxes and regulations.
Criterion 8: Taxation
McCarty begins by pointing out that taxation necessarily means transferring resources
from the private to the public sector. "Through taxes, government takes purchasing
power away from spending for private purposes and spends it instead for public
purposesfor producing goods and services to be used by the community as a
whole" (p. 192). This is misleading: Taxes are often spent for things that benefit
only small segments of the community, and spending for "private purposes" often
creates benefits for many people.
The book identifies the various kinds of taxes collected, but never gives a serious
discussion of the economics of taxation, particularly its costs and impact on incentives.
The authors comments on the Reagan tax cuts are very biased. She writes,
"Income tax cuts favored high-income taxpayers, whose work incentives were already
high at the expense of low-income taxpayers, who had to reduce their savings to maintain
their former standard of living" (p. 207). This sounds more like campaign rhetoric
than serious economics. Good economists do not ask whom a tax change "favored,"
but the positive question of what the consequences were. In any case, when the marginal
income tax rates for high-income taxpayers were reduced from 70 to 28 percent, that did
not increase taxes for low-income tax payers. In fact, the Reagan tax cuts dropped many
low-income taxpayers from having to pay income taxes at all. Also, the revenue to the
government after the Reagan tax cuts sharply increased because entrepreneurs had new
incentives to invest in industry instead of hiding their savings in tax-exempt bonds.
Criterion 9: The Business Cycle
McCartys one-sided treatment of the business cycle is covered in Criterion 5.
Instead of wasting space on a box on the "sunspot theory" of the business cycle,
she could have presented to the student the Austrian and Monetarist theories of the
business cycle and criticisms of the Keynesian approach.
Criterion 10: Wages, Unions, and Unemployment
The books explanation of wage rates as a standard supply and demand price
phenomenon is good, and the important implication that worker compensation is directly
related to productivity is clearly made. Also good is the discussion of minimum wage laws;
McCarty explains why they reduce employment opportunities for low-skilled workers.
The treatment of labor unions is also reasonably good. McCarty notes that while
collective bargaining may raise wages for union workers, it also prevents many willing
workers from being able to find ways to enter the labor market. That has led to job losses
in unionized industries. She also encourages students toward skepticism about the claim
that wage and benefit increases are necessarily due to union action: Market conditions
often compel firms to raise wages to attract and retain good employees. She should also
have said that capital investment raises productivity, and that is the ultimate source of
On the subject of unemployment, McCarty correctly notes the various types of
unemployment and that some amount of unemployment is natural and unavoidable. However,
there are two weaknesses in this section. First, government programs to deal with
unemployment are mentioned, but not analyzed. What are the effects of unemployment
insurance; of government job training programs? They are not discussed. Second, the book
advances the "Phillips Curve" notion that there is an inevitable trade-off
between inflation and unemployment. Many economists reject this view and its policy
implication, that we can have low unemployment only at the cost of inflation. That idea
should not be presented to students as truth.
Criterion 11: Trade and Tariffs
McCartys discussion of trade is sound, but it would have been better if she had
explained that "international" trade is not "trade between nations"
but trade between individuals or firms located in different nations. She also fails to
confront the popular misconception that a "negative trade balance" is something
to worry about. The books treatment of the effects of trade restraints is also good,
including non-tariff barriers and export subsidies. The weakest spot in the analysis of
trade is the overly charitable view of the "infant industry" argument. Many
trade scholars have cast doubt upon the assumptions underlying this argument, but the
student is led to believe that planners can use tariffs to cultivate new industries.
Criterion 12: Money and Banking
The books handling of money and banking is mixedsome very good points, but
some significant errors and omissions, too.
On the functions and characteristics of money, the reasons for the use of money, and
the development of banking, the book is good, if somewhat brief. That money is a creation
of the market, however, is an important insight that is not brought to the students
attention. McCarty discusses the problem of inflation from overissuing bank notes and from
"wildcat" banking, but never mentions either the role of government policy in
encouraging unsound banking, or the ways market institutions (such as banknote reporters)
have minimized the harm.
On the establishment of the Federal Reserve system, McCarty writes that, after the
Panic of 1907, "voters finally began to support the idea of a strong national banking
system." The push for a central banking system, however, did not come from
"voters," but from a few large bankers who saw advantages in having a central
bank to regulate the banking system and act as a lender of last resort. This is another
manifestation of the books lack of public choice analysis.
The books treatment of the S&L bailout is misleading. McCarty portrays the
deregulation of S&Ls as the cause of the debacle, but many economists have argued
strongly that S&Ls were doomed in any event; their very existence was due to unwise
regulation in the first place. Moreover, the author fails to discuss the role of
government deposit insurance. She writes that S&Ls are "important to the health
of the nations housing industry" (p. 221), but this argument is hard to defend.
There has never been a need for government to encourage lending institutions specifically
geared toward the housing industry, any more than there is a need for lending institutions
that might concentrate on auto loans. The capital market allocates capital wherever it
does the most good, but McCarty does not encourage the student to think through the way
the market works.