Economics (Addison-Wesley)

by Richard M. Hodgetts and Terry L. Smart
(Reading, Mass.: Addison-Wesley, 1993), 548 pp.

Rating: F

General Comments: This hardbound book is attractive and nicely printed. The amount of space devoted to photographs and other filler is normal, and the writing is appropriate for high school students. However, the book is very weak when it comes to helping develop the student’s ability to think like an economist. Too much of the material is descriptive, not analytical. The student is simply told about many things without being shown how economists apply their method of analysis to understand costs and benefits. Moreover, the book leaves many doubtful if not clearly mistaken impressions by giving only one view of important policy issues.

Criterion 1: Costs and Prices—How Production is Determined

The book gets off to a poor start by defining economics as "a science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants" (p. 4). "Society" is an abstraction, and has no needs and wants; this definition misses the vital idea that economics is about understanding individual decision-making in the face of scarcity.

The book does a competent job in presenting the concepts of scarcity, cost, production possibilities, elasticity, equilibrium price, and other fundamentals. Missing, however, is a sound explanation of how markets spontaneously allocate resources to their most beneficial uses. The closest the book comes to a discussion of this important point is this rather fuzzy statement: "In a capitalistic society we tend to believe that consumers determine which firms will survive and which will not. The companies that provide what consumers want should be profitable and continue to grow" (p. 33). An understanding of how the price system efficiently directs resources is important, but the student is barely pointed in that direction.

Criterion 2: Competition and Monopoly

The authors explain different market structures clearly, but do not address the efficiency issues. There is no clear explanation of the tendency of monopolists to "understock the market," for example.

The book does have a lot to say about monopoly, but much of it is false or misleading. There is no discussion of why it is tough to form and perpetuate a monopoly when rivals are able to enter the market. The authors give a biased view of the Standard Oil breakup, leaving unchallenged the view that the public interest was served when the company was broken up under the Sherman Act in 1911. Yet, Standard’s superior efficiency in producing and selling petroleum products had brought prices down significantly, and rival firms had whittled away much of Standard’s 90 percent market share long before the antitrust decision.

Also missing is any suggestion that antitrust laws can protect competitors rather than competition. The authors could also have encouraged good economic thinking habits if they had delved into such pertinent questions as the incentives of the antitrust enforcers. Similarly, the book’s discussion of mergers fails to note that efficiency is usually the motivator, and that stopping them does not necessarily "protect competition." This section of the book is typical in suffering from an excess of description (e.g., what the Robinson-Patman Act is supposed to do) and a shortage of analysis (e.g., how enforcement of that act impedes competition).

Criterion 3: Comparative Economic Systems

The book’s discussion of comparative economic systems suffers from inadequate attention to the nature of decision-making in market and command economies. Also, it commits the terrible mistake of presenting socialism as a "middle" system between capitalism and communism.

The authors give the student a lengthy historical exposition of socialism, complete with a distortion of the Industrial Revolution. They write, "Wages were so low that sometimes entire families had to work. Child labor was common in mines and factories. Working conditions were unsafe and workdays were long" (p. 347). Those statements are true, but the implication is that conditions for common people had once been better. Economic historians, such as Max Hartwell, have demonstrated that earnings had always been low, that "entire families" had always had to work, and that working conditions had always been bad. In fact, living conditions for workers improved steadily during the Industrial Revolution, but the book never says so. Indeed, socialist thinking was nurtured by conditions during the Industrial Revolution, but the great irony is that the Industrial Revolution made it possible for many people to escape from poverty.

Next comes a description of Marxism, but there is no critical analysis of the key Marxist doctrines, such as the labor theory of value and the exploitation of the worker. Again, this is a missed opportunity to teach the student good economic thinking by asking probing questions: "Where do the tools of production come from?" "Who bears the risk?"

The socialist economy is not well analyzed either. Regarding economic planning, the authors write, "Planning is the chief characteristic of a command economy" (p. 345). However, there is at least as much planning in a market economy as in a socialist one. The difference is in who does the planning, politicized bureaucrats with other people’s money or market entrepreneurs with money they’ve earned themselves or attracted because of their skills and good ideas. The incentives and information constraints are very different in the two cases. In a market economy, the decision-makers stand to gain from being right or lose from being wrong about investment and production; in a command economy, the decision-makers have no personal financial stake in their decisions. Moreover, in the absence of a price system (which, in turn, depends on private ownership), socialist planners have no way of knowing whether they are making efficient use of resources or not. The student is never led to consider those problems of socialism.

In presenting socialism as a "middle" economic system between the "extremes" of communism and capitalism, the authors mislead the student. As a matter of economic organization, either you have decision-making by private property owners or by government officials. In some countries, you find more pervasive government planning than in others, but socialism and communism are different in degree, not in kind. Finally, the book does not convey to the student the usual economic consequences of socialism—poor quality goods, shortages, technological backwardness, and black markets. With so much evidence piling up from hundreds of socialist failures the world over, there is no excuse for the authors to be ignorant on this point.

Criterion 4: The Distribution of Income and Poverty

The book’s section on income distribution begins with a breakdown of before-tax income. The authors fail to note that the data would look different if adjusted for taxes and non-cash benefits. They also need to discuss income mobility to show the student that "the rich" and "the poor" are not the same people over time. In fact, the text implies that there is little income mobility: "between the 1930s and 1980s, the distribution of income in the United States remained relatively constant" (p. 148). They mean that the percentages in each income quintile remained about the same; many students, however, will think it means that the rich stay rich and the poor stay poor.

In discussing the causes of poverty, the book says nothing about how government laws and programs can sometimes hinder poor people from bettering themselves. Instead, the authors assert the controversial conclusion that discrimination is a major cause of poverty. They are either utterly unaware of the volumes of theory and evidence to the contrary, or they want students to be ignorant of them so they won’t reach political conclusions the authors dislike.

The next section on "Fighting Poverty" is also flawed. The authors describe several government programs that are intended to alleviate poverty, but they fail to analyze them for their actual effects. Social Security has well-known perverse economic effects on rich and poor alike, but they are not mentioned. The text also repeats the mistaken notion that the employer pays half of the Social Security tax. Other programs—public assistance, unemployment insurance, job training—are treated the same way: description, but no analysis. Students may think that if a program has good intentions, that is enough; it doesn’t matter if programs generate poor or counterproductive results.

Criterion 5: The Role of Government

The authors’ treatment of government intervention rarely gets the student to think through the question of costs versus benefits of government action. They set the stage for their chapter with an "Analyzing Primary Sources" box devoted to Upton Sinclair’s The Jungle. Far from proving a need for government regulation of meat packing, Sinclair admitted the book was a polemical work of fiction—designed to promote socialism. Quoting from it may color the student’s thinking, but serves no purpose in teaching economic thinking.

In fact, there is excellent scholarship on the origins and effects of the Meat Inspection Act of 1906, arguing that it was sought by large packers as a way of eliminating smaller rivals who would have a hard time complying with its regulations. The student, however, never reads what President Theodore Roosevelt wrote of Sinclair: "He is hysterical, unbalanced, and untruthful. Three-fourths of the things he said were absolute falsehoods. For some of the remainder there was only a basis of truth."

Public goods are not well covered. Their definition, "goods and services made available by government to everyone" (p. 320) is inaccurate. When economists speak of public goods, they mean goods and services where non-payers cannot be kept from enjoying the good if it is produced. Garbage collection, golf courses, stadiums, schools and other things provided by government are not public goods at all. Furthermore, the authors fail to analyze the efficiency of governmental provision.

On subsidies, the book only considers their positive effects. Without the subsidy to Chrysler in 1981, supposedly the firm would have closed and thousands of workers would have been unemployed. Instead of looking exclusively at the benefits of the subsidy, however, the authors ought to encourage good economic thinking habits by considering the opportunity costs as well. They don’t.

Similarly, the authors defend agricultural subsidies on the grounds that without them, the incentive to remain in farming would be removed. But, the student may wonder, why did we have lots of farmers and no subsidies before 1929? Without subsidies, some farmers, the least efficient ones, might go out of business, but the book conveys the impression that there would be no farming if it were not subsidized. Their treatment of this subject does not teach sound economic thinking. It is tantamount to the notion that unless the king takes charge, the rest of the populace would starve because the people would be too stupid to understand that they should grow crops and raise animals to survive.

Consumer protection is also poorly handled. The FDA is a good example. Its objective of protecting the public against harmful drugs is emphasized, but there is no analysis of the actual effects of FDA regulation, many of which economists have argued do more harm than good. Safety regulation has a cost, but the student is not asked to think about this. Finally, the authors devote several pages to a weak discussion of "the farm problem" (pp. 160-66). They say that government needs to ensure that farmers receive "enough" income. However, the book never asks why there should be "parity" for agricultural prices and not for others, why we cannot let the market determine how much income farmers need, and what are the implications of allowing politics to affect the agriculture market.

Criterion 6: Public Choice

There is no discussion of public choice concepts in the book. Strangely, the authors include a page on James Buchanan and Public Choice theory (p. 305), but the material does not convey any of the key ingredients in public choice analysis. Only once is there a suggestion that "the government" consists of self-interested individuals who are inclined to do what is good for them (in the discussion of the problems of discretionary fiscal policy). When it comes to showing the student how to think critically about public decision-making, the book is very weak.

Criterion 7: The Role of the Entrepreneur

Little is said about entrepreneurship—just a definition and short description (p. 31). Some of the profiles and case studies succeed in giving the student some feel for the role of the entrepreneur, but they need to show more explicitly why entrepreneurs are important to economic progress and how hostile regulation and taxation can stifle them.

Criterion 8: Taxation

The authors describe the taxes levied in the U. S., but don’t engage in much analysis of the economic effects of taxation. They never discuss the direct costs of taxation (compliance and enforcement costs) or the opportunity costs of diverting resources from the market to the government.

The subject of tax incidence is not covered. In fact, the authors seem oblivious to the problem when they write, "Corporations are a very important source of income tax revenue for the government" (p. 298). Corporations do not ultimately pay taxes; people do. Economists debate exactly how the burden of this tax (and others) falls, but it is undisputed that businesses do not actually pay taxes. Sadly, this book leads the student to think that they do.

Criterion 9: The Business Cycle

Why does the economy go through cycles of business activity? The authors present several explanations, but without much analysis for the student. Most important, the authors do not include even the outlines of the critical debate between economists who believe that the market economy is unstable and needs frequent government "fine tuning," and economists who believe that the market economy is stable and that government policy is what causes our occasional ups and downs.

When discussing policies to promote economic stabilization, they omit the Monetarist prescription of adhering to a fixed rule for money creation. They say nothing at all about the Austrian School.

In presenting the Keynesian policy, the authors ask none of the probing questions that critics have been asking for decades. For example, they write, "When the government decides to fight a recession, it might spend an extra $50 billion for goods and services. This money is put directly into the economy" (p. 311). But where did this money come from? What other uses for the resources must be foregone? Will increased government spending in specific sectors lead to economic maladjustments? Unfortunately, the authors never raise questions like these, which leads the student to believe that government action is a simple matter.

Under "Economic Stabilization," the authors discuss various policies designed to "help guide the economy and keep it heading in the right direction." They include job training programs, but there is just a description of the intention of such programs, without any investigation of their actual effects. As for job discrimination, the student receives no critical analysis of job discrimination theories or affirmative action laws. The authors conclude with a weak discussion of "wage-price" policies. They concede that government tampering with the price system entails some problems (such as shortages), but go on to say, "Certainly there is some truth in that argument; however, there are also advantages in the use of wage-price controls" (p. 107). But they never explain what these "advantages" are, how they compare to the disadvantages, and what the alternatives are. None of this helps the student think through economic problems.

Supply-side economics is presented as a stabilization policy, when it is in fact aimed at growth. The authors explain the basic tenets of supply-side theory, but then offer a list of criticisms which many readers will take as proof that supply-side theory has been discredited. Such is not the case, but the student is pushed toward a negative view.

Criterion 10: Wages, Unions, and Unemployment

On wages the authors write, "Supply and demand can determine what happens in the labor market" (p. 196). They refer to this as the "traditional theory of wage determination," but they present no other theory. The book fails to explain labor market dynamics in any depth.

However, the student is informed that "other factors" affect the price of labor, including the worker’s degree of skill. But the worker’s degree of skill is an element of both the supply and the demand. Seemingly, the authors mean for the student to think of "skill" as somehow outside the "traditional theory," but that is misleading. Working conditions are set forth as another "factor" in wage determination, but supply and demand analysis easily encompasses differences in working conditions.

As to the minimum wage law, the book mentions it, but provides no analysis of its effects.

On labor unions, the book spends many pages describing unions, the various laws pertaining to labor-management relations, and the objectives of unions. The economic effects of unions are hardly considered at all. A good economic text will ask whether unions can raise the total pay for workers, under what conditions, and what impact their success has on productivity, prices, and job opportunities. In this text, however, the authors give the student "warm, fuzzy" sentences like: "A company must do its best for its workers. It should provide fair wages, good working conditions, and reasonable benefits" (pp. 213-14).

Criterion 11: Trade and Tariffs

When discussing international trade, the authors write as if it were a national phenomenon ("every country in the world trades with other nations to one degree or another") instead of explaining that "international trade" is just trade between individuals that crosses a national boundary. On comparative advantage, the authors continue this thinking: "A nation should concentrate its efforts on the production of those goods in which it has the greatest comparative advantage" (p.399). In a market economy, however, nations don’t concentrate on production, individuals do—and self-interest naturally drives them to find the best uses for whatever resources they possess.

The arguments about tariffs are not well analyzed. The authors present them in a format of "Some people say . . . but others argue." This does not help the student to learn to think through economic problems.

Criterion 12: Money and Banking

The book’s treatment of money is historically accurate, but never tells the student clearly that money is a market phenomenon. Moreover, it conveys the impression that the fall of the gold standard in the 1930s was inevitable and desirable. The authors say, "new banking regulations and restrictions on gold [in the 1930s] gradually led to recovery." On the Federal Reserve System, the student learns how it operates, but never reads about its track record.

Similarly, the authors describe how banks operate, but they only have a weak discussion of the effects of government regulation of financial institutions. On the S&L crisis, for example, the student receives no sense of the role of federal regulations in making the vast losses (and eventual taxpayer liabilities) possible.

This book is so poor and so misleading in so many places that students who read it may end up knowing less economics than they did before they saw the book.