Applying Economic Principles
by Sanford D. Gordon and Alan Stafford,
(New York: Glencoe, 1994), 480 pp.
General comments: This is an attractive book with many color photos
and diagrams. In its 480 pages, however, it teaches little about economics. The book
devotes so much space to photos, "personal narratives" that seldom have much
instructive value, and to current issue "boxes" that are too sketchy to help the
student understand the issue, that what is left is a very threadbare treatment of economic
principles. At many important points, the authors provide the student with nothing but
government solutions to policy issues. Its conclusions have sometimes been outdated for
over two generations, and in one case for over two centuries. The book fails to teach the
student how to think like an economist.
Criterion 1: Costs and PricesHow Production is Determined
The book begins with a limited definition of economics as "the study of the
decisions involved in producing, distributing, and consuming goods and services" (p.
5). The authors then explain the role of prices and profits in the allocation of
resources, but not always clearly. Consider, for example, this sentence: "The
allocation of resources in capitalism is efficient because resources tend to be attracted
to the most profitable firms." Unfortunately, the student is not told just what
"efficient" means here, nor do the authors explain the process by which the
price system channels resources away from the production of goods that dont pass the
test of the market. Students need a deeper investigation of the market process.
The treatment of consumer sovereignty and "the invisible hand" is
satisfactory, as is the connection between profit and satisfying the wants of consumers.
The problem of dangerous or defective products is raised in conjunction with consumer
sovereignty. The authors make the important point that there is a trade-off between
consumer protection laws and regulations on one hand, and the availability of products on
the other. The book leaves the student with the impression that the only possibilities are
government action or no protection at all. The authors never describe the ways in which
the market provides consumers with information and tends to deter poor quality.
Criterion 2: Competition and Monopoly.
The authors treatment of competition and monopoly is weak. On the plus side, they
do manage to dispel the idea that big businesses are always highly profitable; and they
explain that "monopolistic competition" is not a wasteful, inefficient market
However, they use some ill-chosen language that conveys the idea that it is dangerous
to allow businesses to get "too big." They write, for example, "Government
tries to prevent firms from getting so large and powerful that they can take advantage of
the consumer." It is misleading to use the word "power" in conjunction with
business. Businesses have no power to do anything but make offers to potential suppliers
and consumers. The unfortunate implication of the term "market power" is that
consumer sovereignty somehow vanishes once a business has reached a certain size.
To make matters worse, the books discussion of antitrust is lopsided. It gives
the student no hint of the possibility that antitrust enforcement can actually be used to
stifle vigorous competition. Instead of an economic analysis on the costs and benefits of
antitrust, the student reads only the discredited opinion that antitrust laws protect
competition. Are the authors utterly unaware of the solid critiques of antitrust?
Nor does the book consider the tendency for government itself to create monopolies and
cartels. Although the breakup of AT&T is covered at some length, the student learns
nothing about the early role government played in eliminating AT&Ts rivals in
the telephone industry. Similarly, the authors discuss airline deregulation, but ignore
the role of the federal government in cartelizing the airline industryand the effect
of this action on consumers.
Criterion 3: Comparative Economic Systems
The books coverage of comparative economic systems is threadbare. The authors
write that "Communism seems to have failed as a political and economic system"
(p. 424), but fail to give any analysis. Students should understand that central economic
planning suffers from several inherent problems (among them, the limited knowledge of the
planners, the lack of incentives for efficiency and good quality, and the tendency to put
the interests of the state far above the interests of ordinary consumers). These problems
occur in all government directed economic activity, not just under "communism."
Instead of giving students a look at the process of central planning, the book
gives them platitudes like this: "In exchange for security, the people have given up
a degree of individual economic freedom."
Although the extreme backwardness and inefficiency of the Soviet-style economic system
is well documented, the student reads that Lenins economic system, "worked
reasonably well." Here again, dubious conclusions take the place of serious analysis.
Another example: "As societies become more complex, the need for government power
tends to increase" (p. 419). The book fails to explain what it means by "more
complex," or why complexity necessarily calls for greater government power. Many
economists would argue that although the products of our modern economy are far
more complex than in the past, societythe network of human
relationshipsremains fundamentally the same.
Elsewhere in their discussion of comparative systems, the authors stumble into another
clichéthat population growth is a major reason reason why many poor nations remain
poor. Gordon and Stafford write that "population growth has made economic growth
almost impossible in many developing nations" (p. 406). Nowhere do they acknowledge
contrary views of population and economic development experts. In trying to account for
persistent poverty, the authors point to government favoritism, militarism, and
insufficient spending on education, but fail to mention government economic controls and
taxes that hinder the growth of free enterprise.
Finally, the books treatment of foreign aid is vague, couched in muddy language.
For example: "Because of the apparent lack of progress in many developing nations,
people in developed nations questioned whether aid could ever solve the worlds
economic problems" (pp. 400-01). This gives the books only hint that economic
analysis has shown harmful effects of foreign aid.
Criterion 4: The Distribution of Income and Poverty
The section on income inequality is superficial. Rather than providing any real
analysis of the effects of welfare programs, the student reads that "many people
doubt there can be a solution to the problem of hunger without more government
support" (p. 348). This simply pushes students toward a belief, rather than helping
to develop their ability to think economically.
Furthermore, the book fails to mention the high degree of income mobility and is silent
on the key role government policies play in hindering people from prospering on their own.
Many economists advocate free markets and private charities to alleviate poverty, but that
view is dismissed without any analysis.
Criterion 5: The Role of Government
The authors discussion of the role of government in the book is more opinion than
economic analysis. Students are told, for example, that it is "necessary for our
government to play a greater role in our economic system because consumers are no longer
able to protect themselves from economic abuse" (p. 320). This statement reinforces
the popular image of government in white hats, business people in black hats, and
consumers as defenseless pawns. Here, as elsewhere, the writing is more like political
rhetoric than serious economics.
On the subject of public goods, the authors substitute vague generalities and personal
conclusions for economic analysis. Public educationwhich is not a "public
good" as most economists use the termis purportedly essential; without it,
"only the children of the rich could become educated" (p. 329). Both theory and
history strongly suggest that this conclusion is false; in the 1840s, before the rise of
public education, the literacy rates in many Northern states were higher than they are
today with universal public education. Students, however, read nothing of this evidence.
Nor do the authors bother with an investigation of how an education marketplace might work
without government sponsorship. They also write as if it were self-evident that the
medical marketplace needs increased governmental interventiont: "Modern medicine has
become so expensive that many people could not afford medical care unless the government
helped them pay for it" (p. 239). There are Nobel Prize-winning economists who argue
that the very reason many people cannot afford medical care is because government
interference has distorted the market for this service.
The problem of negative externalities is also poorly treated. Instead of focusing on
the different ways in which we might deal with the problem of pollution, the book devotes
several pages to the Times Beach, Mo. fiasco, in which a federal overreaction caused the
town to be abandoned and destroyed. But the authors draw no sensible conclusion from this
event. After noting the financial loss to residents, they say that it was "corrected
by government action" (p. 241). The loss was not "corrected," but paid by
the taxpayers. The economics of environmental protection is an important subject, but
receives feeble treatment here.
Criterion 6: Public Choice
Nowhere in this book do you find the term "public choice." Virtually nowhere
do you find any references to public choice concepts. A fleeting mention that politicians
desire to be re-elected is all there is on the key subject of the economics of government
Rent seeking by special interest groups, political incentives for waste, the rational
ignorance of votersthe book omits any discussion of such topics. Rather than
painting government "warts and all," the authors almost invariably depict it as
a wise and kindly uncle who can be counted on to do the right thing. History and economics
show this to be far from true.
Criterion 7: The Role of the Entrepreneur
Entrepreneurship is barely mentioned. The authors never try to explain its importance
to the economy, or how it can be stifled by taxes and regulations.
Criterion 8: Taxation
The authors devote several pages to describing the different kinds of taxes that are
collected, and also to the normative "principles" of taxation. But on the economic
effects of taxation, where the student would get some practice in thinking about costs
and benefits, incentive changes, misallocation of resources, and other elements of
economic analysis, the book is silent. Also, the question of tax incidence is never
Criterion 9: The Business Cycle
Gordon and Stafford leave the student with the impression that the Depression was a
natural phenomenon of the free market that discredited clasical economics. "Classical
economists believed there was no need for government intervention in the economy. But when
the Great Depression did not automatically come to an end, it became clear that other
theories would have to be found to explain how economies worked" (p. 324). The reader
finds no hint, even in the page-long profile of Milton Friedman, that many economists
blame bad government policy for causing and prolonging the Depression. The book focuses
entirely on the Keynesian aggregate demand theory to the exclusion of all others. The
authors ignore the destructive policies of the Federal Reserve in the 1920s and 1930s, the
dramatic boost in tariff rates in 1930, the doubling of income tax rates in 1932, and most
of the New Deal interventions from 1933 until World War II.
There is nothing here on the important debate between economists who see a market
economy as being a stable, self-correcting mechanism and those who see it as inherently
unstable, in need of frequent government adjustment. The book does include some discussion
of the difficulties with federal "fine tuning" policies, but does not tell the
student that many economists argue against the need for such policies at all.
Criterion 10: Wages, Unions, and Unemployment
The authors correctly explain that wages, like other prices, are established by the
interplay of supply and demand in the market. They also needed to make the important point
that in a competitive market, wages and productivity are necessarily linked. Their
discussion of the effects of minimum wage laws is accurate, but not very deep.
The books treatment of unions is not good. Again, the student is given very
dubious conclusions, not serious analysis. For example: "It is clear that unions have
helped to improve working conditions, wages and benefits for many Americans" (p.
183). To some economists who study labor economics, the above conclusion is not at all
"clear." The book lacks economic analysis of the effects of unions on
efficiency, employment, and wages (both for unionized workers and non-unionized workers).
It also implicitly assumes that union leaders have interests identical to the interests of
the workers they represent, even though this is not always the case.
Last, the authors correctly identify the different types of unemployment, but are weak
on analysis of the impact of policies crafted to deal with it.
Criterion 11: Trade and Tariffs
Gordon and Stafford start by failing to make it clear to the student that all trade is
an individual phenomenon. People, wherever located, seek to improve themselves by
purchasing from or selling to others. Instead, the book employs language that casts trade
as a group phenomenon: "countries trade because they want to" (p. 370). Writing
like this perpetuates the erroneous notion that "international" trade is
fundamentally different from "ordinary" trade.
To make matters worse, the book argues in favor of trade restrictionsusing the
infant industry argument, the protection of wages argument, and others. Margin notes to
the instructor suggest that he or she question these arguments, but the student reads (and
will probably hear) nothing to cast doubt on the virtues of trade restrictions.
Finally, the authors include a preposterous discussion of the balance of trade. They
say that having a "negative balance of trade" reduces employment, decreases
profitability and slows economic growth. A repetition of mercantilist fallacies refuted
over two centuries ago is not what you want in a book designed to teach young people how
to think economically.
Criterion 12: Money and Banking
The book provides a good explanation of the functions and characteristics of money. It
also explains correctly that inflation is caused by excessive money creation. Nothing,
however, leads the student to understand that money is a market phenomenon, how and why
the gold standard arose, or the drawbacks to having a fiat money system under government
The explanation of the Federal Reserve System and its operations is reasonably good,
but the chapter does not say anything about the Feds track record. Nor does it go
into the debate over the right target for Fed action (interest rates, money supply, or
The books discussion of banks is superficial; it fails to give the student an
appreciation for their importance. Also, the authors never discuss the impact of
government regulations (such as deposit insurance). The coverage of the S&L bailout is
minimal, and the student does not learn of the governments role in that problem.