Sorting Out the New Economics Texts
Which books provide a solid free-market introduction to economics?
A Primer in Economics, by Belton M. Fleisher, Kenneth J. Kopecky, and David Terry Paul, Beverly Hills, Calif.: Glencoe Press, 1976, 471 pp.
The Economic Way of Thinking, by Paul Heyne, Chicago: SRA, 1976, 2d ed., 336 pp.
Choice and Change, by William Dickneider and David Kaplan, St. Paul Minn.: West Publishing, 1978, 355 pp.
People and Markets, by Robert Campbell, Menlo Park, Calif.: Benjamin/Cummings Publishing, 1978, 355 pp.
Not so long ago, anyone who set out to learn or teach about the economics of a minimum-government free-market system had relatively few texts to choose from. There were Alchian and Allen's University Economics and its direct offspring, Exchange and Production, but most of the other texts (not all—for example, Roger Miller's Economics Today) seemed to be under the sway of two influences.
The first influence was the so-called Keynesian economics, which was touted as the cure-all for aggregate economic fluctuations via government spending and taxing decisions. The other was economists' penchant for resorting to the language of mathematics in the interests of greater "rigor"—minimizing, at least implicitly, the importance of such major microeconomic realities as risk, uncertainty, and transactions costs. Under the assumption of certainty, firms in "imperfectly competitive" markets allegedly know where their demand curves are and act accordingly by restricting output, charging "monopoly" prices, and receiving "monopoly" profits.
These two influences made their mark upon introductory economics texts, which taught that government interference in the economic system is both necessary and highly desirable. Big Brother in Washington could provide economic stability with full employment at an engineered rate of economic growth and could save the consumer from monopoly power by intervening in the "imperfectly competitive" marketplace to create and maintain competitive conditions.
Though simplified above, this was the way most introductory economics texts told the story. Government was characterized as a necessary supplement to the "invisible hand" of the free marketplace. Textbook authors were so enamored of Keynesian macroeconomics that many placed it before microeconomics, ignoring individual human behavior—which is the foundation of all economic activity—and presenting economics as akin to a physical science through which the economy can be manipulated to achieve presumably desirable goals.
Fortunately, this situation is beginning to change. In the past few years introductory economics texts with a free-market orientation have appeared on the scene, and the ones with which I am familiar are the subject of this survey.
The first four books listed here are one-semester texts. They are all excellent and share some features. They are well written and easy to read. The discussion of microeconomics (prices and markets) is generally well done. And all four are specifically designed to be a short introduction to economics. They do not simply collapse a more extensive treatment (normally covered in a two-semester course) into a smaller book. They concentrate on fewer but more fundamental topics, make limited use of graphs and algebra in presenting economic concepts, and rely more on verbal logic reinforced with plentiful examples. The four books can be evaluated by briefly examining their handling I of three issues: monopoly markets, the role of government, and macroeconomics—precisely the areas in which earlier texts were largely deficient.
Each of the books tends to downplay the importance of monopoly in the American economy and to zero in on government's role in creating monopoly-like conditions.
A Primer in Economics emphasizes government-instigated entry barriers such as licenses and farm-support programs as the most important source of monopoly power. Collusion and "predatory pricing" are mentioned as sources, but it is pointed out that the greatest force working against the monopolization of markets is the profit motive, which attracts interlopers if the cartel or firm practicing "predatory pricing" is successful. The treatment of "natural monopolies" (resulting from economies of scale) includes a discussion of the many undesirable consequences of regulating natural monopolies. The authors present a case for having periodic competitive price (rate) bidding to determine who would provide the services.
The Economic Way of Thinking has an excellent treatment of monopoly markets. This is hardly surprising, for Heyne openly acknowledges his debt to Alchian and Allen. Finding the word monopoly extraordinarily ambiguous, he rejects it as well as the empty expression administered prices and instead discusses "price-searching" markets. Heyne, too, attributes any significant market power to the set of privileges and restrictions accorded by governments.
The Choice and Change text is in several ways similar to the Heyne text, and the authors also acknowledge a strong intellectual debt to Armen Alchian, who, they say, "taught us economics." One rather original approach is to begin every chapter with three topical questions and to present extensive answers (really discussions) of them at the end of the chapter. The questions for the chapter on monopoly, for example, are about statements by Attorney General Griffin Bell and Senator Hubert Humphrey concerning market dominance, "big firms," and "administered prices."
The authors of Choice and Change present the standard analytical concepts for monopoly but discuss "price searchers" rather than "price setters." After relating the standard scenario that extranormal profits are generated in more "concentrated" industries due to the greater market power, they discuss the difficulties with measuring and interpreting intraindustry concentration ratios—plus the difficulties firms have in establishing and maintaining collusive agreements—and the empirical evidence against the supposed concentration-profits relationship.
The treatment of monopoly, or market power, is least satisfactory in Robert Campbell's People and Markets. He outlines the analytical characteristics of various price-searching markets—"strong price searchers," "weak price searchers," and "oligopolies"—and then develops a hypothetical firm and examines and evaluates its behavior in these market structures. Unfortunately, he devotes far too much space to "oligopoly" and bilateral bargaining, or bilateral monopoly, and to what he calls the paradox of the "prisoner's dilemma." Though this may aid in explaining firm behavior where a small number of firms operates (and it is not clear that it does), Campbell does not really discuss the reasons for "monopoly power." He mentions the legal rules supporting or strengthening collusion or agreement among sellers but seems not to recognize that these, like other things he mentions, are "barriers to entry." He falls prey to the idea that advertising by the "big few" can be anticompetitive and "wasteful." As do so many others, Campbell suggests that the structure of the market can be essentially determined by examining the number of explicitly competing firms. The old assertion of competitive or "predatory" pricing is once again raised. His concluding comment that the best restraint is in the form of "potential" competition is on the right track but is rather hesitant.
The handling of the proper role of government in the economy is less consistent in these texts. A Primer in Economics has no chapter on this topic, although short discussions of particular roles of government are integrated into other chapters, and it becomes clear that the authors support a minimal role for government.
Heyne does have a chapter, "Government and the Market," in which he suggests that government be viewed "as an agency for accomplishing people's purposes in situations where the power to compel cooperation may significantly reduce transactions costs." He warns the reader that the word may is important because the evidence from extensive government activities indicates that this is not always so. The proper role of government is clearly a difficult topic, and Heyne's brief discussion is not always ideal nor clearly presented. The chapter is intended to be a bridge from the micro to the macro portions of the book, but it does not do this well and, because of its brevity, is not an adequate discussion of the appropriate role of government in a market economy.
Choice and Change, in addition to short discussions of particular roles of government in various chapters, spends two chapters near the end of the text on government's role, which the authors would keep to a minimum in a free society. In "Choices about Taxes and Government Spending," the authors discuss the expanding role of government in the American economy, "public goods," and "fiscal policy." Their final chapter, largely devoted to a brief discussion of "democratic capitalism" and other economic systems, emphasizes that economics and politics are clearly allied and influence each other. Like many other chapters, it generally refrains from drawing explicit conclusions, but in this case the chapter clearly suffers from its ambiguous nature.
Of these four books, People and Markets has the most extensive discussion of the role of government. In a section titled "Markets and Society," three of the six chapters take up the problems of externalities and market exchange; "political economy," including the nature of governmental or public choice, majority rule decisions, representative government and the market for votes, regulation of private markets, and bureaucracies; and the appropriate scope of economic policymaking by governments.
The final paragraph of this final chapter clearly states Campbell's position: "The institutions of the market and of relatively free exchange are closely associated with the institutions of limited government and personal freedom. They propose the kind of society that leaves each of us as free as possible—as long as we do not infringe upon the freedom of others—to explore new ways of pursuing and extending our interests. To protect and improve these institutions ought to be the major task of an ecological social and economic policy."
Few introductory economics texts do a good or even adequate job of presenting macroeconomics. Most thrash about wildly because they are tied to Keynesian analysis. And this "analysis" is at best misleading, since it assumes that an economic system can settle into an equilibrium with substantial amounts of involuntary unemployment—then attempts to explain why. Behind this is the assumption that individuals never voluntarily choose unemployment as their best perceived alternative for any significant length of time. One of the phenomena leading Keynes to write the General Theory was the continuously high unemployment rate in Great Britain during the 1920s and '30s, yet recent research by two University of Washington economists suggests that Great Britain's high interwar unemployment rate was due to lavish and easily obtainable unemployment benefits. At best, then, Keynesian analysis has severe problems.
In my opinion, the chapters on macroeconomics in the first book are a dismal failure in contrast to its preceding sections. The authors attempt to use a supply-and-demand-curve analysis—a rather unconventional and difficult approach to macroeconomics. Moreover, when examined, it simply turns out to be the standard Keynesian analysis of discretionary fiscal and monetary policy.
Heyne has a better treatment, though his order of topics is confusing. He presents the simple Keynesian analysis and then, in a chapter on fiscal and monetary policy, finally brings in the income velocity of money, the equation of exchange, and the monetarist explanation. Then he explains that fiscal policies really work (if they actually do) by their effect on monetary conditions.
Choice and Change is better still in its macroeconomics. The authors lead into the analysis from chapters on employment and wages and unemployment. What money is, how it is created and controlled, and the effects of changes in the money supply from a monetarist viewpoint are clearly and succinctly examined. The next chapter briefly presents the Keynesian approach. The crucial distinctions between the Keynesian and monetarist approaches are clearly laid out, and taxes/government spending and inflation/unemployment are explained from each approach.
People and Markets has a drastically different approach. Campbell says macroeconomics really concerns problems of "market coordination—of getting markets to work together as part of a coherent social system." It consists of general equilibrium adjustments and is a logical extension of microeconomics. One of the more important elements in this market coordination is money, and Campbell examines what money is, how it is created, who controls its creation, how it works to coordinate markets, and how money changes can disturb market coordination. Thus, his approach is (correctly) a logical extension of his microeconomic analysis. There is no place in this framework for any Keynesian "aggregate demand" analysis or "fiscal policy," and Campbell does not present any of the Keynesian analytical apparatus. Though very brief and quite unorthodox, his sections on macroeconomics are very good.
Because of his approach to macroeconomics, Campbell's text does not have a fundamental problem shared by the other three. Each of the latter fails to address an important problem associated with discretionary fiscal policy via government spending on public goods and services. If the production and distribution of these goods and services are so important that they cannot be left to the "whims" of the free market, why is the public production and distribution of these same goods and services left to the whims of the unemployment rate?
All four of these texts are good introductions to economic analysis. Each has its drawbacks as well as strong points. In all four, the microeconomic analyses are well done, emphasizing how markets work, the role of inventories, uncertainty, information costs, middlemen, and speculators. The texts all have a strong free-market approach. Although Choice and Change clearly has the best presentation of the Keynesian and monetarist approaches, Campbell's unorthodox approach to macroeconomics is very appealing. Any one of these texts is excellent for a less technical introduction to economics and an excellent route to understanding what Heyne calls "the economic way of thinking."
Elements of Microeconomics, by Robert S. Main and Charles W. Baird, St. Paul, Minn.: West Publishing, 1977, 257 pp.
Elements of Macroeconomics, by Charles W. Baird, St. Paul Minn.: West Publishing, 1977, 306 pp.
Basic Economics, by Edwin G. Dolan, with David E. Lindsay, Hinsdale, Ill.: Dryden Press, 1977, 630 pp.
Introductory economics texts designed for the standard two-semester courses tend to be longer, cover more topics, and go into more detail. The above fit this category. Both the Elements pair and Basic Economics are free-market-oriented and work from "methodological individualism"—their analyses are of how individuals, rather than groups, behave. The government or any particular government agency such as HEW or EPA does not act; the individuals within them act. Compared to other such texts, the macroeconomic analyses are more neoclassical- (or market-) oriented and less interventionist in approach.
The Main and Baird microeconomics text is an excellent exposition of minimum-government, free-market economics. (Again, the authors acknowledge a great debt to Alchian and Allen's works.) With chapters on exchange and comparative advantage, the authors early in the book introduce the possibility of specialization and voluntary exchange—in which there are no losers and only gainers, while with involuntary exchange there is a loser for every gainer. The idea is then presented that "middlemen" can perform valuable services by lowering the costs of these transactions.
The text abounds with real-world examples and applications. The chapter "Restrictions and Markets" covers collusion and cartels (and their inherent instability), bribery and corruption, and the effects of labor unions. Another considers the consumer movement, regulation, and advertising, together with common misconceptions about them. Also discussed are property rights, externalities and pollution, highway congestion and car pools, traffic safety, aerosol spray cans, and income distribution—including the economics of voluntary redistribution, or charity. Firms, too, receive a good treatment. While firms are a most basic and pervasive institution in market economies, internally they do not operate along market lines. I know of no other introductory economics text (with the exception of Dolan's Basic Economics) that asks and explains why this is so.
The companion text, Elements of Macroeconomics, is one of the very best introductory macroeconomic texts available. It is an unabashedly monetarist-neoclassical (or market-oriented) text. It uses much of the familiar Keynesian terminology that is so ingrained in the economics profession, but Baird states in the preface, "Some of the shibboleths of income-expenditure analysis—e.g., the paradox of thrift and the balanced budget multiplier—are challenged immediately after they are exposited."
Chapter Three, "Neither Thieves nor Philanthropists," discusses Say's Principle and is unique to this text. Though the discussion is somewhat difficult, it is also crucial to the rest of the text's presentation. Important topics in macroeconomic adjustment—largely ignored in most other texts—are skillfully presented. The principles are reinforced by continual application to the events of recent years. This is a very good macroeconomics text.
Edwin Dolan's Basic Economics is also excellent. A shortcoming is its exposition of macro- prior to microeconomics. Dolan is quite clear in his preface about the reason for this order: "The number one concern that draws students to the principles course is the problem of inflation and unemployment." He does indicate how the text can be used for a micro-macro sequence, and part one of the text (prior to the macroeconomics section) is a thorough introduction to markets and the price system. He ends the macro section with a recital of the limitations of macroeconomics—"We are back, it seems, to the theme with which we began this book. Economics is about People. It is not about aggregate demand, or expansionary gaps, or Phillips curves except when these things are understood as expressions of the way individual people think and act and plan." Given students' present interests, Dolan's approach may be worthwhile.
Dolan's macroeconomic section, however, is not as successful as Baird's. It is not as closely tied together by a consistent monetarist-market approach, nor are the inadequacies of the Keynesian income-expenditure analysis sufficiently stressed. His chapter on unemployment is very good. He examines the problem of defining and measuring unemployment and the process of job search and information costs. The chapter on stabilization policy is another good one. A positive characteristic of the entire text (both micro and macro sections) is its use of particular cases and profiles of many past and present noted economists.
Dolan's presentation of microeconomics matches up to Main and Baird's. A chapter on the nature of the firm is a good feature of both. Using Ronald Coase's famous 1937 paper, "The Nature of the Firm," Dolan analyzes why firms exist and the nature of their internal coordination. This leads into a discussion of types of ownership, managerial calculation, entrepreneurship—and the latter two are stressed in a good chapter on imperfect competition.
Dolan notes many of the problems of government as a regulator of firm behavior and, in discussing government as a producer of public goods and merit goods, develops a simple model that demonstrates the difficulties of having the public decide through voting how many goods government should produce. In his section "The Economics of Life on a Small Planet," Dolan takes up problems such as pollution, population and resource growth, and economic development. The last section is a clear and concise comparison of economic systems. This text is an important addition to the growing number of free-market-oriented introductory economics texts.
Scarcity and Freedom, by Heinz Kohler, Lexington, Mass.: D. C. Heath & Co., 1977, 549 pp.
Modern Political Economy, by Richard B. McKenzie and Gordon Tullock, New York: McGraw-Hill Book Co., 1978, 610 pp.
Kohler's Scarcity and Freedom, while not a standard-length text and not a free-market text, is included because it has clear and forceful discussions of scarcity, freedom, and the role of government in a free-market society—which he discusses as one kind of arrangement of the economy, the others being a planned economy and an "intentional community" (the Bruderhof and kibbutz, and China and Cuba).
Kohler has a unique chapter in which he defines and explores three meanings of the term freedom. Freedom I is the ability to satisfy all material wants; Freedom II, to reject "false" material wants; and Freedom III, to choose without coercion, the key aspect being that "people are not subject to the will of other people." This chapter is very well done and provides the groundwork for characterizing and evaluating the three types of economic systems.
Although Kohler presents the alternatives to free-market economies dispassionately, the clear impression is that they have been much less successful than the US economy in facilitating any of the freedoms, including the ones they stress (in the planned economy, Freedom I or II; in the intentional, Freedom II).
What is disappointing is his analysis of the US economy. Evaluated with respect to individual freedom (Freedom III), he misreads how successful the United States has been and makes dubious assertions. He shows a misunderstanding of markets with his assertion of the dominance of "monopoly-like" markets. He uses John Kenneth Galbraith's framework without appearing to realize that Galbraith is (at best) unconcerned about individual freedom but is concerned with Freedom II—advocating that we choose his version of the correct values and reject "false" material wants as he (Galbraith) defines them. Kohler ignores, in his discussion of commutative and distributive justice and how the United States attempts to achieve this, that the latter attempt is inconsistent with and inimical to the freedom of individuals to choose freely without coercion. Even with these severe shortcomings, however, Kohler's book is useful for its preliminary discussions.
McKenzie and Tullock have also produced a very unorthodox introductory economics text, although compared to Kohler's text this one is successful in its unorthodox approach. The authors present a minimal amount of traditional economic theory—concentrating on understanding and using market supply and demand curves—and a broad range of applications of this basic economic theory. The title of their text also indicates their return to an older approach and explains the incorporation of such subjects as group behavior and politics.
One of the unique aspects of this text is its use of the idea of social order. The authors discuss the emergence of social order and cover such topics as property rights, anarchy, exchange, communal property rights, ways to internalize social costs, the common-interest theory of group behavior, and the economic theory of group behavior. The market for goods and services is then introduced in the context of social order.
Another aspect of this text is its strong emphasis on public choice and the role of government in an economic system. Price ceilings, regulation, consumer protection, and income distribution are covered, along with broader topics such as the scope and bases of government action, the democratic process, and bureaucracy.
This text has by far the most thorough and knowledgeable analysis of the appropriate and actual role of government in a free-market economy and of the characteristics of public (as opposed to individual) choice. More so than most other texts, it emphasizes applications of the fundamental economic principles it presents. Its drawback (for some purposes) is its liberal use of applications and sharply decreased emphasis on theory. It is, however, an important addition to the growing number of free market-oriented introductory texts.
Economics in Our Time: Concepts and Issues, by Dwight R. Lee and Robert F. McNown, Chicago, Ill.: SRA, 1975, 213 pp.
Economics in Our Time: Macro Issues, by Dwight R. Lee and Robert F. McNown, Chicago, Ill.: SRA, 1976, 206 pp.
The Economics of Macro Issues, by Roger LeRoy Miller, San Francisco: Canfield Press, 1978, 2d ed., 166 pp.
The Economics of Public Issues, by Douglass C. North and Roger LeRoy Miller, New York: Harper & Row, 1978, 182 pp.
The two books by Lee and McNown are powerful statements of the strength, resilience, and desirability of a minimum-government, free-market society. They are designed to be supplementary readings in an introductory course and contain no graphs nor algebra, yet the verbal discussions of the most important principles are clear and rigorous enough that the books could possibly be used independently of other texts. They include extended discussions of the economic theory of the political process and of the mechanism of social choice, and both are filled with examples and applications showing the effects of interfering in free markets. The authors declare, in the preface to the micro-oriented text, Issues and Concepts: "A pervading theme is that government action to correct a market flaw is the substitution of one imperfect mechanism for another.…most people either grossly underestimate the ability of the free market to desirably regulate economic activity, severely overestimate the ability of the government to perform this regulation, or both." For understanding the results of government interference in markets (whether in the name of "social justice" or "control of monopoly" or "the best interests of unwitting consumers" or whatever), these two short books must be considered nearly indispensable.
Two more free-market supplementary economics texts are the companion texts by North and Miller. Both are extremely brief and consist of 33 very short essays covering an enormous range of topics. Though less able to be used independently, these two books are a good way to apply the economic principles learned in the introductory courses. For example, the North-Miller text discusses such "public issues" as the population explosion, abortion, "euphoria," safer products, prostitution, "raising less corn and more hell," usury laws, medical care, juries, taxis and jitneys, oil spills, and "clamming and other 'free' goods." Miller's macro text discusses a multitude of problems associated with macroeconomics. Both are concise, highly readable, and consistent applications of free-market economics and are highly recommended.
This survey has been neither conclusive nor comprehensive. I have discussed introductory economics texts with which I am familiar. Nor does this include free-market-oriented texts in intermediate economic theory or in areas of economics. Such texts as Charles Baird's Prices and Markets: Microeconomics and Macroeconomics: An Integration of Monetary, Search, and Income Theories; Roger LeRoy Miller's Intermediate Microeconomics: Theory, Issues, and Applications; Michael Darby's Macroeconomics; Douglass North's Growth and Welfare in the American Past: A New Economic History; and Gerald Gunderson's A New Economic History of America (as examples) are indicative of the rising interest in and appreciation of free-market economics.
Professor Smiley has degrees from the University of Iowa and teaches economics at Marquette University.