The Study of Economics: Principles, Concepts & Applications

By DR. BURTON W. FOLSOM, DR. GEORGE C. LEEF, and DR. DIRK MATEER | June 1, 1999

The Study of Economics: Principles, Concepts & Applications by Turley Mings (Guilford, Conn.: Dushkin Publishing Group, 1995), fifth edition, 526 pp. Rating: D+ The fifth edition of The Study of Economics introduces economic concepts through examples from current issues, such as the fall of communism, the information superhighway, NAFTA, deforestation, and healthcare reform. Its examples, then, are up to date, but the research isnt. Mings fails to incorporate much economic research of the last two decades on monopoly, taxation, regulatory agencies, and business cycles. Students, therefore, come away with a benign view of government and a perception that market failure is rampant. Mingss examples are often those used by Keynesians in the 1940s and 1950s, not those used by most economists today. Criterion 1: Costs and PricesHow Production is Determined Mings begins by explaining the central role of scarcity and the need for individuals to make choices. He then articulates the scientific method and explains the central role that hypothesis testing plays in testing whether or not an economic policy makes sense. Next, he develops the notion of opportunity costs. Mings nicely explains how scarcity necessitates trade-offs as a means of determining which choices make the most sense. The author asks and answers basic economic questions through the use of case studies on the "peace dividend." Here Mings adeptly shows both the negative consequences of job loss in the defense sector (p. 38) and the efficiency gains from conversion to other types of industry (p. 48). Mings then explains what determines prices in the marketplace. He introduces the twin concepts of demand and supply along with the forces that drive the market price toward equilibrium. Along the way he analyzes the effects of price changes and notes that government involvement can also be a source of higher prices. The section revolves around the demand and supply of peanut buttera good choice of product for students. Criterion 2: Competition and Monopoly Mings uses the standard treatment of market structure by dividing markets into four categories: perfectly competitive, monopoly, oligopoly (he uses the term "shared monopoly" here), and monopolistically competitive. The section is surprisingly only 10 pages. Mings never develops the cost curves that analyze the profits of firms; instead, he presents diagrams that show total revenue and total cost. While this approach has some advantages, it fails to develop the thinking that is essential for business decisionmaking. Also, Mings uses the DeBeers Company, the worlds largest diamond manufacturer, as an

example of a monopoly. However, due to the evolving nature of the industry, DeBeers no longer has anything near a worldwide monopoly. Intense competition from Russian firms, and new diamond finds over the last 10 years, have eroded the share of the market held by DeBeers. So, at best, the example given is merely historical. Mings should have used an example of a pure monopoly (such as a public utility) to further drive home the distinguishing features of a monopoly. Criterion 3: Comparative Economic Systems Early in the book, Mings describes the major economic systems. His central contention is that as societies become more specialized and interdependent they need economic systems to organize and coordinate production and distribution. He highlights four economic systems: the market economy, the centrally directed economy, the traditional economies and the mixed economies. The market economy is thoroughly described and Mings uses the example of Russia to explain why it is hard to go from a centrally planned economy to a market-based one (pp. 68-69). Mings explains how the market economy resolves the central economic questions through the underlying factor and product markets, creating incentives for entrepreneurs and establishing a circular flow of funds. Essentially, in a market economy one persons spending becomes another persons income. Much later in the text, Mings examines the alternatives to capitalism. He writes, "communism, socialism, and welfare statism are fading into history" (p. 439). He uses data from the International Monetary Fund to contrast the growth rates of the former Soviet Union, Asia, the European Community and United States. He argues that the stagnant growth rates in Europe cannot sustain the cradle-to-grave welfare systems in place in many of the nations (p.441). Mings also examines the impacts of capital investment, inflation, and unemployment in different economic systems. The outcome of each system is compared with respect to its environmental consequences, impact upon economic security, and equity. The section is balanced and the advantages and disadvantages of each system detailed. Mings concludes with a biographical sketch on Karl Marx. He points out that while Marx will remain an enduring social critic, his reputation as an economist has "dimmed" (p. 462). Criterion 4: The Distribution of Income and Poverty The Study of Economics explains the distribution of income as arising from two sources: differences in productivity and differences in opportunity. There are problems with the analysis. The text fails to mention that differences in productivity are far more important in determining earnings than are differences in opportunity in the U. S. today. Mings develops the Lorenz curve to show the degree of income inequality. This graphic nicely displays the difference between the current income distribution and what would arise with complete equality. However, Mings misses the chance to use the tool appropriately. There are two problems here. First, the Lorenz curve compares the existing level of inequality with an egalitarian ideal, which, if implemented,

would ruin the economy (no serious economist believes that complete equality as expressed by the Lorenz curve should be a policy goal). Second, Mings fails to show Lorenz curves for different points in time. If this approach had been implemented it would have shown that the degree of inequality (as measured by the Lorenz curve) was practically unchanged from the period 1960-1990. Instead, Mings focuses on minor variations in the income distribution. He misuses data from the U. S. Bureau of the Census to argue that the income distribution is now more unequal than it was a generation ago. This analysis does not consider the overall rise in income, nor does it control for differences in education, work experience, and motivation across groups. In other words, people are moving up and down the income scale as they become educated, change jobs, take risks, and retire from business. The Lorenz curve misses this mobility. Mingss analysis of poverty is very weak. He argues that the welfare programs of the Johnson administration during the 1960s lowered the rate of poverty in this country, only to have the trend reversed by the "cuts" during the Reagan years. This argument is pure political mythology, completely devoid of analysis. Actual poverty rates remained constant during the 1965-1995 period. Mings writes, "in the 1980s, decreases in work training opportunities . . . slowed progress on increasing opportunities for economically disadvantaged groups" (p. 238). In fact, the tax cuts of the 1980s created greater incentives for poor people to escape poverty by fostering economic growth and creating more jobs in the private sector. Mings goes on to write that "in the short run "throwing money at the problem raised some 30 million people out of poverty" (p. 239). This claim is false and ignores recent scholarship by Charles Murray and Marvin Olasky. Mings needed to ask two key questions. First, at what cost are the 30 million people raised out of poverty? Without that information, students cant evaluate whether or not the benefits of welfare programs outweigh the costs. Second, what about using these funds to spark employment through the private sector? For Mings to suggest that "throwing money at the problem" is a positive solution is to ignore how incentives are changed when one group is receiving tax dollars and another group is paying them. Criterion 5: The Role of Government The economic role of government is explored in great detail. Mings argues that governments should be responsible for regulating monopolies, protecting consumers, workers, and the environment. He argues that the creation of government regulatory agencies since 1887 has produced better products, services, fairer hiring practices, less pollution, and safer working conditions. He gives some attention to deregulation (such as with the airline industry), but the thrust of the section is to portray the public sector has having a widespread role in managing the affairs of the economy. Moreover, even though the text points out that deregulation "resulted in lower prices and better services for the consumers" (p. 195) the photo above this caption above shows passengers stranded at the airport when an airline carrier went bankrupt. This approach sends a mixed signal about the desirability of deregulation. The text ignores the problems of government regulation and the adverse effect it has on economic growth and entrepreneurial activity. For example, leading historians such as Albro Martin, former professor at Harvard University, argue that government regulation through the ICC damaged the railroad industry and

made it uncompetitive by the 1930s. Many antitrust scholars, such as Robert Sobel and D. T. Armentano, argue that the antitrust laws have made many American industries uncompetitive in foreign trade. The only acknowledgment Mings makes that there are competing theories about government regulation is in his biographical sketch on the Austrian economist F.A. Hayek (p. 211). Hayeks work on socialism and the questions surrounding government involvement in the economy are noted. The solution that Hayek presents, namely that all public-sector activity be subject to a cost-benefit analysis, is mentioned as an alternative to the frank acceptance of the public sector as arbiter of economic affairs. Criterion 6: Public Choice Mings fails to include the recent research in public choice theory. Since the 1970s, economists have increasingly come to understand that interest groups dramatically influence bureaucrats and politicians. Government action, in other words, is not a reflection of public interest but of pressure from powerful lobbyists. We are also increasingly able to document unintended consequences that occur from government actionall of which must be calculated when we assess government intervention and its costs and benefits. When Mings first wrote this text in 1976, public choice theory was new; but by his fifth edition 20 years later, he needs to show more awareness of it. Criterion 7: The Role of the Entrepreneur Scarcely a paragraph is devoted to a discussion of the entrepreneur. The text defines an entrepreneur as "a particular type of human resource" (p.10) who sees the possibility of profitable production and is capable to organizing resources to produce goods and services. While the definition is adequate, the text fails to explain how entrepreneurs contribute to the advancement of society. Also, there are no concrete examples of successful entrepreneurs offered to spark reader interest. Instead the text is more concerned with factors of production, such as land, labor and capital. These topics are clearly important, but no more so than the person who transforms them into useful resources. Criterion 8: Taxation The principles of taxation are treated under the umbrella of public finance. Mings examines government spending and revenue sources and highlights the growth of government spending during the 20th century (p. 353). He explains the various sources of taxation and explores the questions of equity, efficiency, and incidence. One concern that Mings relegates to a small paragraph is the benefits principle of taxation, namely that taxes should be paid by those who use government services. He discusses the equity of various taxation schemes throughout this section and concludes tht the value-added tax (VAT) is the fairest of all taxes. Mings bases his argument for the VAT partly on its deceptive qualities. It is superior to a sales tax because "the public does not have a constant tax irritant to react to" and that there is likely to be "less squealing than with a normal sales tax" (p.350). This is a curious argument because the efficiency of taxation depends upon all parties correctly perceiving the true costs of taxation. Since the amount of the

VAT is concealed at the point of purchase, many people think they are not paying taxes when in fact they may be paying a large tax. Criterion 9: The Business Cycle Mings compares the business cycle to a roller-coaster ride. Expansions follow recoveries and eventually reach a climax at the peak of the business cycle. As the economy starts downward, it experiences a contraction and eventually the entire process starts over again. This analogy works up to a point. However, Mings writes that, "as the economy starts its downward plunge, it rapidly gains momentum. Widespread bankruptcies result in a collapse of the credit market" (p. 296). This section implies that the severity of the contraction phase causes substantial hardship. In truth, contractions are often short and relatively mild. In only a few instances have contractions led to severe recessions or depressionsand in these cases, many economists argue, government action spurred the problem. The Phillips curve is used to explain the trade-off between inflation and unemployment. The Phillips curve was developed as a tool for balancing and controlling the fluctuations in the business cycle. This tool has been almost completely discredited in the last 10 years and yet it remains an integral part of Mings analysis. The discussion of the business cycle would have been better if Mings had used more historical examples and focused on policies designed to alleviate economic instability. He does mention the stock market crash of 1929, but he ignores the Crash of 1987, which was twice the magnitude (in absolute terms) of the 1929 crash. Of course, the Crash of 1987 is less dramatic because the economy did not slip into a depressionbut that makes it all the more useful as a teaching point. Criterion 10: Wages, Unions, and Unemployment The text is right on the mark when it writes that, "labor unions affect wages, although perhaps not as much as people think" (p. 221). Mings explains collective bargaining and describes the major pieces of legislation governing labor practices. He looks at unemployment by examining the underlying root causes. The discussion is centered around jobs for Generation X, and focuses on the types of employment being created in todays economy. This section is informative and easy to read. Criterion 11: Trade and Tariffs Mings does an excellent job of handling international trade. He describes the principle of comparative advantage and uses this to argue persuasively for free trade. Along the way he chronicles changes in U. S. imports and exports to show how the distribution of jobs and commodities are affected. Next, Mings asks why we restrict foreign trade. He examines tariffs, the most-favored-nation clauses in many trade agreements, quotas, and embargoes. After explaining how trade is restricted, Mings then dispels the traditional protectionist arguments. For a case study, he presents Frederic Bastiat, the French economist who satirized the protectionist position.

Last, Mings uses the Smoot-Hawley Tariff act to show the dangers of import restrictions. Many economists blame the Smoot-Hawley act for creating the downturn of the 1930s. Mings uses trade balance data from the 1920s and 1930s to drive home the point that the Smoot-Hawley was a primary culprit for the Great Depression. Criterion 12: Money and Banking The text describes how money works, how it is defined, what money is used for, and how it is created. There are interesting case applications on credit cards and how POWs used rations during World War II as a form of money. Mings chronicles the history of the Federal Reserve System and argues that it is needed to prevent market failure. He criticizes banks in the nineteenth century for "unrestrained issuance of currency and imprudent lending" (p. 263). He provides no data, however, to back these criticisms. Mings then describes how the Fed works and the ways in which it influences monetary policy. Much later in the text (completely apart from the chapter on money) Mings addresses the gold standard, from a negative perspective. He argues that the gold standard was associated with periods of "high inflation and severe depression" (p. 434) but does not explain how these conditions arose or why the gold standard was to blame. He also does not explain why inflation became so much greater after we went off the gold standard. Mings avoids blaming the Fed for cutting interest rates in the mid-1920s, and hiking them after 1929. A fairer treatment of the gold standard would place it within the section on monetary policy so that it could be more directly compared with the Federal Reserve System of today.