“Economic illiteracy is dangerous,” warns economist Todd Buchholz: “I can ride on a roller coaster without understanding centrifugal force… Physics can protect me, whether I believe it or not. But if I ignore basic economics, I could go broke. And if a country ignores basic economics, it could go bankrupt.”
These observations about economics are profound. Nations (and individuals) can rise or fall on the basis of their knowledge of economics. When people don’t understand economics, they’re vulnerable to crackpot schemes. They may embrace “quick fix” promises (such as government “stimulus” schemes) that make problems multiply and worsen.
Errors abound in the economics texts students are reading. What follows is a sample of statements I found in economics texts over the years—statements that do not inform students, but instead mislead them.
“As societies become more complex, the need for government power tends to increase.” From Sanford Gordon and Alan Stafford’s Applying Economic Principles, this statement is tossed out in a matter-of-fact fashion. Have these authors studied the abysmal track record of government central planning in the 20th century?
The founder of the Foundation for Economic Education (FEE.org), Leonard Read, pointed out that the impossible task of one person planning the life of another is made even more complex when a handful of people in government set out to plan the lives of millions. “No mind of man,” Read noted, “nor any combination of minds can even envision, let alone intelligently control, the countless human energy exchanges in a simple society, to say nothing of a complex one.”
“Despite fears by some Americans that governmental tampering with the free enterprise system would be harmful, most government policies have met with success.” David E. O’Connor teaches this to high school students in his text, Economics—Free Enterprise in Action.
Government doesn’t always fail, but the track record hardly suggests that “most” of its policies have been successful.
Education? Studies show the more government spends and regulates, the worse the schools become.
Monetary policy? Several recessions, a Great Depression, and a currency worth a nickel of its value when the Federal Reserve System was established does not add up to success.
Poverty? Recent scholarship shows that $5 trillion in poverty spending after 1965 only worsened the problem. The poverty rate was declining steadily for years but then when government began spending big time on “Great Society” programs, the poverty rate actually leveled off.
“Under a balanced budget, the government would not be able to do things that many people think it should do, like building roads and providing for the needy.’’ Henry Billings, in his Introduction to Economics, apparently believes one of the following: a) when government spends more than it raises in taxes, we get the extra goodies for free; or b) people have to be bamboozled into supporting programs they wouldn’t knowingly want to pay for.
Students need to learn that deficit spending simply means that today’s taxpayers get the goodies and tomorrow’s taxpayers get the bills, plus a hefty interest charge. There’s no such thing as a free lunch, as economists like to say.
Perhaps the most common error taught in both history and economics textbooks these days is that the Great Depression of the 1930s was the fault of laissez faire capitalism and that Franklin Roosevelt’s New Deal cured it. Nothing could be more remote from the truth.
From 1924 until 1929, the U.S. government’s central bank (the Federal Reserve) drove interest rates to historic lows through a massive expansion of money and credit. The resulting artificial boom went bust when the Fed reversed itself and presided over a massive contraction of money and credit from 1929 to 1933.
The allegedly non-interventionist Hoover administration jacked up tariffs in 1930, igniting a world-wide trade war. Then in 1932, the same “hands-off” administration doubled the income tax. When Franklin Roosevelt ran against Hoover in 1932, he assailed the incumbent for imposing “the greatest taxing and spending administration” in American history.
But FDR’s New Deal saved us, right? Wrong again. FDR’s own Treasury Secretary, Henry Morgenthau, declared in 1939, “We have tried spending money. We are spending more than we have ever spent before and it does not work… I say after eight years of this Administration we have just as much unemployment as when we started, and an enormous debt to boot!”
World War II didn’t end the Depression either. Unemployment fell dramatically in large part because 11 million men were removed from the labor force and shipped to Europe and the Pacific. But standards of living stagnated or fell during the war years. Recovery finally came when FDR was gone, government spending was drastically slashed, trade barriers began to come down and taxes on business income were reduced by more than half in 1945.
Even a cursory examination of textbooks used in high school economics courses reveals a dismal level of understanding or outright bias by the text authors themselves. Students are sometimes reading that citizens are under-taxed, that government spending creates new wealth and that politicians are better long-term planners than private entrepreneurs. It is not uncommon for texts to portray free-market competition and private property in a suspicious light while presenting government intervention with little or no critical scrutiny.
Economics is immensely important. Without it we miss an understanding of much of what makes us the unique, thinking creatures we are. Economics is the study of human action in a world of limited resources and unlimited wants — a lively topic that cannot be reduced to lifeless graphs and mind-numbing equations that occupy the pretentious planner’s time.
Economics teaches us that everything of value has a cost. It informs us that higher standards of living can only come about through greater production. It tells us that nations become wealthy not by printing money or spending it, but through capital accumulation and the creation of goods and services. It tells us that supply and demand are harmonized by the signals we call prices and that political attempts to manipulate them produce harmful consequences.
Economics explains that good intentions are worse than worthless when they flout inexorable laws of human action. It reminds us to think of the long-term effects of what we do, not just the short-term or the flash-in-the-pan effects.
When people have little or no economic understanding, they embrace impractical “pie-in-the-sky” solutions to problems. They may think that whatever the government gives must really be “free,” and that all it has to do to foster prosperity is to command it.
Perhaps today’s economic texts need to come with warning labels. If the current crop of textbook authors could be sued for malpractice, many would need skillful attorneys to stay out of jail.