In the last 20 years, there have been a lot of good economics books in niche areas such as housing, health care, immigration, and business economics, to name just four. But Rhoads’ book is special for two reasons. First, it gently teaches readers the basic concepts of economics, such as opportunity cost, marginalism, and incentives. It then applies those concepts to a wide range of government policies, showing how economists think about them and why many of them — and not just the libertarian ones — believe so many government policies are destructive. Rhoads, a political scientist, shows economics and economists at their best. Second, it challenges economists about their views on preferences and on the workings of the political system. His discussion here is better than in the 1985 edition. I was stunned, for example, by his quotes from economists I have respected about how people’s preferences should inform government policy.

Opportunity cost / The first few chapters of this edition track those in the 1985 edition, but with updated examples. On opportunity cost, for example, he notes that people who are polled about various policies think very differently about them if they are reminded that policies have costs. For example, 48% of Americans polled think that a universal basic income is a good idea, but 54% of that 48% would not be willing to pay higher taxes to fund it. And 77% of people polled “favor a provision of the Affordable Care Act that requires insurance companies to cover anyone who applies for insurance, even if they have pre-existing medical conditions,” but that support drops to 40% if the provision would result in their paying higher taxes. People are supportive of all sorts of government programs — until it comes to paying for them.

In the chapter, Rhoads uses transit to demonstrate politicians’ frequent failure to weigh costs against benefits when policymaking. He quotes Brookings Institution transportation economist Clifford Winston’s statement that “cost-effectiveness analyses suggest improvements in bus service generally cost about $1 to $10 per transit trip while rail construction typically costs around $10 to $100 per new trip.”

Marginalism / One of the first principles I taught my students in my economics courses was the power of “thinking on the margin.” Appropriately, Rhoads has a chapter titled “Marginalism.” He points out that many people think of medical care as something that everyone needs and they fail to think about the components of health care. Few would deny that a person with acute appendicitis needs an appendectomy, but many other forms of health care are not so clear-cut. Do I “need” to have two checkups every year or would one do? People’s answers to such questions, notes Rhoads, depend on how much of the cost they bear. He describes one experiment in which a group of beneficiaries of Medi-Cal (California’s Medicaid program) had to pay $1 for their first two office visits each month. Another group did not have to make this small co-pay. The result? Office visits for the first group were 8% lower than for the second group. Time costs matter, too, because those are borne totally by beneficiaries. Rhoads notes that when one college’s health facility was moved so that it took students 20 minutes to get there rather than the previous 5–10 minutes, student visits fell by almost 40%! What Rhoads doesn’t say but clearly must be thinking is that when people cut back on their health office visits, they are cutting back on the least important visits — that is, the marginal ones.

He ends the chapter by noting Nobel economics laureate James Buchanan’s claim that you can distinguish between economists and non-economists by their reaction to the statement, “Anything that’s worth doing is worth doing well.” Economists point out that we don’t need to do everything well. So-so works in many instances. I don’t completely sweep around our two kitty litter boxes every morning, for example. Sometimes I wait a day, and that’s good enough.

Incentives / The chapter on incentives is as good as the ones on opportunity cost and marginalism. Rhoads points out that taxes on pollution or a system of tradable emissions permits would lead to a given reduction of pollution at least cost. With a tax on each unit of pollution, polluters that can reduce emissions for a cost less than the tax will do so; those whose cost of reducing pollution exceeds the tax will keep polluting. If the resulting level of pollution is deemed to be too high, the tax can be increased until the desired emission level is reached. Tradable permits lead to the same result: those that have a high cost of reducing pollution will buy permits from those that can reduce pollution at a low cost. To the charge that such a system gives people “licenses to pollute,” Rhoads answers the way economists would respond: allowing any amount of pollution implicitly gives polluters a license to pollute up to the limit.

Rhoads points out that the costs of reducing a given amount of pollution vary widely. He notes a famous study that found that a paper products factory in St. Louis could reduce particulate emissions by 1 ton for only $4 whereas reducing emissions from a brewery in St. Louis cost $600 per ton. Requiring each to cut emissions by 1 ton would have cost $604, whereas requiring a 2‑ton reduction and letting the two companies work it out would have resulted in the paper products factory reducing pollution by 2 tons for a cost of $8. This would save $596 while yielding the same environmental benefit. Because the costs can vary so much, notes Rhoads, some studies have found that “such incentive-based schemes could achieve equivalent air quality for as little as 10 percent of the costs of existing methods.”

Rhoads follows many economists in applying the same reasoning to climate change. Like many of them, he favors a carbon tax or a system of tradable carbon permits (now generally called cap-and-trade) to achieve a given level of emission reduction at least cost. He’s right that this would achieve what he says it would. At one point, though, he refers to a carbon tax as “carbon pricing.” We already have carbon pricing; no one is giving it away. Although a tax affects the price of carbon, a tax is not a price. Also, and unfortunately, Rhoads — like many economists — doesn’t consider whether there might be even lower cost ways of mitigating global warming, such as geo-engineering.

Rhoads nicely lays out the very different incentive effects of the Corporate Average Fuel Economy (CAFE) regulations and an increased tax on gasoline. The former requires car manufacturers to achieve a high average miles-per-gallon on their year’s production of cars. Thus, tightened standards apply only to new cars and would cause people to hold onto older cars longer, undercutting the goal of reducing gasoline usage; CAFE also does nothing to incentivize less driving. A higher gasoline tax, in contrast, would cause virtually all users of gasoline to cut back somewhat. Moreover, although he doesn’t mention this, it would allow companies that want to sell gas guzzlers and consumers who want to buy them to do so. It might even cause companies to put a spare tire in the trunk, something many car manufacturers no longer do in their attempt to hit the CAFE target.

Government vs. free markets / Rhoads’s chapter titled “Government and the Economy” makes a strong case that the free market works very well at efficiently allocating goods, provided there are no major externalities, while government works very badly. A big reason why markets work so well, he explains, is incentives. For-profit firms have a strong incentive to produce efficiently. Government agencies, in contrast, have no such incentive. U.S. cities that hire private firms to collect garbage, for example, have costs that are on average 30% lower than costs for having a city government agency do the work.

Rhoads also shows why government industrial policy is such a failure. He quotes Columbia University economist Richard Nelson’s point that private technological innovation is usually unpredictable: we don’t know in advance what will work. Nelson has pointed out that in industries like chemicals and electronics, “most of the bad bets were quickly abandoned.” But government agencies tend to stick with what doesn’t work despite mounting evidence that it doesn’t. Nelson named the federal government’s expenditures on supersonic transport and military research-and-development programs as examples. He argued that the historical record for government support of particular products that officials think will be winners is “unequivocal. Unequivocally negative.”

But if free markets work so well, why is it commonly said that living standards have stagnated for middle-class Americans? The fact is, they haven’t. Rhoads cites the Urban Institute’s Stephen Rose, whose meta-analysis found that between 1979 and 2014, inflation-adjusted median income grew by over 40%. Is the middle class shrinking? Yes, because part of its membership is moving upward on the income scale. In 1967, only 6% of Americans were in the upper middle class; by 2018, 33% were. What about poverty? The officially measured U.S. poverty rate has not fallen substantially, but that’s because the income measure does not include the child credit, Earned Income Tax Credit, Medicaid, food stamps, government housing assistance, subsidized school lunches, and other programs. An alternate measure is what’s called “consumption poverty,” which measures what people actually buy. Economist Bruce Meyer of the University of Chicago notes that the consumption poverty rate fell from 13% in 1980 to 3% in 2016.

Safety information / In a chapter titled “Economists and Individual Well-Being,” Rhoads points out that competitive pressures “do not always yield important kinds of safety information.” That’s true, but his example of cigarette advertising is particularly inapt. On this, he would do well to read a 1985 Federal Trade Commission report by John E. Calfee titled “Cigarette Advertising, Health Information and Regulation Before 1970.” Calfee notes that in the 1950s, cigarette companies started to advertise the bad health consequences of their competitors’ cigarettes. Writes Calfee,

Voluntary health-related advertising reached its climax in the 1952–54 “cancer scare” when, with no government assistance, the industry’s self-inflicted “negative” advertising helped cause sales to decline more rapidly than at any other time between the Great Depression and the present.

Can you guess what happened next? The government stepped in to stop it. Calfee explains:

Near the end of 1954, however, the FTC brought the industry’s alarmist health advertising to a halt by establishing a set of cigarette advertising guides that eliminated virtually all health claims in cigarette advertising. The market’s self-destructive episode of 1952–54 has never been repeated.

In short, rather than the federal government being the white knight warning 1950s consumers about the danger of smoking, it was the villain.

Rhoads’s pivot / Toward the end of the book, Rhoads challenges the character of many modern economists. He scores some points. He notes, for example, a survey’s finding that about 9% of economists gave nothing to charity, a number that was more than double the percentage of any other profession.

One of his biggest criticisms is of economists taking people’s tastes and preferences as given and arguing that the political system should cater to people’s preferences regardless of their content. While economists often criticize the political system from a public choice viewpoint, arguing that politicians are following their narrow self-interest (I’ve done so myself), Rhoads points out that many of us are abysmally ignorant of how politicians actually deliberate on issues. He notes that James Madison argued that politicians should deliberate and not just cater to their constituents’ wishes. But many modern authors think that a political system is better the more the chosen policies reflect constituents’ wishes. Rhoads writes, “Thus, the economists are declared right, and Madison wrong.” Moreover, he adds, modern economists don’t even seem to know about this controversy.

He shows a good awareness not only of modern economists but also of classical economics, but there is one glaring exception. In discussing Thomas Carlyle’s characterization of economics as the “dismal science,” he claims that Carlyle based that view on “Malthusian reasons.” Thomas Malthus, recall, thought that population growth would keep most people on the edge of starvation. But that’s not what Carlyle was thinking. In his “Occasional Discourse on the Negro Question,” Carlyle argued against classical economists and in favor of slavery. What made economics dismal, said Carlyle, is that economists opposed slavery.

Conclusion / These criticisms do not outweigh the book’s overall excellence. Sometimes people ask me what book I would recommend if they want to understand the basics of economics and have no prior knowledge. The one I always recommend is Henry Hazlitt’s 1946 classic, Economics in One Lesson. Second to that, I would add The Economist’s View of the World.