Book Review: Basic Economics: A Common Sense Guide to the Economy
Thomas Sowell is one of the bright intellectual lights of the conservative movement. His specialty is capitalist economics. What Sowell chose to do in Basic Economics is provide a great public service to people like me who skated through a semester of Economics 101 bored and were overwhelmed by charts. There are no charts or graphs in this book. There are few numbers. Instead, there is a logical explanation for how the economy flows.
What makes Sowell's work important is that he does not just address basics like scarcity, supply and demand, and prices, but also how all of these concepts are affected and often distorted by political decisions. This is an important lesson because Econ 101 usually covers only "pure" economics, meaning a description of how markets are supposed to work if no one interferes with with them. However, our government interferes with our economy with increasing frequency, and Sowell does his level best to demonstrate the usually negative consequences of that interference.
Here are some of the basic precepts of free-market economics that Sowell translates for the uneducated reader:
- Economics is the study of how society copes with scarce resources that can have alternative uses.
- Prices, expressed in terms of money, are the result of multitudes of decisions made by free individuals.
- Consumers try to buy as many goods as they can at a lower price until the supply drops and the prices rise.
- Producers of goods and services (in free-market economies--though Sowell covers socialist, communist, and barter economies as well) divert their energies where they can get the most money.
- Multiple producers enter a market where prices are rising. However, they cannot overcharge or they will be underbid by their competitors. Eventually, as more and more suppliers enter a market, prices fall.
- Government interference in a market can take many forms, including rent, price, and wage controls. While these policies are promulgated to benefit some special interest group (often "the poor"), they often lead to worse conditions for the poor. This happens because suppliers cannot make a great deal of profit where prices or rents are fixed. So what they do, as in the the case of rent control, is let the property fall into decay in an effort to get the low-paying renters out so they can turn the property into something that will make more of a profit, like a commercial site or luxury housing, thereby reducing the stock of available low-income housing.
Sowell provides multiple examples of how government interference makes the economy worse or how the intentions of certain policies create the opposite result because politicians do not consider what sorts of incentives (or disincentives) occur when the policies are established. If there is one primary lesson Sowell has for his readers, it is that informed voters should be more careful about paying attention to the quantifiable effects and results of government interference in the marketplace rather than accept emotion-based calls to "do something!" And he informs the reader with his relentless logic page after page, covering the full range of economic issues, from prices to wages to banking to insurance, government finance, international trade, and "non-economic values," (those being the arguments people use to push for government action that costs a lot of money but that MUST be done because some things are just too important to leave to the marketplace).
There are some issues, I must confess, where Sowell didn't answer my questions as fully as I would have liked. One of those non-economic values, for instance, is national defense, which he dismisses with the argument that too many industries are protected in the name of national defense because they are fallaciously perceived as "necessary" to defend the country. Just because some industries are unnecessarily protected does not mean that all of them are. And if we reach a point where we find ourselves at war with multiple sole-suppliers of war materials (as Japan did prior to World War Two), what options will we have except to restart such industries from scratch or take such industries from others?
Another place where Sowell falls down in the field of protectionism is in offering alternatives or recommendations for what to do about low-skill (but often high-wage) assembly line workers in the U.S. who lose their jobs to cheaper, lower-wage workers overseas. He sees the overall benefit to the economy coming through lower prices and higher standards of living for the majority. He also makes the point that protectionist tariffs or regulations might protect jobs in, say, the domestic steel industry, but said jobs end up increasing the prices of many items made from steel across the economy, thereby raising the cost to the economy of jobs saved. What Sowell leaves out is that people in assembly-line or low-skill jobs have fewer educational or job-retraining opportunities, are less able (or inclined) to move, and might be less retrainable in general. What is to be done about them if they are unable to find employment but unable to move to where jobs are better?
We are a compassionate society, which is one of the reasons that politicians and media types are able to portray battles between labor and management or Americans vs. foreigners as opportunities to "do good" or "take action," even when such actions prove disastrous in the long run.
Again, I buy most of Sowell's arguments. However, there are times when free trade results in long-term, permanent blight or unemployment or lost hope. Consider the nation's "rust belt" as one example. It is not just a matter of economics vs. politics. There are also cultural, educational, and human ability issues that need to be addressed. It might be worth an email to Dr. Sowell just to see how he responds. That said, Basic Economics is a sound book, well written and easy to understand. If it runs a little on the long side, it is still time well spent because you really will come away with a better appreciation of the benefits and pitfalls of what used to be called the "free market."