Basic Economics: A Common Sense Guide to the Economy
© 2010 Thomas Sowell
789 pages (4th edition)
Basic Economics is a sweeping introduction to the fundamental principles of market economics and their application to constituent elements of the local and global economy like insurance, banking, trade, labor, and housing. Although the principles chosen emphasize Sowell’s value of free markets, Sowell maintains that certain principles such as the role of incentives, are basic to every economic approach. Drawing from business and political history, Basic Economics is an argument by way of education, one simultaneously impressive and suspicious.
Its scope is grand, but the text coherent: though Sowell offers the reader a girth of data to consider, it is presented in a narrative form. Graphs and charts very seldom intrude on what is more often histories of clashes between competing companies, interest groups, and economic ideologies. Sowell first establishes his principles of economics (his working definition of that being, the study of how scarce resources with alternative uses are allocated) , then working from the general to the particular, demonstrates them in action with the aforementioned data. Most of Sowell’s examples are drawn from American business or political history, but comparisons between it and the planned economies of the Soviet Union and pre-1990s India are rife, and he sometimes plucks illustrations from Asia and Africa as well. Each section, containing multiple chapters, concludes with an overview that summarizes the essential points and provides further commentary. After establishing how prices work to moderate demand — items being demanded less at higher prices, and more at lower prices — he examines the concept at work in the housing market, demonstrating cases in which rent controls destroyed the market for affordable housing by increasing the demand for cheap housing., and discouraging developers from building further out of fear that regulation will forever squelch any hope they have of profit. By the same factors, Sowell writes, the gas lines in the 1970s were caused not by the oil crunch, but by the government imposing price controls to keep prices lower than the market would have set them, and thus inflating demand by encouraging people to take advantage of the lower-than-market price.
Though Sowell’s argument is mighty, given his reputation as a pundit one wonders if all the facts are in evidence in this ‘scientific’ approach to economics. Sowell examines history on the basis of his economic principles, and nothing else: he recounting the Bank of America’s rise, he asserts its founder succeed because if his local knowledge and intimate ties with the Italian immigrant community, something no central bank or governing authority could do well. What Sowell doesn’t recount is that the Bank of America prospered because the Great San Francisco earthquake and fire of 1906 consumed so many of its competitors. Sowell’s arguments about the consequences of rent and price controls have heft, but economic transactions do not contain all of life; there are outside circumstances and greater contexts to consider — despite the spirit of vae victus, success is its own justification that reigns here. Basic economics is too simplistic: humans are not specimens of Homo economicus, weighing incentive in our heads and acting rationally in our pure self-interest. In one section on brands, Sowell describes them as a substitute for particular and local knowledge: that is, while you have no idea how healthy the burgers at a greasy spoon diner in the middle of nowhere are, or how they taste, upon seeing the Golden Arches towering above the road you can rest easy, knowing that inside is a product that is perfectly predictable, right down to the shape of the fries — it is food held to overriding, national standards of safety and appearance But for Sowell, that’s all the brand is: a guarantor of standards. As true as that may be, it ignores the psychological aspect of brands on the mind, aspects the commercial firms are themselves aware of and capitalize on, working overtime to implant affection for their brands in the minds of children so that when tykes grow up to be adults, they will be loyal customers.
Basic Economics offers a great deal of food for thought, but like the offerings of McDonalds which it hails, there are limits to its nutritional value. It is most valuable in explaining the elementary concepts of economics and educating citizens as to why public policy decisions relating to the economy have the unexpected consequences that they do: if the minimum wage is raised, why would companies not seek to employ fewer works? Something as complex as an economy, consisting as it does of an infinite number of transactions between buyers and sellers over a similarly uncountable number of goods and services, is perhaps too unwieldy to plan as we hoped. It does not, however, ease concern of what we then ought to do, and Sowell’s detachment here, while welcome in explaining the problem, leaves one wondering if in the cold world of economics there is room for more humane considerations.