Sowell's Economics

I finished Thomas Sowell's Basic Economics last week. I know the title sounds boring, but the book is very readible, loaded with examples rather than graphs and charts. In my humble opinion, far too few citizens -- and especially politicians -- understand basic economic principles.

First a definition: Economics is the study of the use of scarce resources which have alternative uses. Every society does it somehow; the more efficiently done, the more prosperous the society.

Here are a few of the interesting points Sowell makes:

• Prices are not just ways of transferring money. Their primary role is to provide incentives to affect behavior in the use of resources and their resulting products. Shortages and surpluses are indications of prices that are too low or too high. When people project that there will be a shortage of engineers or teachers or food in the years ahead, they usually either ignore prices or implicitly assume that there will be a shortage at today's prices. Consequently, price controls and subsidies tend to create shortages and surpluses. Their cost to the society as a whole comes from the misallocation of resources.
• Economic policies need to be analyzed in terms of the incentives they create, rather than the hopes that inspired them. Good intentions don't count in economics. Economics is about cause and effect.
• "Costs" to society are the foregone opportunities to use the same resources. Prices and costs often get confused.
• The more efficient the economy, the more prosperous; i.e., the further the scarce resources go.
• Profits are not the product of greed; rather they are the price paid for efficiency. Most profitable enterprises have become so by lowering the price of a product to the consumer.
• Business Week in October 2003 reported an estimate that Wal-Mart saved its U.S. customers $20 billion in 2002.
• Profits are a minor item in the economy as a whole -- about 10%. But the prospect of a profit is critical to the efficient production of the other 90%. The prospect of a loss is also critical to an efficient economy.
• Wages are merely prices paid for human resources.
• The "rich" and the "poor" are often the same people at different times in their life. Three-quarters of those Americans who were in the bottom 20% in income in 1975 were in the top 40% at some point over the next 16 years.
• Comparing "household" income is misleading. Census data show that there were 39 million people in the bottom 20% of households but 64 million in the top 20%. There were more heads of households working full-time in the top 5% of households than in the bottom 20% . Household income only rose 6% between 1969 and 1996, but per capita income rose 51%.
• 80% of American millionaires have earned their own fortunes, having inherited nothing.
• If we define "rich" as having a net worth of over $1 million, and "poor" as remaining in the bottom 20% over a period of years, then only 3.5% are genuinely rich and only 3% genuinely poor. These add up to less than 10% of the population. (So much for a society of "haves" and "have nots.")
• While the average American earned more than four times that of the average in the bottom 20%, the average American only consumed one-third more.
• Discrimination? As far back as 1971, American women who worked continuously from high school through their thirties earned slightly more than men of the same description. Gross statistics show large income differences among American racial and ethnic groups. However, black, white and Hispanic males of the same age (29) and IQ (100) all had essentially the same annual incomes.
• Minimum wage and job security laws result in higher unemployment. The unemployed are made idle by wage rates artificially set above the level of their productivity. Before minimum wage laws were instituted in the '30s, the black unemployment rate was slightlly lower than that of whites.
• Exploitation? Multination companies typically pay about double the local wage rate in Third World countries.
• How much of a given natural resource is known to exist (think oil) depends on how much it costs to know. Exploration is costly, so there is no point in seeking resources too far in advance of the anticipated need. At the end of the 20th century, the known oil reserves were 10 times larger than they were in the middle of the century.

I've gone on too long. I highly recommend the book.