Mimsy Review: Basic Economics: A Citizen’s Guide to the Economy
The real losses to the country as a whole come from the misallocation of scarce resources which have alternative uses… Prices are like thermometer readings—and a patient with a fever is not going to be helped by plunging the thermometer into ice water to lower the reading.
Economics is an important topic, because unlike every other complex field, “from botany to brain surgery”, we cannot avoid taking part: while we can, and usually should, refuse to perform brain surgery, we should not refuse to vote for politicians (and, in some states, initiatives) that have wide-ranging economic effects.
Basic Economics is a very readable book on economics. It’s an important topic, because unlike every other complex field, “from botany to brain surgery”, we cannot avoid taking part: while we can, and usually should, refuse to perform brain surgery, we should not refuse to vote for politicians who have wide-ranging economic effects. In some states we even get to vote on initiatives.
This book is “a citizen’s guide” because it helps citizens—specifically, voters—understand the tradeoffs between particular economic decisions. Too often, the solutions proposed by politicians are unlikely to reach their stated goals. This book teaches economics in a simple manner that still shows people how to understand cause and effect.
The basic definition of economics that the author uses is that “economics is the study of the use of scarce resources which have alternative uses.”
The hardest lesson in this book is that there are no free choices. “Because an economy deals with scarce resources that have alternative uses, every benefit has a cost in the alternative uses that could have been made of the same resources that created a particular benefit.”
What a “free market” does in an economy is spread the cost-benefit analysis out to the people who produce and consume those resources. The alternative, an economy in which everything is run by an elite, “has thrown away much of the knowledge, insights, and talents of most of its people.”
What Sowell shows, using examples and logic, is that when the market is unobstructed, “…resources tend to flow to their most valued uses.” When governments try to obstruct the market, it is because they want to elevate their values above the values of the people in their polity.
Prices coordinate the use of resources, so that only that amount is used for one thing which is equal in value to what it is worth to others in other uses. That way, a price-coordinated economy does not flood people with cheese to the point where they are sick of it, while others are crying out in vain for more yogurt or ice cream. Absurd as such a situation would be, it has happened many times in economies where prices do not allocate scarce resources. The Soviet economy, for example, often had unsalable goods piling up in warehouses while people were waiting in long lines trying to get other things that they wanted. The efficient allocation of scarce resources which have alternative uses is not just an abstract notion of economists. It determines how well or how badly millions of people live.
Because prices coordinate the use of resources, price controls almost always have the wrong effect. Rent control, for example, causes shortages in available housing, for the simple fact that people “buy” more apartment than they otherwise would. Sometimes, they have to. My parents, for example, are looking to move in to a smaller place. They live in a fairly large three-bedroom house on a huge piece of land. It’s been a wonderful place for them to raise a family and to host get-togethers with grandchildren. Now, however, even most of the grandchildren are grown up, so they are looking for a smaller place. Since they live in the country, in Michigan, they’re not likely to have trouble finding it. They will sell their expensive house and get a less-expensive condo or smaller home on less land.
But imagine if I had grown up in New York City, and they had a four-bedroom apartment instead of the four-bedroom house they once owned when all of their kids were home. New York City’s rent control might very well mean that moving out of that four-bedroom apartment to a one bedroom apartment would cost more money than staying in place so that they would never give up their larger living quarters, and a new family would never be able to use those extra bedrooms.
…a study of housing in New York City found 175,000 apartments where one person occupied 4 or more rooms—mostly elderly people in rent-controlled apartments. In San Francisco, a study in 2001 showed 49 percent of that city’s rent-controlled apartments had only a single occupant, while a severe housing shortage in the city had thousands of people living at considerable distances and making long commutes to their jobs in San Francisco.
There is perhaps no more basic or more obvious principle of economics than the fact that people tend to buy more at a lower price and less at a higher price. By the same token, people who produce goods or supply services tend to supply more at a higher price and less at a lower price. Yet the implications of these two principles, singly or in combination, cover a remarkable range of economic activities and issues—and contradict an equally remarkable range of misconceptions and fallacies.
One of the problems with attempting to control economies from the top down is that it throws out all of the knowledge at the consumer level.
A society in which only members of a hereditary aristocracy, a military junta, or a ruling political party can make major decisions is a society that has thrown away much of the knowledge, insights, and talents of most of its people.
Over and over, we find out that such things simply don’t work. I only barely remember the gas shortages of the 1970s, during which…
Americans experienced in one industry for a limited period of time the severe economic problems that were common across the board in the Soviet Union for more than half a century. Because such an experience was so rare and shocking to Americans, they were receptive to all sorts of false political explanations and conspiracy theories for such an extraordinary situation, when in fact such situations were common in other countries using government allocation.
I do remember some of the conspiracies, such as the secret 100 mpg carburetor.
When government control of gasoline prices ended in 1981—amid widespread warnings that this would lead to drastically higher prices—what followed was virtually a lesson in elementary economics. Higher prices led to a greater quantity of gasoline being supplied and a smaller amount demanded. Oil exploration shot up and existing wells whose costs could not have been covered at the controlled prices began pumping oil again. Within months, gasoline prices fell below what they had been under complex government controls. This fall continued over the years until gasoline prices reached an all-time low in real terms. Additional taxes were then piled onto the prices at the pump, but the gas itself was cheaper than ever—and there were no waiting lines.
But that lesson is not one politicians want to learn. I lived through the government exchange controlling electricity generation in California, for example. Prices shot up in San Diego while at the same time we had rolling blackouts.
And then Congress decided to use the same government exchange model for our health insurance. Sure enough, prices jumped and care dropped. But politicians don’t learn because they don’t want to. They’re politicians because they want to be in control, not because they want to let people live their own lives. Even the terminology they use is designed to denigrate just letting people alone.
What is called “capitalism” might more accurately be called consumerism. It is the consumers who call the tune, and those capitalists who want to remain capitalists have to learn to dance to it.
Perhaps the most dangerous of top-down approaches is the minimum wage. There is simply no logic in believing that raising the cost of labor will not have repercussions, but politicians will grab onto any weak straw to believe in policies without repercussions.
Even though most studies show that unemployment tends to increase as minimum wages are imposed or increased, those few studies that seem to indicate otherwise are hailed as having “refuted” this “myth,” while the devastating criticisms of the defects of such studies by economists are ignored.
One common problem with research on the employment effects of minimum wage laws is that surveys of employers before and after a minimum wage increase can survey only those businesses which survived in both periods. Given the high rates of business failures in many fields, the results for the survivors may be completely different from the results for the industry as a whole. Using such research methods, you can interview people who have played Russian roulette and “prove” from their experience that it is a harmless activity, since those for whom it was not harmless are unlikely to be around to be interviewed. Thus you would have “refuted” the “myth” that Russian roulette is dangerous.
It would be comforting to believe that the government can simply decree higher pay for low-wage workers, without having to worry about unfortunate repercussions, but the validity of that belief is open to doubts that cannot be dispelled by the kind of research that would lead to the conclusion that Russian roulette is harmless. The preponderance of evidence indicates that labor is not exempt from the basic economic principle that artificially high prices cause surpluses. In the case of surplus human beings, that can be a special tragedy when they are already from low-income, unskilled, or minority backgrounds and urgently need to get on the job ladder if they are ever to move up the ladder by acquiring skills and experience.
Minimum wages hit teenagers and blacks hardest. And if you happen to be a black teenager? It’s like the minimum wage was designed to keep you out of work.
From the late nineteenth-century on past the middle of the twentieth century, the labor force participation rate of American blacks was slightly higher than that of American whites.… The minimum wage law changed that and those particularly hard hit by the resulting unemployment have been black teenage males.
Even though 1949—the year before the series of minimum wage escalations began—was a recession year, black male teenage unemployment that year was lower than it was to be at any time during the later boom years of the 1960s. The usual explanations of high unemployment among black teenagers—inexperience, lack of skills, racism–cannot explain their rising unemployment, since all these things were worse during the earlier period when black teenage unemployment was much lower.
Taking the more normal year of 1948 as a basis for comparison, black male teenage unemployment then was less than half of what it would be at any time during the decade of the 1960s and less than one-third of what it would be in the 1970s. Moreover, unemployment among 16 and 17-year-old black males was no higher than among whites of the same age in 1948. It was only after a series of minimum wage escalations began that black male teenage unemployment not only skyrocketed itself but became more than double the unemployment rates among white male teenagers. In the early twenty-first century, the unemployment rate for black teenagers exceeded 30 percent.
Many people who disdain wealth are also people who cry out the most against poverty. But the very definition of poverty is practically such that it can only be solved by more wealth.
Wealth means options and who would want fewer options? More important, from the standpoint of society as a whole, wealth is the only thing that can prevent poverty. Yet many people who claim to be concerned about poverty show remarkable little interest in how wealth is generated or which policies make it harder or easier to create more.
Reading this book helped me understand how societies, and everyone in the society, become better off. I come out of this book with a new perspective on a lot of things, especially trade balance and barriers, the benefits of some government-run businesses, and on the value that some middlemen can add. This is a very useful book, and a great way to learn the very basics of economics that a voter ought to know.