01 Apr 2005 Black Economist Has a Lesson for Everyone About Basic Economics, by Dutch Martin

“Economics is the study of the use of scarce resources which have alternative uses.”

That’s the premise of Stanford economist Thomas Sowell’s book Basic Economics: A Citizen’s Guide to the Economy, originally published in 2000.

Dr. Sowell, one of the nation’s most prominent black economists, sought for the book to explain the basic principles that apply to any economy – whether they be capitalist, socialist or feudal – and encourage readers to look at economic policies and systems in terms of their incentives, constraints and consequences instead of simply their intentions and goals.

More than four years have passed, and Dr. Sowell has produced a revised and expanded edition of Basic Economics. Because economic principles are not confined a single country, the new edition includes information on even more countries than before.

Using historical and present-day examples to explain principles such as supply and demand, the role of prices, free-market competition, investment and risk, the role of business and government, absolute and comparative advantage, present value and international trade, Dr. Sowell improves upon the original by enabling the reader to see what happens in their absence. For example, the former Soviet Union – a region of the world rich in natural resources and enormous economic potential – shows the disastrous long-term consequences wrought by a centrally-planned (as opposed to a free-market) economy:

The Soviet Union did not lack for resources, but was in fact one of the most richly endowed nations on earth. What it lacked was an economic system that made efficient use of scarce resources. Because Soviet enterprises were not under the same financial constraints as capitalist enterprises… they were not forced to economize – that is, to treat these resources as both scarce and valuable in alternative uses.

The updated Basic Economics also highlights the crippling consequences of India’s failed economic policies. Only during the last decade of the 20th century did India’s government finally realize the error of its ways and embraced free markets by instituting sweeping economic reforms. This included selling off its state-owned enterprises and removing price controls and international trade restrictions. The same is true for many countries in Latin America.

Speaking of international trade, it’s explains why predictions of “a giant sucking sound” accompanying American jobs moving to Mexico in the wake of the North American Free Trade Agreement (NAFTA) never occurred. To the contrary, over 100,000 American jobs were created in the automobile industry alone over a six-year period. This, Dr. Sowell notes, should not have surprised anyone with a basic understanding of economics. International trade, he says, is not a zero-sum game. Nations trade because both parties expect to benefit.

Distinguishing between incentives and goals is particularly important when examining the political incentives of government officials. Most politically-motivated decisions are usually not only devoid of economic understanding, but can also lead to consequences far worse than doing something “less popular” or nothing at all.

Along with additional international emphasis, the update discusses the economic implications of events since the original release. For example, California’s rolling blackouts in 2001 should serve as a painful lesson of the dangers of price controls.

Arguably the most poignant passage in this book deals with the most important investment that anyone can ever make:

One of the largest investments in many people’s lives consists of the time and energy expended over a period of years in raising their children. At one time, the return on that investment included having the children take care of the parents in old age, but today the return on this investment often consists only of the parents’ satisfaction in seeing their children’s well-being and progress. From the standpoint of society as a whole, each generation that makes this investment in its offspring is repaying the investment that was made by the previous generation in raising those who are parents today.

Dr. Thomas Sowell’s revised and updated Basic Economics is a must-read for anyone desiring to be better informed. The book, and Dr. Sowell himself, are in a class all their own.