We have finally arrived! This is the last chapter of Thomas Sowell’s Basic Economics, where he has just a few things to say to his readers in summary about his book. Let’s see what his parting thoughts are!
If you haven’t read my previous summaries and thoughts on this book, please click here. Otherwise, let’s see what is in this final chapter!
As the book winds to a close, Sowell reminds us that, while reading its contents does help us acquire lenses with which to understand economics, and the difference between it and the popular buzzwords or phrases often used to represent it in politics, there is no such thing as a full list of ideas or fallacies that can fully capture the picture of economics. This is simply because ideas about economics are potentially infinite, just like human imagination.
Instead, it’s important to understand that fallacies in general come due to a few presumptions: 1) thinking of economic transactions as zero-sum, 2) not understanding that competition takes place in the market, and 3) not looking at anything other than the immediate consequence of policies. The second two are really a misunderstanding of the first idea. When we realize that economic transactions occur because both parties assume they will benefit, most other fallacies fall apart.
For example, many are attracted to the idea of central planning (i.e. government intervention) because the alternative to them seems like chaos in an uncontrolled market. Thus, people begin to advocate for or participate in unions, because they believe it will help bring workers more of a share of an industry’s income rather than investors. What they don’t realize is that investors are also competing with each other in terms of return on investment. The result of forcing profit sharing through unions dis-incentivizes investors from participating. And thus, when comparing unionized and non-unionized companies in the same industry, we often see non-unionized ones actually increasing its hiring.
The same could be said of government policies that promise to do one thing to help the vulnerable and poor, but because of a lack of understanding of how prices work in the market, they limit the prices of certain goods (e.g. rent control). Those price ceilings cause those industries to end up with lower profits, who are unable to do as much to keep their businesses going. The competition (in this case, luxury housing builders) take their profits and buy out the resources needed by those serving within the price ceilings. Thus, though they meant well, the government has actually turned the economy away from the goods that help the vulnerable and poor.
It’s also important to note that economic principles extend beyond the typical framework of finance and businesses. The example given in prior chapters was the idea of petroleum or other natural resources running out, because we know there are limits to the current oil reserves. What these statistics don’t account for is the discovery of new natural resources, and the cost to find and finance the operations to tap into the utility of those things. As Sowell explains in this chapter on parting thoughts:
These are just some of a whole range of problems and issues which, on the surface, might not seem to be economic matters, but which nevertheless look very different after understanding basic economic principles and applying them.
The main thing to remember with economic policy is that the goals of a policy are often different than the incentives created by them. Goals are very easy to come up with, but we need to ask the right questions to assess whether those goals will be met. Things like “What will the policy reward and punish?” or “What are its limitations?” or even “have similar things been done in the past? And how have those panned out?”
When we take a moment and consider these questions, we come to the understanding that knowledge of the facts and the implications of those facts play an important role in economics. We can use the case of Kodak, which was responsible for inventing digital cameras, and yet fell due to not understanding just how much digital cameras would shape the future. Having or not having these key insights can thus help propel or destroy any single business or even industry.
Thus, market economies are actually about knowledge more than just simply money. Since capital is always available, the real scarce resource is knowledge, and a free market, rather than any central entity or planner, is very good at picking out the right ideas and insights in an economic system. McDonalds is not a successful corporation due to luck. It has an extraordinarily large amount of detailed knowledge in any and every part of its businesses.
With successes come failures, an important part of learning. What is great about the market is that, since economics is about distribution of limited resources, those limited resources will be taken from the unsuccessful parts and given to the successful parts. This incentivizes businesses to become efficient in distributing and producing resources, so that all costs can be lowered as much as possible and profits made to be as large as possible.
Successes and failures in business are not the same as the zero-sum vision some have of economics. Instead, the successes and failures in businesses are individualized to small groups and people, while the economy as a whole, upon which everyone depends, is made up of millions of transactions between people who want to receive mutual benefit. As Sowell’s actual parting thoughts in the final paragraph of this book points out:
Empirical questions are questions that must be asked, if we are truly interested in the well-being of others…Perhaps the most important distinction is between what sounds good and what works…For those who are willing to stop and think, basic economics provides some tools for evaluating policies and proposals in terms of their logical implications and empirical consequences.
With those wise parting thoughts from Thomas Sowell, we are finally done with reading his book, Basic Economics! While I’ll be doing a couple reflections and overall summaries in the coming weeks, here are some thoughts I had while reading this final chapter.
First, it’s difficult not to read this book in light of current events, especially the past 2020 (and now 2021) year of shutdowns and lockdowns. I can’t help but wonder about how the economy of the entire world will be affected by it. As Sowell’s parting thoughts reminded us that price limits and control of a particular sector (in order to make things more affordable to the poor and vulnerable) often actually takes money away from that industry and puts it in the hands of its competitors who serve the affluent and wealthy, it’s not difficult to feel queasy about the shutdowns.
As a part of much of the marketing and politicizing of keeping businesses shutdown this past year was that only the “essential businesses” were allowed to stay open, and other businesses were locked down. The problem, of course, is that it’s difficult to define what an “essential business” is. Perhaps the grocery markets, gas stations, hospitals and clinics, and delivery services could be considered “essential” and thus stay open.
But every part of an economy is connected. The delivery services depend on small businesses sending and receiving things. Small businesses depend on hard-working owners, many of whom are scraping by financially. When they are forced to shut down, their mental health suffers as they no longer have the money to feed their families or keep their employees on board. These men and women can no longer go out, causing gas stations to suffer, and have little to buy food with, causing grocery markets to suffer. Thus, the “essential businesses” suffer as well.
In all this time, as Sowell points out, the services the wealthy or powerful use are mostly not shuttered. As an example, we saw this last year, as California’s governor strongly discouraged public gatherings while attending to dinner parties himself. In an economic sense, it’s not about his personal hypocrisy, but rather the favoritism towards certain businesses that the wealthy will have access to, which others do not. In these small ways sprinkled all throughout last year, including the riots which took place that smashed up small businesses in urban centers, like a butterfly effect, it could change the economy on a national scale in the United States, if not the world.
Food for thought.
With that, we are done with the chapter summaries of Thomas Sowell’s excellent Basic Economics! As stated before, I’ll be writing up some reflections and summaries of my own thoughts in the coming weeks, sharing what I’ve personally learned throughout.
If you’ve been following me since the very beginning of this long (27 chapters!) review, I want to thank you from the bottom of my heart for trekking with me on this journey. I hope it’s been as enlightening for you as it has for me.
See you in the next one!