Market and Non-Market Economies | Basic Economics by Thomas Sowell | Ch. 9
This is now the ninth chapter summary of Thomas Sowell's book, Basic Economics. If you want to read my previous summaries, please go here. Otherwise, here are my thoughts and summary on the last chapter of Part 2 of the book!
Despite how ubiquitous profit-seeking businesses have become in the modern world today, the understanding of how they work and why they work better than non-market alternatives is still not very prevalent. Such alternatives include things from government associations to colleges and universities to self-sufficient family farms and other similar non-profit organizations. Let's look at how they compare.
Businesses Versus Non-Market Producers
Today, the biggest competitors of for-profit businesses are actually government enterprises. Because governments often have no competitors in the activities it carries out, we can also view them as monopolies. However, there are times when the government is forced to compete with private for-profit companies, and the results are pretty clearly in favor of said companies.
For example, government postal services often have to compete with FedEx Corp. and UPS, Inc. today. In India, which carried 16 billion pieces of mail in 1999, ended up only doing half of that load by the time 2005 came around, after FedEx and UPS had begun to do business there. Similar things happen whether the service is postal, or helping in a humanitarian crisis. Even in banking, this has happened. In India, while its financial sector is still dominated by the State Bank of India, many middle class people are taking their businesses to private banks like HDFC and ICIC.
We have to remember that we aren't looking for perfection in either market or non-market economies. Instead, we're looking at which kinds of organizations are incentivized to do better. Even in terms of quality control, we can see this markets do better, as many brands and names in the market pride themselves on maintaining the reputation of their products, even if those products are as simple as hamburgers or fried chicken. This is due to the fact that if customers do not like the quality of the products or service, they can simply go to competing businesses to get what they really want. In this way, reputation, becomes key to success, not just money.
Here, Thomas Sowell remarks that it may be appropriate to understand that capitalism is really consumerism, where the consumer has the final say on things, and those who want to stay in business must learn to acquiesce to it. Even socialist governments recognized this, so that right before the current millennium, many had already begun to stop centrally planning economies and sell government-run enterprises.
Winners and Losers
Of course, as said before, many people lament the fact that, while market-driven economies do give us better quality products and services than alternatives, there are still losers in a free market, and the losers may sometimes be worse off than when they started. And so many people, including political hopefuls or authorities, want to find a way to prevent losers from having such a bad time of it.
The problem with this is that what often prevents bad effects can also hinder good effects. This is, once again, a problem that can be attributed to principle of scarcity (or in my terms, limited access). Sowell gives the example of Smith Corona, which produced typewriters, which lost millions of dollars of sales when computers began to go mainstream to the public. Both typewriters and computers use some of the same raw materials for production. If the government were to prevent the losses from Smith Corona by buying lots of typewriters (so as to continue to boost their profits), there would be a shortage of resources for computers. But the public wants computers, not typewriters, and so we have a surplus of computers just sitting idly doing nothing. In such a case, scarce resources have been wasted.
The best solution, politically, is that, instead of handing out money, politicians would instead order specific businesses to change from one product to the better one. However, as discussed in previous chapters, politicians have little ability to predict and know for certain what the next best thing for each company would be. And since economies are mixed and don't move in lock step, it's basically impossible to do this without causing really terrible suffering.
The main lesson here, then, is that economies are always changing, and there is little we can do to prevent that change without causing more suffering and waste. And while it certainly isn't fun to see people suffer under poor business management or adaptation, the alternatives often result in far worse consequences.
This chapter basically summarizes and wraps up the 2nd part of Sowell's book. While the conclusions drawn are often repetitive of previous chapters, there are some things mentioned that are really critical in understanding the modern day, especially 2020.
Shutdowns, Bailouts, and COVID-19
It's not unrealistic to say that 2020 has been the year of COVID-19, though there have been many other things that have happened this year that have been pretty crazy. But I want to take a macro look at the situation, and what Sowell's book implies may be happening right now in the global economy.
Many nations around the world today have instituted economic shutdowns across the board, with some exceptions for “essential services” (whatever that means). The consequence of this is that many large corporations which rely on continuing streams of revenue to stay afloat (i.e. airlines, hotels, etc.) went into catastrophic debt in a matter of a few weeks. This has caused the US government to continue to pump out money in order to save these businesses, such as bailing out airlines so that they could stay afloat. While the sentiment may be nice (or at least, give the appearance of saving their own skin for their own instituted lockdown), the economic consequences may be disastrous.
When we understand the scarcity of resources here, we understand that these airlines received money in order to pay for work that wasn't being done by employees. But, additionally, there were still supply and distribution issues to be resolved, such as the fuel for airlines, various airline amenities, and other such things. Given that the airlines will want to continue to stay afloat, while the buying such material and amenities will be lessened, it is still money that is spent on resources that could probably have been used in other areas. And given this state, it's probable that we will find surpluses of wasted material bought and unused in the future, clogging up the liquidity of the global economic machine.
Banks and Crypto
The greatest financial bailout prior to 2020 was, of course, in the 2007-2008 financial crisis that also had global ramifications. In that time, it was the banks that were bailed out, despite the fact that they were incentivized to do their predatory practices by the government.
In my opinion, especially now after reading Sowell's work, in addition to the lack of easily accessible user interfaces in crypto, the lack of mainstream adoption of crypto has much to do with the fact that traditional banks are still running on bailout money. The government's coddling of these huge financial industries has probably prevented real competition from rising up. Yes, there are local and small-time banks, but due to economies of scale, they can't (or don't try to) compete on the level of larger ones like Bank of America or Chase. However, cryptocurrencies like Bitcoin and XRP can certainly compete on that scale, given that their entire schtick is the Internet of Value.
But because most of the public are not aware of the vast potential of these technologies, there is yet still very little capital going into funding these technologies. On the same side, government regulation has also not been favorable, until this year. But even in this year, countries like the United States have no clear regulations with how to deal with cryptocurrencies.
The ramification, of course, is that money is still not really in the hands of most people, and they must rely on the illiquid, outdated financial systems of banks to give them meager interest and income (whereas places like Nexo and Celsius consistently outperform traditional banks by more than 1000%).
In the next few years, it may be quite interesting how things level off, as people continue to lose trust in their governments to do the right thing as technology advances. Slow-moving and unhelpful authorities, coupled with a lack of accountability, will probably eventually fall apart on account of its own lack of movement forward.