In this entire book about economics, so far, we haven’t really touched on the history of the subject. And that’s just what we’re going to do in this 26th chapter of Thomas Sowell’s Basic Economics.

If you haven’t read my previous summaries and thoughts on this book, please click here. Otherwise, here we go!

Chapter Summary

What most people think of when the history of economics is brought up is Adam Smith and his famous book, The Wealth of Nations. Of course, the millennia of human civilization and existence has produced many different thinkers on the subject, from Xenophon in classical Greece to Thomas Aquinas in the middle ages. What was special about Smith’s philosophy was its legacy and development in the following decades after it was written up until even today. Let’s take a look at the history of this development, and how it has shaped modern day thinking on economics.

The Mercantilists

The mercantilists were a group of 16th and 17th century writers who equated net positive inflow of gold with wealth. This has led to the notion, still popular today, that an export surplus is better than a surplus of imports (though, as discussed in earlier chapters, this is basically circumstantial).

The important thing for the mercantilists, though, was not the movement of resources, but the increase of power of their own nations versus others, and their respective rulers most of all. The government was a primary figure in this process. Thus, things like repressing wages, imperialism and slavery, and other similar things were encouraged to promote the nation, and especially those rulers.

Classical Economics

This was the backdrop in which Adam Smith’s The Wealth of Nations was born in 1776. In it, he did away with many of the mercantilist assumptions, such as economic activity being a zero-sum competition, and focused instead on the creation of wealth through free markets rather than government intervention. On a fundamental level, Smith did not regard the acquisition of gold to be equal to wealth. Instead, he argued that the wealth of a nation consisted of the goods and services it offered, and that imperialism and slavery were both economically inefficient and morally repugnant.

This was in diametric opposition to the mercantilist ideas of the day, and became a foundational text for economics in the the next century, and even afterwards. Of course, that doesn’t mean that Adam Smith’s work was perfect. In countering the equation of gold to wealth, he de-emphasized the role of money, leading to misinterpretations by readers of how money affected production and employment.

Among Smith’s followers was a man named David Ricardo, who wrote his treatise, Principles of Political Economy, as an analysis of economic principles without the social, political, and philosophical emphasis Adam Smith had. Instead, Ricardo envisioned that political economy (which, in his time, meant the economics of a nation, rather than a combination of politics and economics) would be reliant on a system of analysis and rationality. It is to his credit, and a few of his other contemporaries, that the ideas of supply and demand became a dominant means of viewing economics.

Here, we must take a moment to look at a controversial subject in economics known as Say’s Law. It means that the production of output is related to real income which produces that output. In other words, “supply creates its own demand”, and output of growth cannot be so great as to completely outstrip demand, and thus collapse an economy. There was (and still is) controversy about it, as many have argued whether this principle is true. Sowell contends that most of these arguments are semantic, and that the reality is that consumers and investors can certainly choose to not exercise their collective purchasing power, and thus prevent such a catastrophe from happening.

Modern Economics

Historically, economics was regarded as a branch of philosophy. Even Adam Smith was not known as an economist by his contemporaries, since that vocation didn’t really exist. It wasn’t until 1890 that economics became a real profession. In the latter 20th century, it gained rapid advancement as mathematical models and analyses were applied more than purely rational arguments.

Classical economists thought that the amount of labor and similar inputs were essential parts of how the price of a product or service was determined. This was part of the impetus behind Karl Marx’s line of thinking, taking to an extreme the idea that labor was the ultimate source of wealth. This was a cost-of-production theory of value, which stood in contrast to the theory that value was determined by utility of goods to consumers, something Adam Smith rejected with his famous rebuttal in which he offered that, while water had infinitely more utility to people, diamonds were what cost more.

In response, Carl Menger and W. Stanley Jevons proposed a new way to look at utility——namely that it was entirely subjective. Thus, rather than looking at the totality of utility, like Adam Smith was, in which case you would need to have either all diamonds or all water (which would be silly), you need to look at incremental or “marginal” utility. Thus, in the case of water vs. diamonds, the amount paid for water was reflective of how most people were already abundantly inundated with water, and thus having a small diamond (an incremental increase in it) would be a greater value to them. Jevons even showed the actual calculus of how this was determined, and thus set the stage for how mathematical analyses would supersede purely verbal arguments today.

Then, as these supply vs. demand arguments raged, Alfred Marshall published his book, Principles of Economics, in 1890, and argued that it was a combination of supply and demand which determined prices, thus changing the history of economics as we know it. His story is interestingly similar to mine, as explained by Sowell:

Alfred Marshall had been a student of philosophy, and was critical of the economic inequalities in society, until someone told him that he needed to understand economics before making such judgments. After doing so, and seeing circumstances in a very different light, his continuing concern for the poor then led him to change his career and become an economist. He afterwards said that…”the increasing urrgency of economic studies as a means toward human well-being grew upon me.”

The increase in using mathematics to show economic truths gave way to theories of “equilibrium”, in which prices in an industry would no longer rise or fall. Of course, this wasn’t an illustration of the real world, since no equilibrium exists. But just like medical students learn about various body functions in their ideal form (even though they mostly deal with less than ideal bodies), understanding economic equilibrium is really trying to understand why things are currently not in equilibrium.

This kind of analyses can be used in both individual industries and whole economies. In a butterfly effect way, a change in the smallest thing (like the Federal Reserve raising interest rates) can have huge effects on the economy. Thus, even having this simple understanding of equilibrium this can help the average person recognize that solutions offered by politicians can have ramifications outside of what’s intended, and could in fact hurt more than help. No economic activity takes place in a vacuum, even those presented as solutions to problems.

As the Great Depression of the 1930’s and other similar economic calamities happened, economists turned their attention from supply and demand to the boom and recessions of economies. In 1936, John Maynard Keynes produced his now famous book The General Theory of Employment Interest and Money, which proposed a dominant view now known as Keynesian Economics. In it, he argued that government spending could make market adjustment and restoration of employment faster, with few negative side-effects. In this case, inflation would necessarily happen, but would be an acceptable alternative to mass unemployment as seen in the Great Depression. As A.W. Phillips discovered later, government’s intervention would be like choosing from a list of trade-offs, each of which would either cater to unemployment or inflation.

Keynesian economics and its Phillips Curve would be criticized by the Chicago School, made up of economists like Milton Friedman. As mathematical models were studied, it became clear that the market was both more rational and more responsive than Keynes had thought. It also became obvious, especially with the inflation and unemployment levels which rose in the 1970’s, that government intervention was not rational or properly responsive. Yet, parts of Keynesian thought still persist today.

Thus is the back and forth nature of the history of economics. Each era and the individuals making them up contribute something to the field. Then, future writers and thinkers embrace, clarify, repair, or take down the faults of the previous. It’s a very scientific endeavor, in which iteration is more the norm than great leaps and bounds.

The Role of Economics

Like other sciences, economists share a common set of procedures to enable them to do their studies. These procedures allow for exposing or deterring biases, such as that which happened with the Phillips Curve. While economists, like scientists, may not agree on everything, the methods and procedures provide a way for them to test their hypotheses, and see which one is correct. When two ideas are mutually contradictory, only one can prevail. In economics, this is often displayed in the mathematic presentation of arguments, where flaws and incompatible ideas are definitively seen.

Of course, unlike a few other sciences, economics cannot be conducted in a controlled setting. This doesn’t make it any less of a science, however, as many other disciplines, such as astronomy and meteorology, also have similar problems. But understanding root causes (i.e. inflating the money supply will cause an inflation of prices) is similar to how meteorologists understand and predict weather phenomena. Thus, controversies in economics are not about fundamental principles, but how those principles apply in the real world.

In this way, economics becomes evidentially based on the history of economics (or economic study). It’s about how the hypotheses made (i.e. facts) result in particular consequences. Thus the validity of a theory is established. It’s about systemic results rather than opinions or intentions, or how one thinks the results should be. In this way, economists of all kinds of backgrounds can come to the same scientific analyses and conclusions. For example, Adam Smith’s family were not businessmen, which informed his negative view of businessmen. Karl Marx’s social ideology was tempered by his analyses, which sometimes came to conclusions opposite of that ideology.

It is certain that the discipline of economics is based in analyzing historical facts. But it is in the context of these facts that politicians and the general public act. Case in point, Keynesian economics was developed out of the Great Depression. But that doesn’t mean economics is subservient to history. Adam Smith wrote The Wealth of Nations without needing to see free markets. Intellectual insight into supply and demand wasn’t responding to any change in costs or consumer demand. And certainly, the idea of government intervention into the market existed long before Keynes wrote his book.

As a reminder, economics is the study of the allocation of scarce resources that have alternative uses. Understandings in the discipline itself has had difficulty reaching the average person, who would probably never have allowed politicians to do some of the things they’ve done if it had been known. And certainly, there have been cases where economists have risen to prominence, and so become politicians who try to fine tune an economy (like the Keynesians in the 1960’s). But just as economics is a factual discipline free of ideological bias, so have such politicians brought ruin upon societies, almost always and inevitably.

My Thoughts

As I read through this chapter on the history of economics, I couldn’t help but wish this was placed near the beginning of book. I feel like some of the points which Sowell expressed in previous chapters would’ve been better placed in the context of the history of economics, rather than isolated by themselves. But nevertheless, I appreciated reading through this chapter, as it was thought-provoking in many ways.

The Coming Artificial Intelligence Revolution

The recent talks about the rise of artificial intelligence, and its take over of prominent industries, has given rise to a lot of talks about things like Universal Basic Income and government intervention. Not to belabor a point, but we can already see the effects of AI. From things like Tesla and WayMo’s self-driving vehicles to Youtubers using AI to “fix CGI” to even AI being used in apps (which I’ve written about a few times), it’s clear this trend will continue to increase.

The question that should be on everyone’s mind, however, is whether the use of artificial intelligence will produce more unemployment than employment.

The question is a familiar one that touches on a similar point of argument made about the first and second industrial revolution. Namely, that though AI can and perhaps will certainly put some people out of business in certain industries (i.e. long-distance truck driving), it may actually create new businesses and new opportunities of employment, many of which may outstrip the demand for truck drivers.

For example, the proposal for self-driving trucks entails that AI will be the primary drivers, while actual people can monitor the driving from a distance away (to take care of any difficulties). This actually produces more jobs, as businesses would need not only the staff to monitor, but other staff members to report, log, and collate the data. Furthermore, there would need to be staff hired and trained to be ready to assist on the road in the event of failure or accident, and more others hired to assist in the legal and financial ramifications of such accidents.

Would that alone take out the number of truck drivers being unemployed? Perhaps not. And certainly, while the majority of truck drivers may be statistically average in IQ (which actually means they’re within standard intelligence), this doesn’t mean that they are incapable of finding employment in other areas. There are still millions of unfilled jobs in 2019 and 2021 (before and after COVID-19). I think this would be a start.

What we understand from the history of economics is that political or government intervention has resulted in more unemployment and suffering rather than help it. The simple fact is that a singular change in policy can have drastic, unintended consequences that affect the lives of millions, many times in negative ways. So before we look into UBI or the like, I think it’s important to understand that the market corrects for itself more often and better than any single centralized entity ever could.

“Equilibrium” and COVID

Such a realization has provoked me to also wonder what the ramifications of the past year or so of COVID-19 panic and lockdowns will have on people. We already know some of the reports that are coming out. Issues with mental health abound due to isolation and the stress of joblessness are becoming known. More than 60% of small businesses that have closed are now permanently shuttered due to the lockdowns. And the government stimulus promised by the US government have still not been received by millions of Americans.

That last one really shows the ineffectiveness of government to even send out money. Imagine that on a mass scale with UBI. Every month.

There’s very little that I have to add to the conversation, outside of the understanding that government intervention, again like the butterfly effect, has consequences both intended and unintended. But now, we’re on the epilogue of a worldwide shutdown that has happened, something which is perhaps unprecedented in history. Time will tell what is to come in the next few years.

In a world where an infinite variety of categories exist, there must be certain products or services which have “non-economic” values. Thus, in the 25th chapter of Thomas Sowell’s Basic Economics, we take a look at some of these things, and see what exactly it means to consider such ideas.

If you haven’t read my previous summaries and analyses on this book, please click here. Otherwise, here we go!

Chapter Summary

As Sowell points out at the very start of this chapter, economics itself is not a moral value. Instead, it is actually a way of weighing values against each other. Thus, “non-economic” values is a misnomer, since all values are non-economic. You can be a private business owner, and yet give your money to charity. Many people in the United States have done so, including famously wealthy economists and business owners. The market can be used to acquire or allocate resources, but what you do with the wealth that results doesn’t necessarily have much to do with economics at all.

When a lot of people talk about “non-economic” values, they are admitting that they don’t want values tested against others. It is a sort of “moralizing” that refuses to jive with reality. They may have good intentions, wanting to help the poor while also helping the environment while also trying to give indigenous people honor and respect, but they are really denying the reality that resources are limited (especially in access), and doing all those things will require choices and trade-offs that may actually hurt others (including themselves) in the long run. While politics attempts to sway people by telling them their desires are always possible, economics understands that reality is a world of trade-offs. With this in mind, let’s take a look at some of these “non-economic” values in specifics.

Saving Lives

A popular political theme is the idea that “if it saves just one human life”, the policy is worth the cost. The problem, of course, is the reality that ‘saving lives’ is dependent on many factors, the solution of which is variable depending on which of those factors exist.

For example, natural disasters affect people in different ways in different countries. In terms of an earthquake, a wealthier country with better built infrastructure may withstand the shakings, and only a few will die as a result, whereas in Third World nations, thousands may die. Wealthier countries also have hospitals in which the injured can be rushed to better care.

Illustrated this way, the higher a nation’s incomes, the more lives that are being saved. Thus, any policy which costs more money than incomes can rise will be inhibiting economic growth, and thus actually not worth the lives it saves. Why? Because there would then be more lives lost than saved. Once again, the reality is trade-offs, not idyllic moralizing. It might be noble to say “there’s no limit on the value of a single human life”, but such doesn’t say anything about the actual policies often implemented with this attitude.

Markets and Values

The idea that the market, a decentralized reference to privatized ownership, cannot be entrusted with life-sustaining things is laughable, though popular in the mainstream. Oftentimes, this moralizing argument is used to prevent utilities such as water supply from being privatized. But in reality, the privatization of such things (like in Britain or Argentina) has caused a rise in life expectancy, higher quality drinking water, and better and more compliant sewage disposal systems.

It is easy for people to idealize what things are morally better, and then impose those decisions on others. Defining what the rich can or should do, what is better for the poor, etc. However, things in themselves change in value over time. In the past, oranges, sugar, and cocoa were luxuries only the wealthy could enjoy. Today, because of privatization and economies of scale, such things can be enjoyed by almost anyone, especially in the West. This is generally what the market does, and can be applied almost universally, from automobiles to telephones to fridges to air conditioners to computers.

All-in-all, while people may use “non-economic values” as a way to speak nobly, it often results in quite selfish enforcement of a single value at the expense of others.

For example, some journalist might drum up some rhetoric about how Wall Street analysts who demand annual profit requirement from newspaper firms are evil. But the reality is that the Wall Street analysts are in charge of a pool of money from the public, which seeks things like a return on investment on their pensions, 401ks, and IRAs. Thus, there is a requirement of return on investment for the newspaper company. In the end, it’s the decentralized market, a market made up of teachers, nurses, car mechanics, and more that determines such.

This isn’t to say that there aren’t financial problems in the newspaper industry. But we can’t ignore the needs of the market in order to acquiesce to the desires of few (in this case, newspaper companies). But this is often what happens in politics. Special subsidies are made to “rescue” or help a certain dying industry or even the poor. But such subsidies are always made at the expense of the greater market. As Sowell points out:

Taxing away what other people have earned, in order to finance one’s own moral adventures via social programs, is often depicted as a humanitarian endeavor. But allowing others the same freedom and dignity as oneself, so that they can make their own choices with their own earnings, is considered to be pandering to ‘greed’.

This is the problem with moralizing rather than understanding the economics of the market. Just because something happens in an industry that results in a certain outcome doesn’t mean that we know exactly what the cause of that outcome is. For example, as explained in previous chapters, businesses in lower-income areas charge higher prices, not necessarily because they are greedy, but because it’s more costly (e.g. need more security, have less space, etc.) to do business in those areas.

People as individuals make certain choices with their own morals. But when it comes to whose moral values are superior, the idea that one should impose their morals on another without proof of reality is what centralized government and politics is about. A market economy, on the other hand, permits people to make their moral decisions for themselves. Thus, in such a scenario, time in the market is what forces people to pay for their decisions.

Another popular thing today is to attack economic disparities between groups with labels like “privileges” or “advantages”. But it’s important to note the difference between privilege, which is at the expense of others, and achievements, which can actually add benefits to others. For example, because of past achievements of scientists and engineers, we have a society with electricity and computation along with cures for and even eradication of diseases.

But such things create economic disparities between the people with access to these technologies, and those who don’t. But we wouldn’t necessitate that those with access are privileged in expense of others. It might not be “fair” that some have more access than others, but it doesn’t make that access morally reprehensible.

To give another illustration, it may be morally accepted, and even celebrated, when we make transfers of wealth or income to help the poor and destitute. But developing the human capital in those areas is often more effective in sustaining wealth, even if it is more difficult. It may be moral to do one or the other, but the results they achieve are very different. Thus, while it’s important to have morals, we need to line up our morals with reality. When we are able align our morals with facts, statistics, and history, we won’t have the needless debates between economic and “non-economic” values.

My Thoughts

There’s a lot to be said about moralizing, and it doesn’t just happen in the context of looking at economic and “non-economic” values. From religious institutions to politics to education today, there’s a large swatch in western society that seeks to moralize everything, all the while not looking at the evidence. I think 2020, and somewhat so far in 2021, has demonstrated that to a large degree, with riots, shutdowns due to pandemics, and other such chaos having happened, much due more to emotional turmoil and moralizing rather than evidence and facts.

As an example, there were large swaths of the mainstream that praised the riots and protestors reacting to the tragic death of George Floyd. Slogans like “riots are the language of the unheard” and such things were thrown around. All of it was presupposed on the idea that riots were the minority communities (especially Black American communities) rising up against oppressors. But the truth is that riots actually harm and historically destroyed minority communities. From the 60’s and 70’s to the LA riots in the 90’s and nowadays, riots almost exclusively take place in large urban centers where Black Americans inhabit, and often destroy the minority businesses which exist there.

Just take a look at this heartbreaking video, recorded after the LA riots of 92.

Another example: for the past four years, the mainstream media lambasted the previous US President for being a racist. They point to his rhetoric that seems to suggest ambivalence, and twist it to suit such a narrative. But what they ignore is that, during his tenure, especially during the first three years, his policies reduced black unemployment by large amounts. And it wasn’t just black Americans, but other minorities in the United States as well. To add in some snark, if Trump were an actual racist or white supremacist, he’s the most inept racist to ever have existed.

The point isn’t to put him on some glorified pedestal, but to recognize that, in spite of our desire to be morally correct, we must always bare with the facts, lest we reveal pride and arrogance rather than truth. The question we should always be asking ourselves is, “Do my beliefs line up with the evidence?” or even, “Have I looked into the evidence contrary to my beliefs?”

That doesn’t mean, of course, that we don’t attempt to help the poor, broken, and oppressed. But many political initiatives, even ones with good intentions, often end up harming the very people it was meant to help. And when we don’t look at the evidence from history and analyze the fruit of what we’re doing, our moralizing will always end up in that same place of doing more harm than good.

We are now in the home stretch of this wonderful book. In the seventh part of this book, where we take a look at miscellaneous economic issues not yet touched on, in this 24th chapter, we’ll be looking at some myths about markets that many may have, and thus use against the arguments Sowell is presenting here. Like in a debate, this is where Sowell will be taking time to address counter arguments and issues in economics.

If you haven’t read my previous summaries and thoughts on this book, please click here. Otherwise, let’s get going!

Chapter Summary

Sowell says this in the very opening of this chapter:

Perhaps the biggest myth about markets comes from the name itself. We tend to think of a market as a thing when in fact it is people engaging in economic transactions

The above is the reason why markets are in contrast to governments, since governments are centrally planned while the market is made up of millions of individual and unique moving parts called people. But because we can make the mistake of thinking of the market as a centralized force, policies and laws are often created to limit the market, which in reality limits the freedom of individuals within the market rather than helping people in any respect.

While myths about markets abound more than what will be addressed in this chapter, here are some of the most important to talk about.

Prices

There are a few myths associated with prices, from the role prices play to why they differ and how they are created.

For example, an often misunderstood aspect of the role of prices is to believe that they are somehow used to keep goods and services from people who need them, somehow putting such things behind a sort of paywall. Terms like “exploitation” or other political rhetoric are used by even well-meaning people to attempt to get around prices through centralized planning. The 20th century, with all the rise in socialist and communist economies, has proven to us that this isn’t possible without destroying hundreds of millions of lives.

The most important thing to understand in rebuttal to the above is that prices are like wages, in that the compensation given to those who work is included in the cost to transact. If the price being paid is too high, then you should be able to find one that is lower. This is because the success or failure of a business is predicated on whether you can find the lowest price possible to offer your customers, lest you be undercut by another business. Thus, if there is no lower price, it’s not really necessary to point at people for exploitation. Rather, it’s more indicative that the current price is the way it is because no business can yet find a cheaper way to produce the product.

Another misunderstanding or myth about markets is rooted in the idea that variation in the price of the same product shows how exploitive businesses are. But the cost to do business is unique to each business in any industry. From variation in real estate cost of different communities to cost of inventory related to local communities to even differences in customer satisfaction of services, each of these things weighs differently for every business. This affects the prices, which explains the variability.

In this way, we understand that saying something should be “reasonable” or “affordable” is really akin to trying to change reality to fit our own desires. But the cost to do business, from transportation to service, has nothing to do with whether we are willing to pay for a good or service. The price of something is not the same as the cost to create it. Rather, a price simply helps pay for that cost. Thus, these price myths about markets don’t actually square with the reality of costs, just asserts that one disagrees and is unwilling to pay it.

Brand Names

Similar myths about markets exist for brand names. People often think brand names are just ways to get customers to pay more for a certain product, or that brand names are not aligned with consumer interests.

The reality is that brand names communicate knowledge to customers, and force producers to own up to the brand they represent.

For example, if someone is on a road trip driving into a town they’ve never been to before, they are more likely to go to a gasoline station or a diner that they are familiar with. The McDonalds and Chevrons offer a customer immediate knowledge of the quality of product and service they can expect, despite not being in a familiar location. Similarly, we would rather purchase a Samsung phone or Toyota car, rather than no-name brands for each of those respective products and services, simply because those brands are better known for a specific kind of desired quality.

Even with the myth that “all brands are alike”, this is actually an indication of similarity of quality rather than anything negative. Certainly, few people can find the difference between a Pepsi or a Coca-Cola. But that shows us that they are similar in quality, and we would certainly rather drink those than some strange concoction with questionable smell and odor made by a local, dingy restaurant chef.

In reality, and historically, brands are the result of market forces. If it were more advantageous to hide behind a no-name label, then businesses would certainly do so. But when Henry Heinz put his name behind his food business, it flourished due to the reputation of the brand. And thus, though McDonalds uses machines to make its hamburgers and shakes and french fries, it also established policies of supervising its suppliers to make sure all of its products were up to quality inspection. This pressured its competitors to do similarly, and made the quality of every hamburger diner rise as a result.

The maintenance of quality for a brand is also paramount. Class action lawsuits abound every day, and if a brand is going to keep its reputation up and not be legitimately sued on the average day, keeping the face of its financial value high is key for the sustained legacy of that business. Thus, brand names are in reality a benefit to markets, not the soulless entities often portrayed in myths of markets.

Non-Profit Organizations

In addressing the myths of markets, it’s important that we take a look at non-profits as well.

For-profit businesses are kept accountable through immediate profit-and-loss feedback from customers. Even if customers don’t fill out a survey about their satisfaction, they will display their attitudes towards a business by whether they continue to shop at or use the services of that business.

Such incentives and feedback mechanisms to keep up in quality of service does not really exist for non-profit organizations. In fact, those who run these organizations have a tendency to use the resources of those organizations to benefit themselves, many times at the expense of what those organizations are meant to do. The only limitations on these tendencies are the outside interests that fund these organizations. This is pretty ironic, as it shows that financial incentives are still the ultimate check on these organizations.

But large funding organizations don’t have the ability to keep non-profits in check, as they don’t often spend the resources necessary to do so. And though they receive some financing from clients at times, it isn’t the main bulk of their funding. Thus, there’s very little pressure on non-profit organizations to make sure the funding they receive is effectively helping with the cause they support.

In this way, the benefits coming out of non-profits effectively function like subsidized benefits from the government. A non-profit’s goods or services can cost more to produce than they are selling. But they will continue to run with them, since the beneficiaries can’t put any financial pressure on the organizations. The feedback loop to make the non-profits is thus broken, and therefore the tendency for the leaders in the organizations to divert funds in an unhelpful fashion is far greater.

This is an important point, as the scope of things which fall under the umbrella of “non-profit organizations” is vast. From charities and universities to religious institutions, there are a lot of entities which claim to be not-for-profit. This doesn’t mean that these entities don’t engage in the marketplace, of course. In fact, there is a lot of overlap between the activities of non-profits and for-profit businesses. In this way, non-profits have proven to be less effective in both social and financial matters. For example, non-profit universities often produce less diversity of thought, even though such would be beneficial to education. In a similar way, 1948 produced the first black chemistry professor in the United States, though hundreds of black American chemists worked for for-profit chemical companies for years before that.

The difference between for-profit and non-profit becomes even more stark when they compete on the exact same grounds. Here’s the quote from Sowell:

For example, the University of South Carolina “rarely netted as much as $100,000 per year” from its college bookstore but Barnes & Noble paid them $500,000 a year to rune the same book store. This implies that Barnes & Noble must have made even more money in order to pay the University of South Carolina more than the university ever made for itself from the same bookstore.

In these comparisons, it becomes obvious that, while it may seem nice or even moral to conduct business without profit in mind, reality shows us that non-profits are fated to be ill-equipped to do the very things they set out to do, while for-profit businesses are able to do this and more.

My Thoughts

As Sowell addressed the problems with non-profits in this chapter on myths about markets, I suddenly realized something that has been bothering me for a while. Let me attempt to lay this out.

As a believer and follower of Christ, one of the things of primary concern to me (at least in terms of society as a whole) is the alleviation of poverty. If we are to take our spirituality and Scriptures seriously, then we need to recognize that helping the poor and broken of society is one of the primary callings Jesus Christ calls us to. And so, participating in charity and homeless shelters and things is one of the things that I do when I can, even if it’s just giving money for a cause.

As far as I know, and from my life experiences, most Christians, whether they are Catholic, Orthodox, or Protestant, feel similarly, with varying degrees of concern (but almost always the concern exists).

This is why one of the absolute strangest facts that exist is that there is a near direct correlation between how religious an area is, and how high on the scale of poverty that area is as well. In other words, the more religious a group of people in a nation tend to be, the more impoverished that nation tends to be as well. You can read about it here in this study or get a summary of it in this article, but there are many more like it.

Many religious people read something like that and immediately throw up their defenses and apologetics. They say things like, “Well, just because this is the case doesn’t mean the religion isn’t true,” or “my religion is not primarily about alleviating poverty, it’s about proper worship and understanding of God.” And certainly, it’s easy to take a look at places like the former Soviet Union and current day Venezuela and Zimbabwe and see that the absence of religion also exists in extraordinarily impoverished nations. These responses may be true in a logical or rational way, but they don’t answer the primary point being made very well.

But I think Thomas Sowell’s chapter on myths about markets answers the issue perfectly.

It’s not unexpected that any non-profit does not produce profit. After all, if the focus isn’t to produce a net positive financially, we shouldn’t expect them to try in the long run. And certainly, when we’re talking about giving or attending to the poor (i.e. those who cannot make a profit for themselves), there will probably be some sort of loss involved.

But since we don’t expect these churches (or other religious institutions) to make a profit, then when one exists, it will create a certain drain in the local economy. Thus, when a lot of them exist, in the absence of businesses that can make up for that loss, then poverty will be multiplied. And since non-profits tend to utilize money inefficiency, it would seem such a scenario would actually exponentiate the situation, creating an ever worsening condition.

It seems then, that in a macro sense, whether a society prospers has more to do with the balance of the number of successful for-profit businesses versus the number of other non-profit actors, including religious and governmental institutions. After all, as noted by previous chapters, a larger and more direct part of keeping a nation impoverished is corruption and lack of honest business interactions. Actually, it’s not a balance at all, but that the successful for-profit businesses needs to vastly outnumber the others, so as to alleviate the drain economically.

Thinking back on it, while it seemed revelatory at the time, it’s really quite rational. But then we must reckon with the actual conclusion to this line of understanding: The greatest way out of poverty for any society is not through non-profit work, religious institutions, or government intervention. It is the creation and sustainability of successful for-profit businesses.

This redefines helping the poor. Rather than giving money primarily for causes like giving food, shelter, or other physical necessities (all of which are still very important), time and financial investment should be made to educate those in poverty on starting, managing, and sustaining businesses. If such things are too difficult for some to learn immediately, then it’s education on how to get a job to support local businesses that are already successful.

However, such notions need also be for-profit. Rather than handing these educational tools to non-profits which are both unaccountable and inefficient, as well as unable to give feedback on whether their efforts are effective, businesses need to be created for this educational purpose. Such businesses would probably function like an App Store or Music Retail shop, where it not only educates the people who come to learn, but market and provide a platform for those same people to start a business, and taking a cut from those businesses.

The most effective of these, if they desire to be truly transparent and thus receive the greatest feedback, would be those that ‘open source’ their financials publicly, including the successful businesses which were created by them and operate on their platform. Then anyone and everyone can see whether they would want to participate in and learn from this business, or if it’s just a scam.

If all this sounds familiar, it should. It’s what all corporations, whether national or multinational, do. In fact, this kind of thing (where businesses educate those under them to be successful) has existed for a while, and it’s generally the next step when a small local business desires to begin expanding and franchising. It stands in direct contrast to our normal public school systems, which are government (or otherwise non-profit) sponsored, and which churn out, year after year, more and more people who have no idea what to do with their lives.

In other words, the solution to our problems isn’t a new technology, a new idea, or a new revelation. It’s been sitting in front of us the whole time, if we were willing to look for it. In the words of a teacher in the Bible:

What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.

- Ecclesiastes 1:9

A lot of social justice and left-leaning talking points today are based around the idea of very real and very ubiquitous disparities which exist between the rich and poor. Such disparities exist even between international sovereignties. In this post, we look at how Thomas Sowell addresses these international disparities head on in the 23rd chapter of his book, Basic Economics.

If you haven’t read my previous chapter summaries and thoughts on his book, please click here.

Chapter Summary

The first thing to recognize is that wealth disparities between nations have always existed, and those disparities are often quite vast, with some nations having less than a fifth or even a tenth of the GDP of other nations. A lot of energy often goes into finding out why such disparities exist. With that, there have been a number of different factors that were found to cause these disparities. Here are some insights into them:

Geographic Factors

There are a number of geographic factors that have been considered to potentiate a country’s economic well-being. The first thing to note, of course, is that no single country exists that has the exact same geography as another. This powerful fact may cause some to believe international disparities exist due entirely to it, but there’s much more nuance than that.

In regards to growing food, things like the soil composition, rate of rainfall, amount of sunlight, and other fundamental things vary vastly around the world. Additionally, different combinations of the above as well as other factors like the abundance of natural resources, can have positive or negative effects in local areas. Then, the ability for the people of a certain locale to be able to exploit these resources also varies.

Access to water is also important. Most cities around the world are located around rivers, open seas, and other waterways. Such locations allow for better transportation (since water transport is generally historically cheaper than land transport), in addition to the reception and importation of food and fuel. Of course, rivers and waterways are certainly not evenly distributed around the world, and different places around the world have differences in how much these waterways penetrate the main continents.

Here are some examples. Factors like changes in elevation as the water goes to the sea will hinder or help things like transportation. Additionally, in comparing Europe to Africa, though Africa has a much larger landmass, its coastline is shorter than Europe, simply because the coastlines of Europe twist and turn more, and thus creating more opportunity for harbors and such. Even in comparing Western Europe to Eastern Europe, there are differences in temperatures and climates, thus giving Western Europe more flow and time in favorable seasons.

Mountains also have effects on economics and livelihood. Those in lowlands usually form communities that are interdependent on each other, while those in highlands or mountainous regions are more likely isolated. This gives lowlands easier transportation, and thus more cultural sharing, which resulted in faster technological advancement. But mountains have a positive effect in that they supply lowlands with water. While the non-mountainous plains of Africa have resulted in dependency on seasonal rainfall, areas with greater mountain features often benefit from being able to exploit waterways which are fed by mountain runoff.

The availability of certain animals has also affected economies. Prior to the discovery of the Western Hemisphere by Western Europeans, there was a lack of horses, oxen, and other beasts of burden. The lack of such resulted in a dearth of technological development for the indigenous people of North and South America, despite their geographic similarity to Western Europe.

In fact, such a difference in development of civilization meant that those in North America often had no contact with their counterparts in South America, in contrast to the massive trade networks and frequent contact between those in Europe, Africa, and Asia. Similarly, those indigenous to Australia had little contact with those outside, and indeed didn’t have the ability to farm as the soil of Australia has low fertility. While Australia has other natural resource in great abundance, such resources weren’t utilized until after the British had colonized it.

All of these geographic features play into how agriculture grew and expanded as humanity matured, and the places where agriculture was adopted faster produced cities that resulted in greater philosophy, literature, mathematics, and other intellectual (as well as technological) developments. But because geography is so diverse, it’s difficult to locate a singular feature to blame for international disparities.

Cultures

Differences in culture have also created differences in wealth between various people groups and nations, and may also factor in international disparities in wealth. For example, cultures which promote “rule of law” as opposed to rule by the whims of leaders often also do well economically. Additionally, cultures where honesty is valued and practiced also result in the same, as countries with the greatest corruption are usually also among the poorest. At times, positive attitudes towards work and seeking economic progress have also been positive factors in economic development. Generally, when culture intermingle, the ability to see how others do things differently has stimulated economic growth, whereas isolation usually leads to less progress.

As mentioned in previous chapters, human capital is also a crucial part of prosperity. Even after wartime, when a land has been devastated, often the recovery from such a state can be quite quick when people are given the chance. Such was what happened in Western Europe following the Second World War. In a fascinating way, those who take from others are often doing so to their own detriment, as physical capital that is stolen is not likely to produce lasting wealth, and human capital cannot be replaced in the invention of useful physical capital.

While geography can certainly have impact, the greater impact is whether a nation is able to fully utilize its human capital. In fact, while most advanced civilizations have sprung up in the temperate zone, oftentimes the people who emigrate to other regions from those zones also prosper. Furthermore, the advantages of certain advantageous geographic locations have been known to produce less developed human capital, and thus less economic progress. Thus, those in tropical zones have never had the hardship of needing to save food for the winter, whereas those in temperate zones did so out of a necessity to survive. In this way, the human capital of habits can create economic benefits.

As mentioned before, whether cultures are willing to learn from each other also as an economic effect. For example, the British and the Japanese, both of which were geographically disadvantaged, eventually overcame their detriments by learning from and incorporating features from other cultures and nations. The Arabian Middle East, on the other hand, went from being a dominant force to resisting learning from others, and fell behind. As Sowell puts it:

Spain translates as many books into Spanish annually as the Arabs have translated into Arabic in a thousand years.

A similar story exists in China, which was extraordinarily advanced before the fifteenth century. But because the country closed itself off, a couple hundred years later, when European nations came knocking, they found themselves at the mercy of those who could impose their might militarily on them.

Similarly, when a society limits its population from determining for themselves what they want to do, the result is often that the people tend to be less productive economically. Whether by race, sex, religion, caste, tribe, or a myriad of other things, systemic targeting or persecution of particular groups tends to prevent a society from actually doing well. In fact, ethnic tensions often come through the implantation of a foreign culture or ethnic group onto native soil, due to the fact that those foreign cultures or groups have some kind of advantage (e.g. they speak a language that is the dominant language for industrial growth). Then, because the foreign group has more control and represented the majority of a certain industry, are hated and persecuted by the indigenous population. In such situations, which is often the norm, leaders of particular ethnic groups have targeted other cultures, often to their own detriment.

Population

How populations change or move, and even how large or dispersed they are, can have an impact on economies, and thus, show up as international disparities.

While overpopulation has been a popular concern, studies show that such doom and gloom theories based on it are absolutely false. There are many countries with high population density that have much higher living standards than others. In fact, poverty and famine in the world are more closely associated with sparse or thin populations, rather than dense ones. While there are certainly poor countries that are densely populated (i.e. Bangladesh), it’s not about the number of people as much as the productivity, habits, skills, experience, and other factors that make a country rich or poor.

As humanity has evolved over the centuries, there have also been times of mass movement of populations. Such movements in pre-industrial and early industrial ages would diffuse the knowledge of technological advancements from one area into other regions and nations. As transportation and communications improved, such advances spread faster and faster. Mass movement also gives people chances to adopt other cultures, some of which are more conducive to economic progress. Thus, peoples who are initially poor may migrate to other places in which they can prosper. But this is not always the case.

Imperialism

In history, there have been many instances of invasions and conquests, most of which resulted in transfers of wealth and culture, and has had real effects on international disparities in wealth. While today most of it is blamed on Europeans, this happened across history with Asian, Middle Eastern, and African conquerors as well.

Fascinatingly, the imperialism of nations more often than not resulted in the impoverishing of the conquerors. For example, the Spanish Empire extended from California to the southernmost parts of South America, but today, Spain is one of the poorest countries in Western Europe. Countries like Switzerland and Norway, which never had empires, have much higher standards of living.

Oftentimes, conquerors don’t actually promote commerce, industry, and labor, but rather do so to support the luxurious lives of their elites. The Spanish aren’t alone in this. No one really thinks about Genghis Khan’s Mongolian hordes or the threat of the Ottoman Empire anymore, nor the Moguls or Russian Empires. The British Empire may be the exception, since most Britons today are relatively well off. However, at the height of its imperial rule, only individual elites were rich, while the rest of the British citizenry were heavily burdened with taxes. Even with the largest slave trade in the world, such a thing only amounted to less than 2 percent of its industry.

In fact, slavery as an industry was a massive waste, economically. In every nation where there were large concentrations of use of slaves, from the southern part of the United States to parts of Eastern Europe (where slavery lasted far longer than in the West), those places remained more impoverished than those without. Forced enslavement has always resulted in less economic development over the long term, proved over centuries to even today, where places like Sub-Saharan Africa where slavery is still allowed are noted for extreme poverty. Thus, imperialism cannot be said to have much economic benefit, especially in the long term.

Implications

With all the factors given above, it’s extraordinarily difficult to compare any number of nations or civilizations. What we can say is that interaction between cultures and people is extremely important. As interaction between different peoples increased, the ability to exploit natural resources increased as well. After all, oil may be a valuable resource today, but the caveman of millennia ago would have no use for it. And while immigration can have sometimes resulted in increased economic activity, not all immigrants equally emphasized the same thing within their cultures.

Even in assessing imperialism, we must remember that far more indigenous people in the Western Hemisphere died due to diseases introduced than anything else. As Sowell explains:

It was said of a kindly Spanish priest who went among the native peoples in friendship, as a missionary, that he was probably responsible for more deaths among them than even the most brutal Conquistador.

From all of the issues above, the only thing we really understand is that trying to determine patterns of outcomes in equality or inequality is nearly impossible. Hopefully, future leaders and people will recognize this fact, too.

My Thoughts

In relation to what’s talked about in the mainstream media and on most of the big tech platforms today, this chapter on international disparities in wealth is an interesting take. Of course, due to the ubiquity of terms like “equity” or “social justice”, it’s pretty difficult not to think about such things these days, even if it’s just to rant on how everything presented today just feels extraordinarily and unnecessarily political.

The grand implication of differences in geographic origin, cultural and population differences, as well as political and class circumstances on international disparities is framed and understood as this: there is no singular pattern or conclusion anyone can make about whichever category they choose, be it race, ethnicity, religion, sex, or otherwise, that can conclusively and universally apply to that entire category.

That one nation or country is poorer economically is not necessarily due to oppression from another nation, nor even another race. Such things can certainly happen, but as Sowell points out, over the long term, it’s rarely the case, since it’s actually economically unfeasible to maintain oppressive tactics for very long before the oppressors are actually paying more to be oppressive than otherwise.

This does lead me to wonder about something, however. Presently, one of the most oppressive regimes in the world is the CCP (the communist party of China), who have targeted Tibetans, spiritual practitioners of Falun Gong, and most recently Uygher Muslims in some of the most atrocious human rights abuses ever. If you don’t know what’s going on, I would encourage you to listen to any of China Uncensored’s Youtube videos to get caught up on the subject. But, in short, it wouldn’t be any stretch or exaggeration to say what’s happening is as bad or worse than what has happened under the most evil and despotic regimes in history.

The thing is, that they’ve been doing this for a while. The Great Leap Forward and the Cultural Revolution, which sparked the communist domination of China directly after the second World War, targeted and killed over 20 million people. Since then, the regime has continually focused on specific ethnic or religious minorities in genocide and ethnic cleansing.

What is perhaps more disturbing is that China today is one of the wealthiest nations in the world. Its GDP is rising, and is set to overtake the United States sooner than we think. This leads us to the question: if the oppression of population leads to economic stagnation, then why has China boomed economically, even while atrocities happen? Is this an outlier against Sowell’s argument in talking about international disparities in wealth?

It’s significant, I think, to understand that the United States is one of the nations primarily responsible for boosting China to its current status on the world stage. An overview and understanding of the Kissinger Doctrine can help clarify this. In a nutshell, however, along with then-President Richard Nixon, Henry Kissinger opened US relations with China with the intent to capitalize on its growing population economically. The result is a China that has grown to economic peaks, despite its oppressive tactics against its own people.

In the interim, the influence of the CCP has infiltrated the United States, from the very top levels of government to its education system. It’s fascinating that the most recent internal conflicts within the United States have almost all centered around tearing the nation apart, both politically and socially. It’s not difficult to make the argument that we are now more divided than ever before, except perhaps during the Civil War era.

My intention isn’t to belabor the point, but rather to point to how Sowell’s argument isn’t flawed at all, but rather doesn’t account much for what’s going on today. The Great Leap Forward and Cultural Revolution in China most assuredly did reduce China economically through its oppressive tactics. But Sowell never accounts for two superpowers colluding to prop up an oppressive regime, which is what has happened since the 70’s. The world would certainly look different if the US and the Soviet Union were as economically entangled as China and the US are today.

It may be that such a situation is unprecedented in history, and we have yet to see how it all plays out. But that would fall outside the scope of a chapter on international disparities in wealth.

The term ‘transfers of wealth’ is often used these days to refer to the misguided idea of money going from the corrupt and wealthy to those who are somehow more morally deserving or responsible. Of course, this is not what Sowell talks about here.

Instead, in this 22nd chapter of Basic Economics, we’re taking a look at the positives and negatives of why and how wealth moves around the world.

If you want to see my previous chapter summaries and analyses, please click here. Otherwise, let’s get to it!

Chapter Summary

There are many ways in which an international transfers of wealth take place. From individuals and businesses to whole countries investing other individuals, businesses and countries, these kinds of transfers have become quite normal today. For example, remittances to Mexican citizens totaled $23 billion in 2011, received by about a fifth of its population from the United States. In Lebanon, it is about 22% of its GDP. And of course, when there is more violent circumstances that result in the takeover of one population by another, there are transfers of wealth from the loser to the victors. But let’s take a look at the more peaceful kinds of international investments, first.

International Investments

While some may believe that the moral ideal would be that rich countries invest in poor countries, in the real world rich countries more often than not invest in other rich countries. This is because, in terms of capital, most investment is done with the expectation of getting that money back. Poorer countries tend to be less stable and more corrupt, and thus a deterrent for outside investment. Additionally, the inflow of capital is often less efficient in poor countries, because of various laws within them that allow their governments more control over the economy. In fact, any time a country loosens its governmental controls over the economy (e.g. India, Hong Kong, etc.), investments begin to pour in.

There’s a wrench to be thrown however, when looking at international trade with the perspective of accounting. Since accounting ascribes categories to different goods and services, whether it sees a trade balance or not often depends on what counts as international trade. Oftentimes, exports and imports are goods focused, and disregard services. Thus, when the media reports on the effects of international trade on the US, it’s often at a deficit, despite lots of American know-how and services being used and paid for by other nations. This happens across many sectors, including technology and software.

So should we be talking about “balance of payment”, rather than “balance of trade”, since a deficit in trade of goods can be made up for elsewhere in services? There are issues with this as well. For example, nations with a good balance of payment (e.g. Nigeria presently, Germany and the United States at times, etc.) are not necessarily prospering.

Back to the main thing: when people invest, they want to invest knowing that their money is secure, and in a place where they are more likely to earn a good return. Thus, people often put their money in the United States rather than even their own countries, which means that once again, rich countries tend to be invested in. But when this happens, the debt that the United States owes to foreigners increases. So even though a deficit is happening, said country may actually be prospering.

There is a lot of talk about “creditor nations” and “debtor nations”, though neither are intrinsically good or bad. The term “debt” is thrown around a lot to evoke a certain idea, but the term doesn’t actually add much meaning to the conversation. When you deposit money in a bank, that banker becomes a debtor, because it owes you that money. Thus, such a bank would go more and more into debt the more customers it has. The same thing happens with credit (though in the other direction), and the same thing happens with debtor and creditor nations.

The United States has almost always been a debtor nation, but has almost always had the highest standard of living in the world. Those foreign to its soil have more frequently owned more assets in the US than Americans owned abroad. In such terms, this is also the case with other countries such as Australia and Argentina. While some fear that international investment means that foreigners will carry away the wealth of the country they invest in, the story of the United States and that of these other nations shows us that this is never the case. Economic transactions are not zero-sum, they create wealth.

A much more dangerous kind of debt is when a poor nation borrows money from other countries in order to cover the difference when their own exports do not cover their imports (basically, they’re spending more money than they are making). But these are illustrations of poor financial management rather than a blanket explanation for deficit and debt.

Since economic transactions are about the creation of wealth, this stifles the idea that large multinational corporations profit primarily through the exploitation of third world country workers. Firstly, as said before, the vast majority of international business investments are in more prosperous nations. Secondly, such employment is not often given to the poorest countries where they are needed most. And third, as discussed previously, attempting to artificially drive up wages in such impoverished countries would actually decrease investments into them, as the rise in wages do not reflect an increase in efficiency, which is what generally happens in countries with higher wages.

Remittances and Human Capital

While investments are essential to international economics today, the sending of money from countries to support families in others still plays a key part in it all. In fact, in 2009, they outpaced the value of foreign aid by more than two times. In these cases, as given before, the ‘foreigners’ are actually creating industry in the land, despite sending money home to family, and when politics force them to leave, it is more often than not that the economy declines afterwards.

What we need to realize is that people themselves are a large source of wealth. An interesting fact is that ethnic and immigrant groups are often responsible for creating and dominating entire industries (e.g. Germans and beer, Huguenots and watches, etc.). The reception of immigrants has often been the source of economic gains in various countries. In the same way, the emigration of people, especially educated ones, have resulted in economic losses.

Of course, there are negative patterns as well, including bringing disease, crime, and terrorism. Interestingly, as Russia and Nigeria are ranked among the most corrupt nations in the world, such emigrants from these areas often result in a rise in criminal activities in the United States. So we need to know what kind of immigrants we’re actually talking about.

Like immigration, imperialism is actually a tricky subject to touch in terms of international economics. While many decry the stripping of economic resources of the conquered nations, there are also ways in which the conquerors also lose economically on net balance. For example, even when the British Empire was at its peak, it invested more money in the United States than any of its colonies in Asia and Africa. This is, again, a reflection of the fact that rich countries want to invest in rich ones for economic gain, rather than exploiting poor ones. Thus, in terms of economics, imperialism is not much of a source of real transfers of wealth internationally.

Because of these principles, foreign aid also often fails to do what it says it’s supposed to do. Since they are transfers of wealth between governmental agencies, rather than private investments and enterprises, the financial aid often goes into the creation of things that look impressive to foreigners, but fail to produce things which raise the material standard of living in the same country.

There’s another problem as well. Since foreign aid is often given by an industrial country to a rural one, the money pouring in incentivizes the locals to abandon previous economic activities (such as fishing and farming) for the new economy being hoisted on them. Without the locals having built their own surviving economy, it is doubtful that such would become self-sufficient again, once the foreign aid stops. In this way, it actually slows economic development, rather than helping it.

One of the main problems (outside of corruption) is that these poorer countries typically have the natural resources to create wealth, but much of it is either undeveloped or not legally recognized as physical wealth by bankers, lenders, and other investors. This lack of ability to create property rights around such natural resources becomes a bottleneck that prevents them from turning them from small enterprises into larger businesses, and thus adding into the nation’s economy.

We must remember that, even in the United States, most large corporations began as small enterprises, and grew from an individual’s own small savings into the large, expansive conglomerates we see today. This was able to happen because the ability to have property rights allowed individuals to make wealth out of what they could legally own. Such a thing doesn’t exist in most Third World countries.

In the United States, a large percentage of actual transfers of wealth happens, not through foreign aid, but private philanthropic donations, private business investments, and remittances. While it’s difficult to measure the impact of all of these, in addition to official foreign aid, from what we have seen, it is the private doings of people and businesses that have helped raise the standard of living more than official government aid.

The International Monetary System

Stability in the monetary system is an important factor in international trade, as the vast majority of transfers are in fiat form, rather than goods and services. When currencies fluctuate wildly, they cause everyone to become speculators, since anyone that holds fluctuating currencies are betting something on its value relative to real goods and services.

In general, where national economies used a gold standard (where currency could be exchanged for a set amount of gold), there was not only stability in the nation, but the stability encouraged investment as well. In this way, “currencies were just names for particular weights of gold” (Robert Mundell).

When the gold standard ended, there was a variety of effects. Some nations (like those in Europe) banded together to create an international currency. Others, like the Japanese yen, became a widely accepted in international financial transactions due to their stability. Still others, due mostly to governmental corruption, began inflating their currency to the point of instability and suffering for their people.

In these times, the idea of strong and weak currencies became a normal talking about for economics. Strong typically refers to an increasing value, while weak refers to a decreasing value (almost always in reference to the United States Dollar).

However, a strong currency does NOT mean a strong economy. Sometimes it means the opposite, as the prices of imports rise, and thus fewer people are buying. On the other hand, a weakening currency can give domestic businesses a boost. But such is not always the case, since a stronger currency can also help when buying within other nations using the stronger currency. And of course, any currency can rise and fall at the same time, since there are multiple currencies to measure up against.

My Thoughts

To address the very first part of this post, the idea of ‘transfers of wealth’ has become quite the nomenclature for the Robinhood-esque idea that, with the rise of technology and current geopolitical landscape, there will somehow be a movement of wealth from where it’s typically or publicly been seen to others. Some believe this will happen from current wealthy classes to either the less fortunate (a la Bitcoin or the like) or to their own specific side they are advocating for.

As I read this chapter, I started to realize that these much more popular ideas may be a bit misguided. As Sowell explains above, transfers of wealth are happening all the time, and the vast majority of what is done effectively is not through foreign aid or a singular big dump, but rather transfers and remittances through private individuals and businesses.

As explained above, the vast majority of investments go from rich countries to rich countries. This isn’t a moral or immoral happenstance, but rather a rational reality. Those who invest want to know that their money is going to make a good return for themselves, as well as create a better economic situation for them to invest again in the future. On the moral side, perhaps there is desire to do philanthropic good as well, but in the grand scheme of things, these moral quandaries don’t really factor in.

And so to believe that some technology like Bitcoin is going to suddenly make poor people rich is quite a misnomer. Yes, perhaps those who got in early into Bitcoin are going to become part of the wealth class in the next decade, but such early adopters are rarely part of the poor working class. As much as I would want more stories where families are able to sustain a desired lifestyle through Bitcoin, this is more often a nice individual anecdote rather than a statistical trend. Instead, transfers of wealth most often happen between people who are doing well, to benefit each other.

There is another key idea he mentions that I want to explore, something that cryptocurrency may actually be able to address.

Poor countries are not poor because they are exploited. Rather, such countries are often unable, for a variety of reasons, to exploit their own often vast natural resources for their own economic gain. This is something that I think is so rarely talked about, but is perhaps the actual problem rather than things like foreign oppression or imperialism.

Let’s take a look at the opposite factor: countries like Japan, the United Kingdom, and Singapore have very few natural resources. At times, I wonder if this is a positive factor. These nations with poor natural resources are forced to work with the outside world, and thus have transfers of wealth going into their own country.

Of course, that can’t be the only factor, as that would mean that all countries with little natural resource would be rich. Instead, again, as Sowell explains, these countries with little natural resource but are also prospering economically are typically free market societies. In other words, the government doesn’t attempt to control the economy in these places, but rather allows free enterprise to do so. Perhaps, it is because there are few natural resources to exploit that the governments in these places are forced to rely on businesses.

And thus, when we look at places like Venezuela and Russia, where the natural resources are in abundance, but the society is poor, we see that centralized control has actually delayed and prevented economic activity from happening. The entities of the government take the natural resources it has access to in abundance, and uses it for its own gain rather than for and by the people it presides over.

How does cryptocurrency factor into all of this?

Of course, the first thing to recognize is that governments need to be favorable towards cryptocurrency in order for it to work.

Secondly, as demonstrated in the case of MakerDAO and DAI, the value of certain items can be soft-pegged. This means we can have decentralized digital representations of elements like metals (i.e. gold). Such things can then be bought and sold on decentralized exchanges.

Imagine if a country, rich in copper but perhaps poor otherwise, is able to take the copper it has mined and digitally trade it around the world without needing to rely on bankers and financial institutions controlled by larger nations. This would allow a smaller country to exploit its own natural resources for gain. Of course, to do so would require its governments to desist from trying to control it all, which as we now know, will only lead to extreme inefficiencies and more poverty. Instead, they’ll need to let private individuals and companies with property rights become the better experts required to produce and distribute such things.

And thus, real transfers of wealth that benefit both poor and rich countries can exist.