Special Problems of Time and Risk | Basic Economics by Thomas Sowell | Ch. 15

We are now in chapter 15, the last chapter of this part on time and risk in Thomas Sowell's Basic Economics. In this chapter, we look at miscellaneous problems in these areas.

As always, if you want to look at my previous analyses of this book, click here. Otherwise, let's head get into it!

Chapter Summary

In this world, risk is inescapable. Even if we were to look at agrarian cultures, there was risk to farming, whether from droughts, floods, plagues, or other acts of nature (let alone human immorality). In the modern world, where many are increasingly living in cities, these risks are often less tangible, though no less real. When guarantees (e.g. job security, pay security, etc.) are given, the risk of losing such things is still real. It's just that the guarantor of such promises are, in reality, bearing those risks. This is why professional speculators, though they may not be popular in mainstream culture, are nevertheless just as valid a workforce as the manual laborer.

The biggest factor in all of this is time. Even if you were to guarantee that someone's idea would profit, it still takes time for such an idea to bear the fruits of that success. And since different people have differing levels of patience as well as expectations of profit rates, it's difficult to assess what is best for everyone. Such is the difficulty of any attempt to singularly coordinate an economy.


In economic terms, while risk is calculable, uncertainty is not. Risk allows things like insurance companies or other entities to cover foreseeable contingencies. Uncertainty, on the other hand, is when some action, like a government constantly changing policies, creates unknowns.

In times of uncertainty, people generally save their money rather than spend, which adversely affects an economy at large. Thus, when newspapers or magazines print headlines that ask why an economy isn't recovering despite many businesses having the capital to do so, it is primarily due to one reason: uncertainty.

Time and Money

In general, the more time something takes, the more money it will take as well (thus the old saying, “time is money”). For example, if someone borrows money for constructing homes in an area, that person will have to continue paying that money with interest even when there is a delay in the schedule. These kinds of delays, which include things like determining environmental dangers or amenities requirements, often add exorbitant amounts to the cost of construction.

Even if the builder doesn't want to build such things like amenities, they may be required to do so by the city. In these cases, either the builder decides to not to build (which would be a detriment to the city), or because of limited resources, must front the cost down the line (e.g. higher home prices).

Thus, these mainly bureaucratic delays are often the source of the high costs of building. Further adding to it is often political corruption, where government entities will delay a project unless they are bribed.

There are other ways time is money as well. For example, the government could raise the retirement age, which actually fronts the cost of paying retirees to private employers. What is important is that people remember the fact that more time means more cost, no matter if a change sounds moral or not.

Economic Adjustments

And so we can see that when there are adjustments in an economy, it takes time (i.e. costs money) to make those adjustments. But because these adjustments take up real time, politicians have grown used to the fact that they can delay the real costs into the future, and create some sort of benefit in the present.

Because people generally don't have much foresight, there is inherent risk with time. Economic activities discussed in previous chapters (e.g. insurance, speculators, etc.) can often minimize them or give the burden to those who can carry them (who typically have the resources to do so). Thus, speculators actually create a situation economically that produces more of a product, given their ability to spread the risk out. But politicians often take advantage of these situations, and decry foul on speculators and insurance companies and retail companies when prices go up due to anticipation of more risk.

This is where time and politics get messy. Politicians often attempt to increase benefits in the present time in order to get elected. However, all they really do (as explained in preceding chapters) is displace the cost to the future. The politician then moves up the hierarchy of politics due to popularity, and the displaced cost comes during his or her successors tenures. They then blame those successors on the costs they pushed on them.

What would a private enterprises do, instead? Since economics anticipate the future through present value, private businesses would use insurance and speculation to offset costs. This may cause prices to rise in the short term, but competition would drive such prices down. Thus, both the cost and risk are alleviated. It simply takes time. Yes, there may be jobs lost in the short term. But jobs are always lost, even in societies in their golden ages. The difference is that when businesses are allowed to flourish, even when jobs are lost, new jobs will take their place.

What people should understand is that government programs often have the unintended consequence of incentivizing behaviors detrimental to the intended policy. For example, when money was given by the U.S. government to help children with learning disabilities, organizations running programs for such children were incentivized to diagnose more of the problem in order to receive more money. Additionally, low-income welfare recipients often told their children to do poorly on test, so they could receive the money given through these programs.

Prices — which are simply costs that reflect whether resources have been allocated efficiently — are incentivized to go down due to competition. But what lower prices should reflect is the knowledge that resources have been allocated efficiently, despite any risks associated with the creation of that product or service. Thus, in a market free of political manipulation, such proper knowledge to assess one's ability to purchase goods or services is what drives the economy beneficially for everyone.

In general, people behave in a way to further their own wants and desires. What that may mean is different depending on who you ask. In a private marketplace, people can be hired to assess risks and analyze data for everyone else's benefit. Economically, this is a far better way to alleviate problems than governmental intervention.

My Thoughts

It's fitting, perhaps, that I'm writing about this chapter in the wake of the recent news about the SEC's case against Ripple. I think it's a pretty clear example of a government entity stepping into something that it may not have much understanding of, given that XRP is basically just a technologically superior Bitcoin (which it ruled as not a security in 2019), and one with far more utility.

I also think it's significant, however, that the price of XRP has bled to less than half of its value since the announcement of the SEC's case. Such a thing usually only happens to real securities — when a company does poorly, its stocks often drop in price as people lose faith in it. Of course, this doesn't actually mean XRP is a security, but rather reflects the fact that, in many people's minds, XRP is imminently tied to Ripple, an association that is, in my opinion, extremely detrimental to the coin's utility.

But instead of getting lost in all that hubbub, I instead want to concentrate on price and cryptocurrency. Namely what information prices should be giving in the crypto space.

Vitalik Buterin, the creator of Ethereum blockchain, recently wrote a fascinating rundown of 2020 in regards to crypto. In it, he talked about how the Internet has changed the way we need to think about economics. Given Sowell's definition, that economics is the allocation of scarce resource with multiple uses, he may be partially right.

Much of the internet is built on code. As Buterin explains, however, this code is infinitely replicable. Unlike physical matter, we can take any byte of code, and just copy it over to another software.

A similar thing can be said for crypto, though not in the same way. While blockchain technology prevents double-spend, we can certainly all simply create our own blockchains based on the code for them that's already out there. In fact, if you wanted to, you can simply follow this Youtube tutorial to make your own.

However, if something is infinitely replicable, economically, it has no value. This is because that's the literal opposite of scarcity (or even in some ways, my definition of limited access). Thus, economically, when something is infinitely replicable, it has no value.

This is probably why the Internet eventually evolved around social media. Because the internet itself is infinitely replicable, the value to use it rests in the people who use it. People, and their attention, are still a scarce resource. Thus, in order to create value, advertising became the norm for monetization.

However, now, we have this new internet-based technology called blockchain and cryptocurrency. The same problem still exists (i.e. infinitely replicable technology). So how can cryptocurrencies derive value?

In my estimation, they still need to be attached to people. It will ultimately be the people who are invested in certain projects which utilize cryptocurrencies effectively that give them value. Thus, while improving the tech within different blockchains is important, if people don't flock behind and support the project, in reality, it has no value.

And I think that, ultimately, this is a part that Ripple has been missing for quite a while. While they certainly have made strong connections with enterprises, financial institutions, and even some governments, on the Internet, they seem to have almost no social capital. It's difficult to go into a general cryptocurrency sphere without hearing about how evil Ripple is, and how XRP is a 'banker's coin' (which means basically nothing at this point).

This lack of wide support (and understanding) has cost the XRP ecosystem dearly for quite a few years now, a cost that is reflected in its price.

Of course, being someone who writes on Coil, as well as has investments in XRP among other currencies, my obvious desire is that XRP will do well. But, in order for such a thing to happen, I believe that the popular stigma around it needs to be alleviated. Such alleviation can only happen when projects are developed on it that outstrip the usability and utility of other projects.

And only time (wink wink) will tell if that will happen.