What Is Economics? | Basic Economics by Thomas Sowell | Ch. 1
As I wrote last week, I will be doing a basic review and summary of the primary concepts behind Thomas Sowell's book, Basic Economics. My primary reasons for doing this are not only to help others understand the importance of economics (as I wrote in that previous post), but also a bit of self education. Having been a marginal fan of Thomas Sowell for a while now, I've decided to dive a bit more into his written body of work, and see how it can connect with present day ideas of economics, especially from the viewpoint of the new emerging asset class known as cryptocurrency.
In this first part, we'll be diving into the first chapter of the book titled, What is Economics?
The definition of economics is quoted as:
Economics is the study of the use of scarce resources which have alternative uses.
This quote was taken from Lionel Robbins, and is the one that Sowell starts with as a basis in the chapter. There are a couple things to take note of here.
First, scarcity is not defined as quantifiably minimal, but rather that the number of ways any given resource can be used is greater than what is available. In the book, Sowell uses the example of the New York Times showing a picture of a middle-class American family in a swimming pool, but then having the headline be “The American Middle Class, Just Getting By.” While the American middle-class is vastly wealthier than even the richest king in ancient and medieval times, yet they are 'just getting by'. Everyone seems to want to live above their means. As Sowell puts it:
There has never been enough to satisfy everyone completely. That is the real constraint.
And so we come to the second part of the definition: that we have multiple or “alternative uses” for any single resource. Every resource on earth has a variety of uses. For example, something as simple as water, with its various forms, has utility that spans from hydration to powering electric devices.
As Sowell points out, rich resources exist in even poor country, where it isn't the number of resources that make the country poor, but the fact that those countries don't employ skillful labor to take advantage of those resources. In the same way, nations such as Japan or Switzerland have great economies, despite the resource-starved nature of their country.
In all of this, because economics is about scarce resources with various use-cases, we don't actually have to involve money very much to study economics. The example given in the book is in the military—when soldiers are wounded, various medical services must decide between who to care for and who must wait for their care. While we may not like having to make choices like this, they exist. Thus, economics is a way for us to understand these choices and make the most of them.
Of course, this doesn't mean that prices and money don't have any role in economics. But it's important to understand that, despite the variety of economists' perspectives in the field, “this does not mean that economics is just a matter of opinion”. And thus, the following chapters will look at the role of prices in an economy, and what happens when markets aren't allowed to flow freely due to the hindrances from government, labor unions, and even other businesses.
This first chapter lays out the premise of the book very well. By defining economics in a certain way, we now understand how Sowell will be approaching the topic for the rest of the book. There are a few caveats that I would want to address.
I largely agree with the presented definition of economics. However, perhaps due to the evolution of language over time, I believe that “scarcity” may not be the best way to formulate the ideas that have been told so far. Instead, “limited” or “limited access” seems like the best way to conceptualize what Sowell is after.
This is because the universe, as far as we know currently, has a virtually infinite number of potential resources we can tap into. The earth we live on is infinitesimal in comparison. In a similar way, as human beings become healthier and the average age becomes older and older, time as a scarce resource is even becoming less relevant (although, obviously not completely).
With such an unlimited field with which to play with, it seems that “scarcity” isn't the problem, but limited access. And that limited access may always be true, barring the miraculous, or some technological advancement we haven't come up with yet.
Thus, my personal definition, based on this first chapter, would instead be:
Economics is the study of the use of resources which are limited in access, but have potentially unlimited utility.
This is the best definition I believe we can have in mind as we continue reading the book.
There isn't much in the first chapter to do with cryptocurrency, since we haven't really talked about the roles of prices, currency, and money. However, in addressing resources, and with the rise of STO's and similar types of cryptos, there is something we can think about.
The promise of cryptocurrency is not just a decentralized ability to conduct trade through fiat replacement. Such a system already existed with bartering. It is also the realization that anything in the world can be tokenized, or broken down into sellable parts that can be immediately interchangeable.
For example, currently, there are cryptocurrencies that are pegged to the value of an ounce of gold. An ounce of gold is currently worth just a little less than $2000 US Dollars, and so 1 of these cryptos is worth around $2000 US Dollars. However, these cryptos can also be broken down into smaller chunks, so 0.5 of this crypto is actually $1000. And, of course, we can break it down even further.
While gold is the only resource that I know of so far that can be broken down like this, any resource that we can think of can also be, including silver, oil, and real estate. Virtually, any physical resource that we can think of can be tokenized, and then immediately traded as a result.
This doesn't obsolete or diminish the definition of economics, but it does give a particular spin to it. Just as the Internet has forever changed the way we communicate, cryptocurrency could have a similar effect on the way we do economics. The idea of what scarcity or “limited access” may change, and certainly the idea of “alternative uses” has gotten much bigger.
Hopefully those were some interesting and invigorating thoughts. I'll see you in the next chapter!