I was on the phone with a disgruntled client. A hurricane left his entire family homeless and struggling to navigate detoured streets in the search of lodging. His main complaint? Price gouging in the area. On the surface, price gouging sounds like a way for businesses to take advantage of desperate consumers. In my client’s words, “Why should I accept paying 4 times the standard rate for a hotel room? Or $8 a gallon for gas?” His complaints were legitimate, but he viewed the scenario through narrow lenses of a consumer.
I avoided launching into an economic argument with my client. I doubt he would’ve enjoyed hearing how 400% mark-ups were a basic econmic function under the circumstances.
Here’s the reality of the situation: elevated prices for catastrophe repairs act as an incentive for expedited emergency services. Increased fuel prices incentivize rationing, which means there’s still fuel available for other afflicted citizens. Outrageous grocery store prices decrease the likelihood that the first families visiting the supermarket buy out the entire supply of canned goods, leaving others to go hungry.
If you failed to consider these price gouging consequences, don’t feel bad. This is one scenario of many where economic principles prove elusive to the majority.
Just like my experience above, Basic Economics delves into cause and effect relationships across various facets of the economy. The general public lacks even a modest understanding of many of these fundamental relationships. Cutting through political framing and propagandist opinions, author Thomas Sowell examines historic and present methods of allocating scarce resources that have alternative uses.
About the Author
Born in 1930, Thomas Sowell is an American economist and social theorist. Sowell received his economics education through a combination of stints at Harvard, Columbia, and The University of Chicago. Sowell has written over 30 books, most of which serve as prominent endorsements for a free market economy. Publicly, Sowell is identified as a libertarian. Personally, rather than aligning himself with political parties, Sowell rejects group identity and prefers to be seen as an economic truth-seeker.
The Basics of Basic Economics
Many of us go about our day without wondering about varying predicaments all around us. How do countries rich with natural resources struggle to achieve a modest standard of living? Why do politicians allocate resources back and forth between the demands of different social movements? What do price movements in an economy tell us as consumers?
Reading Basic Economics is a bit like choosing the red pill over the blue in the Matrix. In his book, Sowell illuminates the hidden cause and effect reality that surrounds us. You must take the red pill to open your eyes to it. Political rhetoric focuses on desires, morality, and short-term logic. Basic Economics examines the opportunity costs of decisions made on small and large scales.
Basic Economics establishes that resources are mostly finite. Therefore, allocating each of those resources comes at the expense of each alternative use. In a free market economy, prices rather than a governmental body direct resources to their most optimal use through bidding. Low prices force a producer to stop making something society doesn’t want. And high prices tell producers to ramp up production on a desirable item. In essence, prices act as a decentralized tool to reduce waste in an economy. Thus, according to Sowell the key to a healthy economy is price movements, not law-making.
The Government and the Economy
Governmental bodies have committed the error of disrupting the natural flow of prices, and efficient allocation of resources. Though political efforts produce varied results, society can expect the governmental interference to create a net loss on the economy. For instance, price controls in apartment housing repeatedly gains wild public support. Unfortunately, price control advocates often fail to understand basic economics.
Throughout history, price control methods exhibit the net effect of creating higher scarcity in public housing and reducing the quality and quantity of mid-level apartments by lowering profitability incentives.
In the same way, tariffs aimed at stimulating local economies overlook the positive net effect of foreign trade in our economy. Foreign trade wouldn’t have occurred in the first place unless the aggregate result was dual gain. Both of these remedies are installed because an emphasis is wrongfully being placed on the intent of law-making efforts rather than the actual consequences.
Imagine tomato farmers all over the United States are struggling to remain in business due to foreign competition. In response, a heroic politician passes a law to set tomato prices at $3 dollars a pound instead of $2. In addition, tariffs on imported tomatoes are set to make the foreign tomatoes $4 a pound. You might find that voters support this law, backing their position with ideals of keeping food local.
Unfortunately, this allocates a scarce resource (land) away from more efficient uses. In saving one facet of the farming industry the government in effect has taxed the entire country to compensate for the tomato farmers’ lack of economic efficiency. Moreover, the net gain of foreign trade is nullified by the protection of the domestically failing business sector.
Supply and demand are in a constant interdependent dance with prices. In a free market shortages will cause prices to rise, triggering additional supply coming from the price incentive. In a fixed price economy the artificially low prices in the economy will cause more consumption of the service at the lower rate. But services will never meet the added demand because the high price incentives are absent from the price controlled model.
Lessons such as these propel readers to focus on the true economic consequences of political initiatives that impact the economy instead of getting caught up in the intention-oriented political bombast. Basic Economics asks us to judge the utility of economic resources in the greater context, one that considers alternative uses.
Basic Economics holds value for both the everyday, and applied economic thinker. While books like The Meaningful Money Handbook offer personal strategies for handling your money, Basic Economics offer insights in a macro perspective. It is my opinion that grasping large scale cause and effect relationships in the economy not only makes you a more informed voter, but also serves as a gratifying learning exercise.
I rate Basic Economics 5 stars without reservation and recommend the book to anyone with serious interest in expanding their knowledge of how money works on a larger scale.