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Book Review: Basic Economics

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Basic Economics: A Citizen’s Guide to the Economy
by Thomas Sowell (New York: Basic Books, 2000); 366 pages; $30.

WHEN ADAM SMITH completed his criticisms of mercantilism, the 18th-century system of government planning and control, in The Wealth of Nations, he expressed a deep pessimism that the free-trade ideal that he had defended, instead of the regulated economy, would ever be established. He said that there were two powerful forces working against implementing a free-market system: the “prejudices of the public” and “what is much more unconquerable, the private interests of many individuals” who benefit from government special favors and monopoly privileges.

Yet, in spite of Adam Smith’s own doubt and despondency, the idea and ideal of a system of economic liberty that he clearly and forcefully presented in The Wealth of Nations helped to change the course of human events. He did not live to see those changes, but nonetheless in one lifetime Great Britain went from a rigid system of government control to almost a completely free-market society. Even those “unconquerable” special interests failed to stop the rising tide of economic liberalism that gave the 19th century so much of its freedom and prosperity.

The idea of freedom conquered the forces of political and economic tyranny. But before the 19th century ended and during most of the 20th century, a collectivist counterrevolution took hold under a variety of different names: socialism, communism, fascism, national socialism, interventionism, the welfare state.

And even now at the beginning of the 21st century, the interventionist-welfare state still dominates public policy throughout the world.

Why?

To a great extent it is because of what Adam Smith referred to as “the prejudices of the public.” He meant the difficulty for many ordinary people to understand and follow the reasoning and logic of how a market economy works and how individuals pursuing their own self-interests for personal improvement can be guided by the system of voluntary exchange to serve the interests of others in society at the same time. And how it can be that when government directly attempts to improve the condition of “society” through regulation and command, the economic well-being of many people in that society can be made significantly worse off.

There have been only a handful of writers who have been able to make the complex workings of economic freedom clear, simple, and commonsensical for the ordinary person to understand. In the 19th century, the master of this art was the French economist Frédéric Bastiat. He could take the arguments for protectionism, regulation, and socialism and show their absolute absurdity, while demonstrating the magnificent workings of the market economy.

Another author of similar simplicity and clarity in the 20th century was economic journalist Henry Hazlitt. His 1946 book Economics in One Lesson has been a guidebook through dozens of economic fallacies while also showing the logic of the free market for more than half a century.

In the opening page of his book The Constitution of Liberty, Friedrich A. Hayek pointed out, “If old truths are to retain their hold on men’s minds, they must be restated in the language and concepts of successive generations.” This applies to the fundamental truths and insights of free- market economics just as much as to other areas of knowledge.

This is what makes Thomas Sowell’s new book, Basic Economics, such a valuable contribution. Sowell has devoted a good portion of his scholarly efforts to analyzing the relationships between race, culture, and economics from a market-oriented perspective. He has challenged and refuted many of the myths and fantasies of modern-day “political correctness.” And for years he has offered a devastating running commentary on the absurdities of contemporary politics, culture, and public policy in his weekly syndicated newspaper columns.

In the Bastiat-Hazlitt tradition

In Basic Economics, Sowell follows in the Bastiat-Hazlitt tradition of educating the reader in the elementary principles of sound, free-market economics through criticisms and critiques of dozens of domestic and international economic policies, with historical examples ranging from the ancient world to the most recent government follies.

In the opening chapters, he demonstrates the central importance of a market-generated price system for a well-functioning economic order through a series of examples showing the harmful effects from various forms of price controls on rental housing, gasoline supplies, and agricultural production.

And these negative effects are not presented as pure abstractions but are instead shown to have harmful effects on real people and usually on the very people the price controls were supposed to help.

Next he explains the nature of business in a world of changing supply-and-demand conditions, product innovations, and technological improvements. The market respects only continual success in constantly meeting the changing patterns of consumer demand and the competition of supply-side rivals attempting to make better and less-expensive goods for the buying public. Even the mightiest of giants in the business world will decline and fall if they fail in the arena of open competition.

In Sowell’s hands, competition is not portrayed in terms of the unrealistic assumptions and models of the modern economics textbook. Rather, competition is a dynamic process of rivalry for excellence and improvement.

In similar manner, he explains that prices serve several functions in the market economy, including to be an incentive mechanism and to be a tool for the use of knowledge in society.

Following in the steps of Austrian economist Friedrich Hayek, Sowell clearly explains that only a functioning, market-based price system enables the coordination of millions of pieces of knowledge dispersed among all the participants of the market economy for a successful coordination of all the individual consumption and production plans in the society.

And he applies these insights to show why socialism failed and government intervention creates economic disharmony.

Next he discusses the nature and relationships between work, wages, and production. He answers the critics of the market economy who accuse the capitalist system of generating unjust inequalities in income and wealth and details how the statistical “facts” on this topic are abused and misused by the opponents of the market.

He discusses why government programs to guarantee job security often create unemployment; how minimum-wage laws frequently price the poor and the unskilled out of any employment opportunities; and how labor unions and collective bargaining not only close off job markets to those looking for work but actually limit the earnings of those desiring to improve themselves and adjust to changing market circumstances.

He also introduces the reader in a very commonsensical manner to the logic and workings of investment and market speculation and the nature and benefits from both. Without savings and capital formation, standards of living cannot permanently improve, and without speculators to coordinate the possibilities of the present with the uncertainties of the future, markets would fluctuate far more than they do in a world of changing supplies and demands.

Briefly turning to the topic of macroeconomics, Sowell points out the pitfalls and errors in national-income accounting and the harm from monetary mismanagement by governments and central banks. In discussing the role of government in society, he explains the importance of clearly defined and securely protected private-property rights, without which society would lack both an incentive mechanism and the most important institution for social order. He also shows that pollution and environmental problems have frequently arisen precisely from the absence of defined and enforced property rights.

Sowell also challenges the rationales for antitrust laws and a wide variety of government regulations; explains the benefits from market-driven entrepreneurship and the gains from international trade; and shows the folly of trade barriers, exchange-rate manipulations, and export subsidization.

Basic Economics will surely become the best supplemental text for every introductory economics course and essential reading for years to come for anyone wishing to understand how the real-world market economy works for the benefit and improvement of everyone in society.

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    Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).