An interesting book by Dr.Thomas Sowell, who is an economist at Standford University. This was an informative read since the author explains economics in an understandable manner that does not involve any type of graph or complicated math. Some of the criticisms for this book include politically-charged diatribe on government and over glorification of the free market. Even though I agree that the book was more political and ideological than I expected, I was raised in a partially socialist economy and the book opens my horizon and helps me to see the world from a different perspective. In brief, it not only helps me understand how the economy operates from a birds-eye view and how it plays a crucial role in some of the social problems such as minimum wage and unequal pay but also makes me a critical thinker of politics, which is also a consistent theme in the book.
Recommendation: anyone who want to understand the fundamentals of economics and can read with critical thinking
1. The economics is the allocation of scarce resource which has alternative uses.
This is the definition of economics given by Sowell and a central theme that connects the entire book. The economy is a system where resources are distributed and circulated among individuals and economics study the most efficient way to allocate those resources. Resources, in this case, can be many things such as skills, goods, time, and so on.
2. The market can adjust itself through price.
In a market economy, price is largely used to determine the allocation of resources. It can not only be used for transactions but also provide insight into how people utilize those resources. This the result of supply and demand from economics classes. When the goods become scarce, its price rises, and people refrain from purchasing it due to the high price. But when the goods become abundant again, its price drops so that more people would buy it. However, when the price of a scarce resource is artificially set, it often causes a shortage. This also explains why a controlled economy often fails because the government cannot keep track of the prices of millions of items and adjust them accordingly.
3. Money creates incentives
Money provides incentives for businesses to become more efficient and scarce resources to not go extinct. In another word, money helps people to choose certain actions over the other and it helps the market to adjust itself. However, when prices are artistically controlled, demand goes up and supplies don’t have the incentive to provide high-quality services. For example, under rent control, by keeping rent below a certain price point, landlords no longer have the incentive to provide good housing conditions.
4. Competition is good for the economy
In a free market, competition usually weeds out those who cannot provide better service at a lower price. Competition forces companies to develop better technology or reconfigure their business plan to keep the cost down. On one hand, it eventually benefits the consumers since they are the recipients of the goods provided. On the other hand, companies receive profit for their efficiency in providing certain goods or services.
5. Competition is not always a zero-sum game
Many people think of competition as either one wins or loses without considering the possibilities of both parties benefit from the competition. However, in reality, competition can cause mutual enhancements without harming either one of the parties. For example, even though immigrants take away some resources, they create new industries and job opportunities that would benefit the economy as a whole such as Germen immigrants create beer industry, etc. Policies such as restricting imports not only hurt the restricted countries but also cause a series of revenge restriction, which harm the global economy as a whole.
6. Risk pays
Higher rewards provide incentives for people to engage in higher risks. This explains why stocks pay higher than bonds and why dangerous jobs pay higher than typical jobs. People often don’t want to deal with risk so they turn it to professionals by paying a premium, such as insurance. This also explains why insurance costs for high criminal rate neighborhoods are higher.
6. Policies often have unintended long term consequences
Each transaction can be considered as an equilibrium between the consumer and the supplier. However, very often politicians make policies that make sound ethical but break the balance between transactions and cause unintended consequences in society. For instance, minimum wage laws, mandatory benefits, and other policies seem beneficial to lower-wage workers, but such laws often drive up unemployment. It is because the costs of each worker rise due to such policies, employers have to hire less and eventually increase unemployment.
7. Politicians usually only consider short term results
This is a repetitive argument in the book. Politicians usually urge for certain agenda that would appeal to people’s emotions and win them votes in the next election while the agenda itself does not make sense economically. For example, politicians would rather build a brand new community center than fix a broken bridge that costs much more maintenance fee since new buildings are always more appealing politically. When encounter political agendas, consider the incentive it creates, not the goal.
8. Government still plays an important role
Despite the previous criticisms of politics, the government still plays an important role in enforcing rules and protecting natural resources. Without rules, a market place can be very chaotic and people can be very deceiving, which hinders proper transactions. In addition, private entities don’t have the entire human race in mind and could potentially scarce natural resources such as clean water and clean air. Governments can intervene and prevent resource depletion from happening.
9. Connectedness is important for the economy
Throughout history, countries and continents that are most connected thrive economically, such as Europe. Connectedness increases the adoption of new technology which promotes more efficient utilization of resources and a better economy. Once wealthy nations and companies such as Kodak got disconnected from the rest of the world or not following the latest trend, they eventually became lagged behind and even disappeared.