Basic Economics

Summary

Basic Economics is Thomas Sowell's introduction to economics for general readers, written without graphs or equations. First published in 2000 with the subtitle A Citizen's Guide to the Economy, it has gone through five editions, the most recent in 2014 under the subtitle A Common Sense Guide to the Economy, and has grown to more than six hundred pages. Sowell defines economics as the study of the use of scarce resources which have alternative uses. Because resources are scarce and wants are not, every society must have some way of deciding what is produced, how it is produced and who receives it. He argues that prices in a market economy do this job by conveying information and incentives: a rising price tells producers to supply more and consumers to use less, coordinating the decisions of millions of people who never meet. Much of the book shows what happens when this mechanism is suppressed. Price ceilings, such as rent control, create shortages, deterioration and queues; price floors, such as agricultural supports and minimum wage laws, create surpluses and unemployment among the least experienced workers. Later parts apply the same reasoning to business and industry, explaining profits and losses, the role of entrepreneurs and the reasons firms rise and fall; to work and pay, including productivity, discrimination and occupational licensing; to time and risk, covering investment, speculation, insurance and the stock market; to the national economy, including money, banking, inflation, the business cycle and government finance; and to international trade, the balance of payments and the economic development of nations. A final part takes up special topics and common myths about economics. Throughout, Sowell insists on judging policies by their incentives and results rather than by their intentions, and on asking what will happen next, after the first and most visible effects. He draws many examples from history and from countries around the world, including the Soviet Union, India, China and African countries after independence, to show how different economic systems handle scarcity. The book became a best seller and has been translated into several languages. It is widely used in high schools, homeschooling and introductory courses as a non-technical companion to standard textbooks. Critics note that it presents a consistently free-market view and gives less attention to market failures, externalities and the arguments for active fiscal policy.

Plot or Argument

• Prices and markets

  Sowell defines economics, explains the role of prices in allocating scarce resources, and shows the effects of price ceilings and floors.

• Industry, commerce, work and pay

  He discusses profits and losses, the rise and fall of firms, regulation and antitrust, productivity and pay, minimum wages, discrimination and occupational licensing.

• Time and risk

  He explains investment, speculation, insurance, the stock market and the economics of the present and the future.

• The national and international economy

  He covers money and banking, inflation and deflation, the role of government, international trade, the balance of payments and the wealth and poverty of nations, ending with common economic myths.

Characters

• Thomas Sowell, author

  Hoover Institution economist writing for readers without technical training.

• Adam Smith, authority

  Classical economist frequently cited on markets and the division of labor.

• Friedrich Hayek, authority

  Economist whose view of prices as conveyors of dispersed knowledge underlies Sowell's account.

Lessons

• Scarcity and trade-offs

  Every choice gives up an alternative. Sowell's definition of economics makes trade-offs, not solutions, the basic reality.

  • Why does Sowell define economics in terms of scarce resources with alternative uses?
  • What trade-offs did you make this week?

• Intentions and results

  Sowell argues that policies should be judged by their results, not their goals. Students can apply this test to any proposal.

  • What happens under rent control, according to Sowell?
  • How could you find out whether a policy actually works?

• Prices as information

  Prices summarize the knowledge of millions of people. Sowell's examples show what is lost when prices are fixed by law.

  • How does a rising price coordinate the actions of strangers?
  • What would happen if all prices were frozen?

Context

The book appeared at the turn of the twenty-first century, after the collapse of Soviet-type economies and market reforms in China, India and elsewhere had renewed interest in how markets work. Sowell wrote in the tradition of the Chicago school and of Hayek's work on prices and knowledge.

Composition

Basic Books published the first edition in 2000. Sowell expanded and revised it in 2004, 2007, 2010 and 2014, updating examples and adding new chapters.

Reception

The book was a best seller and was widely praised for its clarity. It has become a standard non-technical introduction to economics for students and general readers, though some economists consider its presentation one-sided.

Comparisons

• Economics in One Lesson

  Hazlitt's short primer shares Sowell's method of tracing the later and less visible effects of policy, especially of price controls and minimum wages.

• The Wealth of Nations

  Smith's account of prices, the division of labor and trade underlies Sowell's chapters on markets and international commerce.

• The Road to Serfdom

  Hayek's argument that central planning cannot use dispersed knowledge informs Sowell's explanation of why prices outperform planners.

• Capitalism and Freedom

  Sowell's teacher at Chicago, Friedman, applies the same reasoning about incentives to proposals on money, schooling and welfare.

• The General Theory of Employment, Interest and Money

  Keynes's case for government management of demand is the main tradition Sowell's chapters on the national economy argue against.

• Economic Calculation in the Socialist Commonwealth

  Mises's argument that socialism cannot calculate without prices is a theoretical source of Sowell's discussion of planned economies.

Quotes

For Students

A reading companion for classical Christian high school students. See the student guide.

Reading Guide

Watch for

• The definition of economics in the first chapter.
• How prices transmit information and incentives.
• Examples where a policy's results differ from its intentions.
• Historical and international comparisons.

Key terms and names

Scarcity

The condition in which wants exceed the resources available to satisfy them.

Price ceiling

A legal maximum price, which tends to cause shortages.

Price floor

A legal minimum price, which tends to cause surpluses.

Incentive

Something that motivates a person to act in a particular way.

Trade-off

Giving up one thing to get another.

Seminar Questions

1. Comprehension How does Sowell define economics?
2. Comprehension What happens when the government sets a price below the market price?
3. Interpretation Why does Sowell insist on judging policies by results rather than intentions?
4. Interpretation How do prices coordinate the actions of people who never meet?
5. Big Question Are there goods that should not be allocated by prices?
6. Big Question How much should economic efficiency count against other values, such as fairness?

Faith Connections

• Proverbs 21:5 (Scripture)

  'The thoughts of the diligent tend only to plenteousness': the wisdom tradition's attention to the long-term consequences of choices parallels Sowell's emphasis on incentives and results.

• Aristotle, Politics, Book I (Great Conversation)

  Aristotle's discussion of household management, exchange and money is one of the earliest reflections on the questions Sowell's book addresses.

Logic and Rhetoric

Central argument: Because resources are scarce and have alternative uses, every society must allocate them somehow; free prices do so by conveying information and incentives, so policies that override prices tend to produce shortages, surpluses and waste.

Rhetorical device: historical example. Sowell supports general principles with concrete cases from many countries and periods, such as shortages under rent control and in the Soviet economy.

Debate: Resolved: Rent control does more harm than good to the people it is meant to help.

Writing Prompts

Essay: Using Sowell's analysis, explain why price controls tend to create shortages or surpluses, and consider one objection.

Comparison with Economics in One Lesson: Compare Sowell's and Hazlitt's treatments of rent control and minimum wages. How has the argument changed in fifty years?

Creative Prompts

• Classroom

  Hold a classroom market with tokens and goods, then impose a price ceiling and observe shortages and black-market trading.

• Essay

  Choose a policy debated in your community and analyze it as Sowell would: what are the incentives, and what will happen after the first effects?

• Fiction

  Write a short story about a town where the price of bread is frozen by law, following the effects for a year.

Further Reading

• Applied Economics, Thomas Sowell

• Knowledge and Decisions, Thomas Sowell

• Economics in One Lesson, Henry Hazlitt

• A Personal Odyssey, Thomas Sowell