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.

Top Lessons

• Scarcity and trade-offs

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

• Intentions and results

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

• Prices as information

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

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