Review of Basic Economics
The goal of reading a book isn’t to internalize or memorize every single fact or piece of information contained in those pages. A six-hundred-page book on economics contains a lot of information, but what’s important is what the reader takes away and remembers once they’re done. I learned a lot from Thomas Sowell’s Basic Economics and formed opinions opposite to what I might have held beforehand, but there are a couple of key points that impacted me more than the others.
Price Control
Although I was slightly averse to most kinds of price control before reading this book, Sowell’s section about rent control opened my eyes to the utter foolishness that is price control. It’s a relatively simple concept if you understand that profits are necessary for sales to function. The price you pay for a good or service does two things: it reimburses the owner of the product or the laborer who performs the service for the cost, time, and labor associated with that good or service, and gives them the money necessary for their daily life.
If you paid solely to reimburse their costs, they would have no money left over to buy their food, pay their bills, or do any of the necessary functions of life in today’s world. Without profit, the owner or laborer would not be able to live and therefore would not be able to continue to provide the goods and services they desire. Profits are not extra charges that add to mountains of already existing wealth: they enable others to live.
With this understanding, the problem with price controls becomes evident. While the policymakers might have the best of intentions, they are acting under the previously stated assumption that profits are extra charges, not the necessary wages of hard workers. Therefore, in the eyes of such government figures, creating a law that limits prices from going above a certain amount is merely keeping more money out of the hands of the grossly wealthy.
What they fail to realize is that prices rise and fall based on the supply and demand of that specific product. If an item is abundant, like a house, or if the costs of making the item are lowered, the price will go down as the sellers try to get more customers to buy their item.
However, if there are few houses compared to popular demand or the materials suddenly become more expensive, sellers have to raise prices so they don’t sell out of all their inventory, and so they can continue to make a necessary profit. While politicians or other people who don’t know better, increased prices look like greedy business owners trying to make more money, when in fact, their actions are vital to the long-term existence of their products.
Thus, price control policies such as rent control severely hurt those trying to provide the public with such a product. If the price of wood and metal rises due to limited supply, a real estate developer is forced to raise the cost of his houses so that he will have enough profit to continue to live and make more houses for other people. With something like rent control, however, his profits are suddenly removed completely, and even the reimbursement of his costs can be slashed.
Without profits, his life will become untenable, and he might not be able to build more houses, even if people need them. If the price controls go so far as to cut into his reimbursement, he will likely be forced to stop his business, often meaning that he has to close down many of his houses. This is why in cities like New York, there are hundreds of apartments that are boarded up while people sleep in the cold streets. The rent control policies have prevented the landlords from being able to pay for the services required by their tenants, shutting down their business. Consequences just like this can be seen anywhere a price control is applied, not just in rent control.
Foreign Companies in Third World Countries
The second economic fact I learned greatly surprised me; I probably would have been on the opposite side of this issue before reading Basic Economics. This issue is that of foreign companies opening branches and operating in Third World countries. The debate arises when these companies suck up local workers and pay them better wages than they could get at other jobs in their country.
Semantic arguments arise over whether it’s “moral” or “fair” for these rich companies to “take advantage” of these nations since they are stealing workers from local businesses while also paying those workers less than they pay their employees in successful nations. A couple of weeks ago, I would have agreed with these outrages and been opposed to such actions.
However, I’ve learned a lot in those weeks, including the fact that such actions by these foreign companies will benefit poor countries far more than they could hurt them. The reality is that most workers in Third World countries can’t find good jobs that are both safe and pay enough money to live off of. Sowell gives an example of a worker in Africa who spends up to 16 hours a day picking recyclable items out of garbage dumps only to make a few cents off all their labor. Unfortunately, this is the life of millions of people around the world.
To these people, working in an air-conditioned factory out of the sun for only 8 hours and earning several dollars is a dream come true. Their work days are like a paradise compared to what they were forced to do before, and their wages have multiplied beyond their best hopes. They can live better than ever thanks to these huge companies.
But what about the economy in the area? Will the factory destroy the little activity that was happening and reduce the local business owners to paupers? No, it will help build the economy much faster than foreign aid could ever do. When a rich nation like America gives millions of dollars to a poor country, that money will very likely be eaten up long before it can reach the population, or will be managed by inept government officials who will waste it all.
When workers in such a place are earning much higher wages from a foreign factory, they will now have much more money to spend in their local community. The factory isn’t selling its items to the people; in all likelihood, it will be shipping them elsewhere, leaving the employees to give all their business to local people. In this way, the money will spread throughout the populace, enriching everyone and raising the standard of living sustainably.
But why is this foreign company paying these people so little compared to what they pay their employees in rich countries? How is that fair? First, you need to understand what being a Third World country entails. It means that every part of society is in a much worse condition than what we enjoy in the West. Not only are the workers in bad shape, but the roads, transportation companies, government regulations, and every other aspect of doing business are much worse for this large company. They lose a lot more money just producing and getting their goods to other countries, so they can’t pay the workers the so-called “fair” amount some might think they should.
Additionally, the workers simply aren’t as skilled as those in other nations might be since they’re brand new to this type of employment. But economic progress has never been and will never be immediate, so if we’re simply patient and allow the market to work, the trickle-down effect of higher wages will enrich everyone in that country and raise it out of its broken state.
Along the line of the relationship between rich countries and poor countries, another issue is the fear that jobs in a rich country like America will be taken by poorer countries such as Mexico if laws and regulations are not put into effect. The logic is that since those workers are happy to work for lower wages than those in America, companies will move all their factories there to make more profits.
However, with the understanding of the problems within a poor county economy that I discussed above, the problem with this issue quickly becomes apparent. A poor country means every service in the country will be of poor quality, costing any company that does business there more in losses than they could make with the lower wages.
Add that to less production due to workers with less experience, you can see why a company would want to do business in America and not Mexico. In America, they can rely on good workers who will get a lot done, good roads for quick transport, good transportation companies who will work quickly and well, and little to no government corruption that would take a piece out of their profit.
Unions
The fourth fact that I learned from Basic Economics is that, for the most part, unions are a dated invention that causes more problems than they solve. I was surprised to read this, but the evidence and logic behind it are clear. Unions began with good intentions, mainly due to workers protesting their dangerous working conditions.
In cases like coal mines, workers contracted diseases right and left, and many died in dark places deep underground. Unions were formed so that every single person could have a voice against their boss and negotiate terms with them. While this had early success and did a lot of good for workers, the ability to get whatever they wanted soon went to the heads of the union leaders.
The early and middle 1900s saw many conflicts between unions and companies, often resulting in strikes, protests, and even riots. People were killed due to the actions of organizations that were started to protect the small and forgotten populace of America. By the time the 2000s rolled around, unions had been somewhat quelled due to actions taken by people like President Ronald Reagan, who fired thousands of government workers who wouldn’t go back to work and had no good reasons for their actions.
However, unions still play a role in economics to this day. Just this past year, unions made up of dock workers on the coast of the US went on a strike to demand more pay when their wages were already significantly higher than the great majority of other workers in America. Unions have become a route for workers to selfishly force their bosses to give them extra privileges, all the while hurting the rest of America due to the slowing of their respective professions.
Unions were started because workers had very limited options of where to work and no one to examine their companies for safety or worker well-being. In today’s world, you can find another job almost as fast as you can leave your current one, and there are multiple government agencies to make sure your boss treats you well. If your company doesn’t treat its workers well, you can all threaten to leave, and it will be forced to raise wages so it can stay successful in the competitive free market.
Additionally, unions are a way of protecting the old and established at the cost of the young and aspirant. Those who have worked at a company for a long time can form a union and grant themselves benefits only achievable by bending to their demands. A new worker entering such a workplace is already at a disadvantage due to no fault of his own. Unions now protect the already wealthy and bully everyone who wants to succeed into conforming to their demands. They are unnecessary to today’s workers and only serve to complicate workplaces, give workers reasons to be selfish and take more than what’s fair, and slow down our nation’s economy every time they go on strike. They are outdated and unfair and should not hold the power they currently enjoy.
Economics Statistics
The final surprising economic fact I learned from Basic Economics is the extent to which economic statistics often misrepresent the data about the distribution of wealth. Government policies and laws touted by politicians are usually directed at “helping” areas that are suffering and use surveys and statistics to prove the need for their actions. Statistics that claim to measure where and how the wealth of the nation is distributed have led to hundreds of policies and laws aimed at making this spread “fair” for everyone.
These stats seem to clearly show a large number of people in poverty, another large number of people in the middle class, and a small minority of people with large amounts of wealth. This last portion is also divided by an even smaller sector of those who are extremely wealthy. The natural thing for politicians to do is to campaign on helping those in the poverty sector of such statistics, which has led to a lot of needless red tape, programs that spend more money than they create, and wanton government expenditures that lead only to further inflation of the economy.
The reason these policies fail is that the statistics leave out two key factors: time and age. The data is collected in a short period and doesn’t measure the average age of those in these wealth sectors. Once time and age are taken into account, we see that the majority of people represented in these stats move upwards through the wealth brackets as they get older. In other words, the majority of those in the “poverty” bracket are young people who, on average, make much less money than their peers. Due to less work experience and fewer skills, they are working small, easy jobs as they start their life journey.
If the same study were to be done a decade later, you would see that the majority of those young people, now much older, have moved into better jobs and are making more money. They are now the middle class or maybe even in the wealthy bracket. In other words, everyone moves upwards through this bracket as their life goes by; the vast majority of people don’t stay in one wealth class their whole life.
Additionally, no data is collected on the number of “wealthy” people who lose their money and drop down to a lower bracket. The figures in these stats represent real-life people who work every day to make their lives better, which isn’t reflected on paper. Every little dot or point you look at appears frozen in time, but very likely might now be in a different economic position than what’s reflected in the one study. If these stats measured the monetary trajectory of all citizens to see how the nation is faring economically, instead of taking one snapshot that only reflects one year or one moment, then it would be worth using them as the basis of policies and laws.
Economics is not studied by the majority of Americans, and many might even see it as a waste of time or just a collection of ideas from a few old men. However, economics is vital for the success of a community, city, nation, and the entire world, so it makes sense that we should know something about it. It is not merely a collection of opinions or ideas, either, as you can weigh every theory based on historical evidence.
Want to know how socialism plays out in the real world? Look to the massively inefficient and economically vapid Soviet Union or the famines that caused millions of deaths in China. Want to test the wisdom and viability of an economy under the sway of government intervention? Study how the actions of presidents like Franklin D. Roosevelt crippled the US economy and made the Great Depression worse than it would have been on its own. Want to see how a free market that’s unburdened by constant government overreach works? Observe how the economy recovered and thrived under the presidents after FDR, who let the market run itself.
The study of economics isn’t a debate over ideas and opinions, it’s a study of the actions and mistakes of the past and how we can do better. It’s an application of proven theories that allows for the most success enjoyed by the people possible. There are correct ways of running an economy and wrong ways, each entailing big consequences.
If we want to choose the right way and avoid making disastrous mistakes, we need to learn what has worked and what hasn’t. That’s the study of economics, and if you need a good place to start, I highly recommend Basic Economics by Thomas Sowell. I understand so much more about how the world works and what we’re supposed to do to make it work well. I thoroughly enjoyed reading this book and think it’s imperative for everyone to read.