Sowell's Basic Economics

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Sowell's Basic Economics

by Ari Armstrong, March 7, 2006

Tomorrow evening (Wednesday, March 8) begins the class in Golden, Free People, Free Markets. Students can register for college credit through the University of Colorado, Colorado Springs. The class is also open to the general public. Registration is still open, though people need to call the Independence Institute (303.279.6536) beforehand and pay at the door. Previously I reviewed the documentary Commanding Heights in parts one and two. Here I review the first five chapters of Thomas Sowell's Basic Economics, another of the five required sources.

The main value of Sowell's book is that it explains basic economic principles through common-sense language and historical examples. Thus, the importance of economics, and its application to the real world, becomes obvious.

For example, Sowell discusses price controls, and how they cause the misallocation of resources, by looking at the gas shortages in the U.S. during the 1970s. He also examines the food surpluses -- and outright destruction of food -- caused by price supports in the U.S., India, and Europe. Sowell, citing the Wall Street Journal, notes that "every cow in the European Union gets more subsidies per day than most Africans have to live on" (page 36). Subsidies lead to the production of crops such as sugar and rice in regions unsuitable for them, which results in wasted resources and higher prices for consumers.

Sowell explains that politicians first raise food prices, then subsidize the poor so that they can afford food, then capture the votes of recipients of political "favors" (page 37).

Rather than allow food production in the regions where costs are lowest, politicians impose protectionist policies. "While roughly one-fifth of farming income in the United States comes from government subsidies, more than 40 percent of farming income in countries of the European Union comes from such subsidies, as does an absolute majority of the farming income in Japan" (page 37).

Rent control caused housing shortages and even the deterioration of housing in cities around the world, Sowell explains. "Such inefficiency in the allocation of resources means that people are sleeping outdoors on the pavement on cold winter nights -- some dying of exposure -- while the means of housing them already exist, but are not being used because of laws designed to make housing 'affordable'" (page 28).

Sowell is also excellent as he explains that, in a free market, individuals make choices for themselves based on their particular knowledge, and the choices of all participants in the market guide producers to offer what people want at the lowest costs. Sowell reviews the crucial role that prices play in coordinating the "knowledge and insights... scattered among the millions of people" in a society. By contrast, bureaucratic controllers do not have the knowledge to plan the economy, and "the limited knowledge and insights of those leaders become decisive barriers to the progress of the whole economy" (page 68).

Sowell reviews how profits and losses reward innovators and drive businesses to meet the needs of customers -- or fail. For example, the A & P grocery chain grew in the 1920s, but then it gave way to stores like Safeway, which better met the needs of changing demographics and technology, such as the rise of the automobile. Then Safeway was surpassed by Wal-Mart. "While A & P succeeded in one era and failed in another, what is far more important is that the economy as a whole succeeded in both eras in getting its groceries at the lowest prices possible at the time..." (page 66)

Unfortunately, Sowell's work suffers from some problems in its framing of the issues. For example, Sowell claims that economics "has nothing to say about social philosophy or moral values..." (page 41) Yet this is at odds with Sowell's previous statement that economics "is about the material well-being of society as a whole" (page 3). Thus, in a move typical of "mainstream" economists, Sowell simultaneously bases economics on the moral theory of utilitarianism even as he claims that economics is detached from morality. Yet the idea that "material well-being" is good is a moral evaluation, as is the idea that "society as a whole" matters. The idea that "material well-being" matters is easy for us to take for granted, yet it was downplayed or disparaged throughout much of human civilization.

Sowell's utilitarianism leads him to make a number of unfortunate comments. He writes, "Much as we may deplore private greed, it is likely to move food much faster, saving far more lives" in famine areas. He also points out that market competition drives some people out of business. He writes, "In a sense, it is unfair when some people are unable to earn as much as others with similar skills, diligence, and other virtues. Yet this unfairness to particular individuals is what makes the economy as a whole operate more efficiently for the benefit of vastly larger numbers of others" (page 20). Sowell also writes, "Economic policies need to be analyzed in terms of the incentives they create, rather than the hopes that inspired them" (page 27).

Yet why "may" we "deplore private greed," in the context of trading value for value by voluntary exchange? While Sowell relies on utilitarianism to justify the prescriptions of economics, his utilitarianism is self-consciously marred by selfishness. It's too bad that society has to allow "private greed" in order to achieve a productive economy, by Sowell's account, but that's just how it is. Thus, by implication, the realm of material production must stray from the high morals of self-sacrifice.

And why is it "unfair" if some people can't make money providing goods and services that others don't want to purchase? Implicit in Sowell's statement is the idea that some people hold moral claims over the wealth of others, only these moral claims must be sacrificed on the alter of efficiency, a competing utilitarian moral claim. Thus, Sowell's implicit moral foundation is incoherent and contradictory.

Finally, why should we evaluate policies only on the basis of consequences, not intentions? Implicit in this view is the idea that protecting or violating the individual rights of others is of equal moral worth, except insofar as different policies impact "society as a whole." Yet slave-labor camps, protectionism, and prohibitions of trade are not bad simply because they result in less total wealth for society; they are immoral because they violate the individual rights of the victims. Some socialists may have intended to create economic wealth, but they also intended to do so by sacrificing individuals and their rights to the state. Their intentions are precisely what demand moral condemnation.

It is true that free markets allow for (vastly) greater aggregate wealth. But the mistake of the utilitarians is to treat the "well-being of society as a whole" as something apart from the well-being of individuals who make up a society. Free markets simply are the implementation of individual rights in the sphere of (or from the perspective of) economic exchange. If you start with the rights of individuals, you get a system of free exchange that allows individuals to produce wealth according to their own "knowledge and insight." However, if you attempt to separate individual rights from social welfare, you end up with a theory that, at best, finds the "private greed" (i.e., rational self-interest) enabled by individual rights unseemly, and, at worst, seeks to eradicate individual rights wholesale for the sake of the collective.

At the end of the book -- to which we shall return -- Sowell talks more about morality and values. At best, though, given his shaky foundation, he'll be able to patch together some sort of unstable fix. Economics and material values properly integrate with a broader system of morality. A proper morality deems the terms of trade reached by free individuals just, and it condemns the violation of individual rights regardless of pretext.

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