FULL DISCLOSURE: I have not finished reading this book.
Thomas Sowell's "Basic Economics" is just that, basic economics. There are very few ideas explained and arguments articulated that one wouldn't hear in a freshman microeconomics course. Thomas Sowell, in the first part, very methodically explains the laws of supply and demand (That people tend to buy more of something when price declines, and that people tend to buy less of something when price rises), scarcity (that at any one time there is a finite amount of resources in the world, but unlimited wants) and the role of the price system in creating an efficient "allocation of scarce resources that have alternative uses." Judging by how often Thomas Sowell repeats that last phrase, he obviously wants you to memorize it and remember the very simple fact that every dollar of capital, every hour of every day, every little bit of labor, has an alternative use and that the opportunity cost of consuming any resource matters.
The second section details the roles of businesses in the economy, and how profits and, just as importantly, losses to businesses create extremely strong incentives to allocate resources in the most efficient manner as possible. Businesses which misuse labor and capital will find themselves out-competed by more efficient businesses. Sowell explains very clearly that this profit, while it indeed could have been put to "better" use, is simply the price that society must pay if it desires an "efficient allocation of scarce resources that have alternative uses." In a thorough and methodical fashion, Sowell explains the consequences of government policies which restrict, or even outlaw, the ability of a business to make a profit. It is no coincidence, one will surely conclude, that avowedly marxist and socialist countries have had far poorer standards of living, even for the poor, than countries which have embraced free markets (like the United States, Hong Kong, Singapore, and others).
The third section details how prices and scarcity work in labor markets. Being from Ohio, a state that where organized labor was a deeply divisive issue this last election, this section was the most interesting to me. Sowell first explains that the upper limit of the total wages (the sum total of all incentives for a person to work, including cash payments) in a competitive labor market is the productivity of the worker. Bear in mind, productivity is nothing inherent to the worker herself, but depends on on many other factors such as how efficient (or inefficient) the management is, or how well (or poorly) maintained the machines in a firm are. Sowell then explains in the chapter on controlled labor markets that wages, in a competitive market, will tend towards the productivity of the worker. Sowell explains further the effects of monopsonies and monopolies in labor markets. Monopsonies, firms which workers have no choice but to work for, create a mis-allocation of "scarce resources that have alternative uses", thereby making everyone, not just the workers they employ, materially worse off. More relevant to modern concerns, labor unions, by creating monopolies on labor, also create misallocations of scarce resources, thereby creating deadweight losses to the economy and making all of us materially worse off.
Recall, Sowell presents nothing new here. This isn't some "Cutting edge" theory of microeconomics that Sowell is presenting to explain the behavior of business. Rather, Sowell, in very methodical and well-written prose, is presenting very basic laws of economics and explaining their impact on society as a whole. Again, there is almost nothing here that one wouldn't learn in a freshman micro-economics course.
After reading these three sections, it defies reason how many genuinely smart, well-intentioned people in academia or the halls of government would ignore the most basic laws of economics (those being scarcity and supply and demand) and would support such outmoded theories like Marxism or Leninism, or fanatically support organized labor in our modern, industrial, competitive economy.
Perhaps we should add another law of economics, Murphy's law from Alan Blinder, which says "Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently."
Academics and Policymakers with genuinely good intentions would be wise to heed Sowell's prescriptions. 5 stars for "Basic Economics." Do not hesitate to buy, read, and digest this book.
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Basic Economics: A Common Sense Guide to the Economy
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Amazon emailed me about trading my copy in...
Reviewed in the United Kingdom on May 31, 2013