Basic Economics

by Thomas Sowell

  In past centuries, even such things as oranges, sugar, and cocoa were luxuries of the rich in Europe. Not only do third party definitions of what is a luxury of the rich fail to account for such changes, the stifling of free markets by third parties can enable such things to remain exclusive luxuries longer than they would otherwise.

  Markets and Greed

  Those who condemn greed may espouse “non-economic values.” But lofty talk about “non-economic values” too often amounts to very selfish attempts to have one’s own values subsidized by others, obviously at the expense of those other people’s values. A typical example of this appeared in a letter to the newspaper trade magazine Editor & Publisher. This letter was written by a newspaper columnist who criticized “the annual profit requirements faced by newspapers” due to “the demands of faceless Wall Street financial analysts who seem, from where I sit, insensitive to the vagaries of newspaper journalism.”{977}

  Despite the rhetorical device of describing some parties to a transaction in less than human terms (“faceless Wall Street financial analysts”), they are all people and they all have their own interests, which must be mutually reconciled in one way or another, if those who supply the money that enables newspapers to operate are to be willing to continue to do so. Although people who work on Wall Street may control millions of dollars each, this is not all their own personal money by any means. Much of it comes from the savings, or the money paid into pension funds, by millions of other people, many of whom have very modest incomes.

  If “the vagaries of newspaper journalism”—however defined—make it difficult to earn as high a return on investments in newspapers or newspaper chains as might be earned elsewhere in the economy, why should workers whose pension funds will be needed to provide for their old age subsidize newspaper chains by accepting a lower rate of return on money invested in such corporations? Since many editors and columnists earn much more money than many of the people whose payments into pension funds supply newspapers with the money to operate, it would seem especially strange to expect people with lower incomes to be subsidizing people with higher incomes—teachers and mechanics, for example, subsidizing editors and reporters.

  Why should financial analysts, as the intermediaries handling pension funds and other investments from vast numbers of people, betray those people, who have entrusted their savings to them, by accepting less of a return from newspapers than what is available from other sectors of the economy? If good journalism, however defined, results in lower rates of return on the money invested in newspaper chains, whatever special costs of newspaper publishing are responsible for this can be borne by any of a number of people who benefit from newspapers. Readers can pay higher prices for papers; columnists, editors and reporters can accept lower salaries; or advertisers can pay higher rates, for example.

  Why should the sacrifice be forced on mechanics, nurses, teachers, etc., around the country whose personal savings and pension funds provide the money that newspaper chains acquire by selling corporate stocks and bonds? Why should other sectors of the economy that are willing to pay more for the use of these funds be deprived of such resources for the sake of one particular sector?

  The point here is not how to solve the financial problems of the newspaper industry. The point is to show how differently things look when considered from the standpoint of allocating scarce resources which have alternative uses. This fundamental economic reality is obscured by emotional rhetoric that ignores the interests and values of many people by summarizing them via unsympathetic intermediaries such as “insensitive” financial analysts, while competing interests are expressed in idealistic terms, such as journalistic quality. Financial analysts may be as sensitive to the people they are serving as others are to the very different constituencies they represent.

  Often what critics of the market want are special dispensations for particular individuals or groups, whether these are newspapers, ethnic groups, social classes or others—without acknowledging that these dispensations will inevitably be at the expense of other individuals or groups, who are either arbitrarily ignored or summarized in impersonal terms as “the market.” For example, a New York Times reporter writing about the problems of a middle-aged, low-income woman said, “if the factory had just let Caroline work day shifts, her problem would have disappeared.” But, he lamented: “Wages and hours are set by the marketplace, and you cannot expect magnanimity from the marketplace.”{978}

  Here again, the inescapable conflict between what one person wants and what another person wants is presented in words that recognizes only one side of this equation as human. Most people prefer working day shifts to working night shifts but, if Caroline were transferred to the day shift, someone else would have to be transferred to the night shift. As for “magnanimity,” what would that mean except forcing someone else to bear this woman’s costs? What is magnanimous about someone who is paying no cost whatsoever—in this case, the New York Times reporter—demanding that someone else be saddled with those costs?

  Both in the private sector and in the government sector, there are always values that some people think worthy enough that other people should have to pay for them—but not worthy enough that they should have to pay for them themselves. Nowhere is the weighing of some values against other values obscured more often by rhetoric than when discussing government policies. Taxing away what other people have earned, in order to finance one’s own moral adventures via social programs, is often depicted as a humanitarian endeavor. But allowing others the same freedom and dignity as oneself, so that they can make their own choices with their own earnings, is considered to be pandering to “greed.” Greed for power is no less dangerous than greed for money, and has historically shed far more blood in the process.

  Markets and Morality

  Whether assessing the effects of market economies or of government or other institutions, it is a challenge to make a clear distinction between results that emerge from those institutions and results caused by those institutions. Because a given institution or process conveys a certain outcome does not mean that it caused that outcome. As we have seen in Chaper 4, stores in low-income neighborhoods often charge higher prices than in other neighborhoods, but the causes of those higher prices are higher costs of doing business in those neighborhoods, not higher rates of profits resulting from arbitrary price increases by the stores. Many businesses and professions in fact avoid low-income neighborhoods because earnings prospects are usually not as good there.

  The same principle applies to many other institutions, whether in a market economy, a socialist economy, a government agency or others. Some hospitals have higher death rates than others precisely because they have the finest doctors and the most advanced medical technology—and therefore treat patients with the most difficult, life-threatening medical problems that other hospitals are simply not equipped to handle. A hospital that treats mostly people with routine infections or broken arms may well have a lower death rate than a hospital that performs operations like brain surgery or heart transplants. Higher death rates at more advanced hospitals convey a reality that they did not cause.

  Similarly, everything that happens in a market economy, or a socialist economy, or in a government agency, is not necessarily caused by those institutions. Everything depends on the particular facts of the particular situation. This affects not only questions about causation but also moral questions. Income differences, for example, may be a result of barriers created against some groups or a result of factors internal to the groups themselves, such as average age, years of education and other factors that vary from one group to another.

  Most people, in the Western world at least, would probably consider arbitrary barriers against particular groups to be morally wrong, and something that should be eliminated. But such a consensus is not equally likely if income differences are due to age differences—a factor that evens out over a lifetime, since all of us spend the same amount of time being 20 years old
, 30 years old or 40 years old, even if we are not all simultaneously at the same ages when statistics are collected. Nor is such a consensus likely if income differences are a result of differences in individuals’ chosen behavior, such as dropping out of school or going on drugs, since many people feel no obligation to subsidize such behavior.

  In short, moral decisions depend on factual realities. However, people with different moral values can make different decisions about the same facts. Therefore the policy question often comes down to whether some people feel that their moral values should be imposed on other people with different moral values through the power of government. Market economies permit individuals to make decisions for themselves, based on their own moral values or other personal considerations—and at the same time the market forces them to pay the costs that their decisions create. The question is therefore not whether moral values should guide market economies, but whose moral values, if any, should be imposed on others or subsidized by others.

  Many whose sense of morality is offended by large economic disparities among individuals, groups and nations tend to see the causes of these differences as “advantages” or “privileges” that some people have over others. But it is crucial to make a distinction between achievements and privileges. This is not simply a matter of semantics. Privileges come at the expense of others, but achievements add to the benefits of others.

  Few of us may have had whatever combination of factors enabled Thomas Edison to make electricity a major part of millions of people’s lives. But vast numbers of people around the world benefitted from Edison’s achievements, both in his own time and in generations that followed. Whatever the sources of Edison’s achievements, we have all benefitted from those achievements, as we have benefitted from the achievements of the Wright brothers and of others who added whole new dimensions to human life.

  Similarly for the scientists whose work led to cures or preventatives for crippling diseases like polio or lethal diseases like malaria. Even business leaders who simply found ways to produce goods and services better, or to deliver them to consumers at lower cost, contributed to rising standards of living around the world.

  All these things, and more, create economic disparities among individuals, groups and nations with different achievements. That may seem morally offensive to some observers. But, here again, moral decisions require an accurate understanding of facts and causes, as well as a clear distinction between privileges and achievements. Moral decisions, and policies based on those decisions, cannot be made on the simple basis of statistics, visions and rhetoric—not if the purpose is to make human life better, either materially or otherwise, rather than to indulge one’s emotions in disregard of the actual consequences for others.

  The moral judgment that life is not “fair” to individuals, groups or nations in the sense of providing them all with the same factors that promote economic prosperity or other benefits, is one that can be shared by people with very different moral or ideological values.

  As already noted in Chapter 23, neither geography nor culture nor history has presented equal opportunities to all individuals, groups or nations. Nor have such other factors as demography or politics. In the words of distinguished economic historian David S. Landes, “nature like life is unfair.” But not all sources of unfairness—in the sense of very different life chances—have moral dimensions: “No one can be praised or blamed for the temperature of the air, or the volume and timing of rainfall, or the lay of the land.”{979}

  There are of course decisions and actions for which human beings can be judged morally or held responsible legally. But just looking at the bare facts of statistical disparities does not tell us which those are, much less what actions taken now can or will be effective. For that we need not only facts but analysis, whether of economics, history, politics or human nature.

  We also need to keep in mind a clear moral distinction between doing things that let us vent our pent-up feelings and doing things likely to actually help those who have been unfortunate in the circumstances into which they were born. Transferring income or wealth is relatively easy. But developing human capital among those who lag is far more effective, even if it is also far more difficult. After all, the income or wealth that is transferred has a limited time before it is gone, and continued economic progress depends on having the human capital to replenish this income and wealth as it is used up. Moral decisions cannot be divorced from the consequences they create.

  Morality is not a luxury but a necessity, because no society can be held together solely by force. Even totalitarian dictatorships promote an ideology with their particular kind of morality because not even a government apparatus with pervasive and ruthless powers of repression and terror is sufficient by itself to create or sustain a functioning society. But, while moral principles are necessary for any society, they are seldom sufficient. To apply moral principles to an economy requires knowledge and understanding of that economy—and an ability to “think things, not words,” as Justice Oliver Wendell Holmes once said.{980}

  Otherwise, attempts to help “the poor,” for example, may not merely fail but be counterproductive, if we cannot distinguish people who are genuinely and enduringly poor from people who are simply young and beginning their careers in entry-level jobs that they will soon outgrow, as they acquire human capital that is valuable to themselves and to the society. Making blanket benefits available to “the poor” can short-circuit this process by making it unnecessary for many people to work, and minimum wage laws can make it harder for the young to find work, costing them both current pay and the acquisition of human capital for the future. Similarly, the need to “think things, not words” makes the distinction between privilege and achievement not simply a matter of semantics, but an urgent need for clarity when making moral decisions. Privileges, which harm others, must be distinguished from achievements, which benefit others and advance society as a whole.

  Chapter 26

  THE HISTORY OF ECONOMICS

  I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

  John Maynard Keynes{981}

  People have been talking about economic issues, and some writing about them, for thousands of years, so it is not possible to put a specific date on when the study of economics began as a separate field. Modern economics is often dated from 1776, when Adam Smith wrote his classic, The Wealth of Nations, but there were substantial books devoted to economics at least a century earlier, and there was a contemporary school of French economists called the Physiocrats, some of whose members Smith met while traveling in France, years before he wrote his own treatise on economics. What was different about The Wealth of Nations was that it became the foundation for a whole school of economists who continued and developed its ideas over the next two generations, including such leading figures as David Ricardo (1772–1823) and John Stuart Mill (1806–1873), and the influence of Adam Smith has to some extent persisted on to the present day. No such claim could be made for any previous economist, despite many people who had written knowledgeably and insightfully on the subject in earlier times.

  More than two thousand years ago, Xenophon, a student of Socrates, analyzed economic policies in ancient Athens.{982} In the Middle Ages, religious conceptions of a “fair” or “just” price, and a ban on usury, led Thomas Aquinas to analyze the economic implications of those doctrines and the exceptions that might therefore be morally acceptable. For example, Aquinas argued that selling something for more than was paid for it could be done “lawfully” when the seller has “improved the thing in some way,” or as compensation for risk, or because of having incurred costs of transportation.{983} Another way of saying the same thing is that much that looks like sheer taking advantage of other people is often in fact compensation for various costs and risks incurred in the process of bringing goods to consumers or lending money to those who seek to borrow.

  However far economists have m
oved beyond the medieval notion of a fair and just price, that concept still lingers in the background of much present-day thinking among people who speak of things being sold for more or less than their “real” value and individuals being paid more or less than they are “really” worth, as well as in such emotionally powerful but empirically undefined notions as price “gouging.”

  From more or less isolated individuals writing about economics there evolved, over time, more or less coherent schools of thought, people writing within a common framework of assumptions—the medieval scholastics, of whom Thomas Aquinas was a prominent example, the mercantilists, the classical economists, the Keynesians, the “Chicago School,” and others. Individuals coalesced into various schools of thought even before economics became a profession in the nineteenth century.

  THE MERCANTILISTS

  One of the earliest schools of thought on economics consisted of a group of writers called the mercantilists, who flourished from the sixteenth through the eighteenth centuries. In a motley collection of writings, ranging from popular pamphlets to a multi-volume treatise by Sir James Steuart in 1767, the mercantilists argued for policies enabling a nation to export more than it imports, causing a net inflow of gold to pay for the difference. This gold they equated with wealth. From this school of thought have come such present-day practices as referring to an export surplus as a “favorable” balance of trade and a surplus of imports as an “unfavorable” balance of trade—even though, as we have seen in earlier chapters, there is nothing inherently more beneficial about one than the other, and everything depends on the surrounding circumstances.