Basic Economics

by Thomas Sowell

  11. Why would an Albanian bank, with 83 percent of the country’s bank deposits, refuse to make any loans? And what were the consequences for the Albanian economy? (page 387)

  12. Explain “the fallacy of composition” and give economic examples. (pages 346–347)

  13. Since “money talks” in the marketplace, why would rich people want to shift some decisions out of the marketplace and have these decisions made politically or by the courts? (Hint: housing is a classic example.) (pages 402–403)

  14. Under what conditions is the burden of the national debt passed on to future generations? Under what conditions is it not? (pages 437–438)

  15. From time to time there are conflicting estimates of how much of the total taxes are paid for by various individuals and organizations. Why is it not easy to tell who is really bearing the burden of taxation? Explain with specific examples. (pages 428–432)

  PART VI: THE INTERNATIONAL ECONOMY

  1. If laws restrict the importation of a particular foreign product, in order to protect the jobs of domestic workers who produce that product, how is it possible that this can end up reducing domestic employment? (page 491)

  2. Although Africa is more than twice the size of Europe, the European coastline is longer than the African coastline. How can that be, and—more important—what are the economic implications? (page 533)

  3. If country A can produce a given product more cheaply than country B, what economic reason would cause it to buy that product from country B, instead of producing it itself? (pages 479–483)

  4. Australia manufactures automobiles, but these are cars developed by Japanese or American car companies. Why would an advanced and prosperous country like Australia not design and produce its own cars? (pages 483–484)

  5. What is meant by a “favorable balance of trade”? Why was it considered favorable? Is it also favorable to producing prosperity in the economy? (pages 476–478)

  6. What economic effects do mountains have on (a) the people living in those mountains and (b) the people living below on the lands near those mountains? Explain why these economic effects are what they are. (pages 536–539)

  7. What are some of the reasons for restrictions on international trade that economists usually recognize as valid? (pages 492–493)

  8. In the absence of restrictions on international trade, would low-wage countries tend to take jobs away from high-wage countries through lower production costs that would allow them to sell at lower prices? Explain. (pages 486–489)

  9. The United States has often been a “debtor nation” owing more to people in other countries than people in other countries owe to Americans, while Switzerland has often been a “creditor nation,” to whom others owe more to the Swiss than the Swiss owe to others. What tends to lead to this difference and is it economically beneficial or harmful to Americans or Swiss? (pages 506–507)

  10. How did the cultural universe and the disease universe of Europeans differ from that of the indigenous peoples of the Western Hemisphere, as of the time when they first came in contact with each other? Explain why—and the economic implications of those differences. (pages 539–541, 565–566)

  11. If, instead of having international trade restrictions that save perhaps 200,000 jobs, the European Union allowed free trade and paid $100,000 to each individual who lost a job as a result, would the European Union come out ahead financially? (pages 498–499)

  12. “Theoretically, investments might be expected to flow from where capital is abundant to where it is in short supply, much like water seeking its own level.” What are some of the reasons why countries with abundant capital seldom invest much of it in countries where capital is much more scarce? (pages 503–505)

  13. Name five reasons why one group of people might be more culturally isolated than another, and explain the economic implications of that isolation. (pages 536, 537–541, 549–551)

  14. What are some of the problems in applying laws against “dumping”? (pages 493–495)

  15. Why is free trade likely to be more valuable to producers in a small economy than to producers in a large economy? (pages 483–485)

  PART VII: SPECIAL ECONOMIC ISSUES

  1. Costly safety devices or policies have often been defended on grounds that “if it saves just one life, it is worth it.” What is the problem with that reasoning? (pages 586–588)

  2. What are some of the reasons why different prices are charged for things that are physically identical? (pages 572–573)

  3. How did the mercantilist economists differ from classical economists such as Adam Smith? (pages 598–601)

  4. What is the point of having different brands of the same product if in fact all the brands are of pretty much the same quality and sell for about the same price? What would happen in this situation if laws did away with brands, so that each consumer could only identify what the product was, but not who made it? (pages 574–578)

  5. For about a century—from the 1770s to the 1870s—most of the leading economists believed that the relative prices of goods reflected their relative costs of production, especially the amount of labor they required. What are some of the problems with that theory? (pages 607–611)

  6. Explain how the presence or absence of the profit motive affects an organization’s likelihood of achieving the purpose for which it was created, to the maximum extent possible with the resources at its disposal. (pages 578–580)

  7. During the era before there were laws against racial discrimination in employment, were black chemists more likely to be hired in profit-making businesses or in non-profit organizations such as colleges and universities—and why? (pages 581–582)

  8. Critics have claimed that profits exceed the value of the services performed by those who receive those profits. What empirical evidence could be used to test this belief? (pages 582–583)

  9. When fighting a war leads to a diversion of a substantial amount of resources from civilian to military purposes, most people would be more concerned to see that the poor could still get bread than that the rich could still get caviar. Then why not put price controls on bread but not on caviar? (pages 628–629)

  10. Some people regard economics as just the opinions of economists, reflecting their various ideological biases. Examine that belief in the light of the history of economics. (pages 621–622)

  11. Can government–imposed prices for medical care reduce the costs of that care? (page 573)

  12. It is common for politicians to set out to create a law or policy to solve a particular economic problem, and many in the media and among the public urge them to do that. In the light of economic theory in general, and general equilibrium theory in particular, what is wrong with that approach? (pages 612–613)

  13. Where do natural disasters like earthquakes or hurricanes do the most damage in terms of financial costs and in terms of loss of human lives? (page 587)

  14. A government official in India said: “I don’t want multinational companies getting rich selling face creams to poor Indians.” What does that statement imply? (pages 589–590)

  15. Nobel Prizewinning economist F.A. Hayek said: “We shall not grow wiser before we learn that much that we have done was very foolish.” What do you consider to be the three most foolish policies discussed in this book? Would you have considered those policies foolish before reading Basic Economics?

  Footnotes

  {i} Previous editions have been translated into Spanish, Chinese, Hebrew, Japanese, Swedish, Korean, and Polish.

  {ii} A visitor to the Soviet Union in 1987 reported “long lines of people still stood patiently for hours to buy things: on one street corner people were waiting to buy tomatoes from a cardboard box, one to a customer, and outside a shop next to our hotel there was a line for three days, about which we learned that on the day of our arrival that shop had received a new shipment of men’s undershirts.” Midge Decter, An Old Wife’s Tale, p. 169.

  {iii} The Turning Point: Revitalizing the Soviet Economy (
New York: Doubleday, 1989).

  {iv} The same thing can happen when the food arrives by land. See “Death by Bureaucracy,” in the December 8, 2001 issue of The Economist (page 40), for examples of Afghan refugees dying of starvation while waiting for paperwork to be completed by aid workers.

  {v} My wife was once an attorney for a non-profit organization that often represented tenants in disputes with landlords. After observing how often the landlords were people of obviously modest economic and educational levels, she began to rethink the assumptions that led her into supporting rent control and its accompanying housing regulations.

  {vi} In many cases, goods in short supply were kept in the back of the store for sale to those people who were willing to offer more than the legal price. Black markets were not always separate operations, but were also a sideline of some otherwise legitimate businesses.

  {vii} This is not an uncommon pattern in the evolution of other kinds of government programs.

  {viii} Do not try this at home. Professional chemists can handle these dangerous chemicals, with appropriate safeguards, in a laboratory but either can be fatal in other hands.

  {ix} In many cases, the middle-class borrower who already has a checking account at the bank from which he wishes to borrow also has an automatic line of credit available with that checking account. When the need for a $5,000 loan arises, there may be no need even to file an application. The borrower simply writes $5,000 more in checks than there is money in the account, and the automatic line of credit covers it, with minimum time and trouble to both the borrower and the bank, since the potential borrower’s credit rating was already established when the account was first opened and the size of the line of credit w.5as established on the basis of that credit rating. Cashing a check in such situations involves little risk or cost to the bank, as distinguished from the risks and costs incurred by a check-cashing company whose customers typically have no bank accounts.

  {x} Purists can say that there is no up or down in space, but that simply requires rephrasing the same facts by saying that the axis on which the earth rotates is not perpendicular to the plane of the planet’s orbit around the sun.

  {xi} Men who drank either nothing alcoholic or just one drink per week had a reduction in cardiovascular disease when they increased their alcohol intake by from one to six drinks per week. However, among men who already averaged seven or more alcoholic drinks per week, an increase in their drinking led to more cardiovascular disease, according to the Archives of Internal Medicine (September 25, 2000 issue). The medical publication The Lancet reported that “light-to-moderate alcohol consumption is associated with a reduced risk of dementia in individuals aged 55 years or older” in its January 26, 2002 issue.

  {xii} A New York Times writer, for example, said “we need high-quality, universal, subsidized day care.” (Alissa Quart, “Crushed by the Cost of Child Care,” New York Times, August 18, 2013, Sunday Review Section, p. 4). In other words, some people should make the decision to have children and simultaneously pursue a career, leaving the costs to be paid by taxpayers who had nothing to do with these decisions, and with no one basing these decisions on weighing the costs against the benefits—except, perhaps, third-party observers with no personal stake in the outcome and with no adverse consequences for being wrong.

  {xiii} Further discussion of this phenomenon can be found in Chapter 24 in a section titled “Non-Profit Organizations.”

  {xiv} A book of mine was reviewed in the New York Times on two consecutive days by two different people—one favorably and the other unfavorably—apparently because the weekly edition and the Sunday edition were under two different departments.

  {xv} Far from being excessive under the circumstances, inventories in the Soviet Union often proved to be inadequate, as manufacturing enterprises still ran out of components. According to Soviet economists, “a third of all cars come off the assembly line with parts missing.” Shmelev and Popov, The Turning Point, p. 136.

  {xvi} See my Conquests and Cultures, pages 101–108.

  {xvii} This is not to say that there are never component suppliers who fail to deliver in a market economy. Planes costing hundreds of millions of dollars can sit idle after being built, waiting for a cooking galley, a toilet or some other component to arrive from another company before it can be sold. As one Boeing official put it, “You have a huge asset that’s not moving, waiting on a galley.” An Airbus executive said, “The issue can even escalate to the point that I have to go and ask, ‘What the hell’s going on?’” Such a question from a company that is buying millions of dollars’ worth of a component supplier’s output is more than an exercise in rhetoric. In short, human beings have the same shortcomings in all economic systems but the difference is in the pressures that can be brought to bear to force corrections. Daniel Michaels and J. Lynn Lunsford, “Lack of Seats, Galleys Delays Boeing, Airbus,” Wall Street Journal, August 8, 2008, pp. B1, B4.

  {xviii} This was a system where all steel prices in the United States were based on the fixed price of steel plus the cost of shipping it by rail from Pittsburgh—regardless of whether the steel was actually produced in Pittsburgh, Birmingham or anywhere else, and regardless of whether it was shipped by rail, barge or by other means. Otherwise, it would be easy for individual steel producers to hide price reductions in the large and variable freight charges for shipping a heavy product like steel from different places by different modes of transportation, making it far more difficult to tell who was undercutting the price agreed to by the cartel. But, under the cartel’s pricing system, it was easy to tell what the total delivered cost of steel—price plus rail shipment cost from Pittsburgh—should be at any point in the country, regardless of where it was produced or how it was shipped. From the standpoint of the economy, however, this system led to a misallocation of resources, since someone located near Birmingham would just as soon buy steel produced in Pittsburgh as in Birmingham, since they had to pay the same price plus the same rail freight cost from Pittsburgh, either way. This meant that far more steel was transported greater distances than would have been the case in a free, competitive market.

  {xix} Imagine that an industry consists of ten firms, each hiring 1,000 workers before a minimum wage increase, for an industry total of 10,000 employees. If three of these firms go out of business between the first and the second surveys, and only one new firm enters the industry, then only the seven firms that were in existence both “before” and “after” can be surveyed and their results reported. With fewer firms, employment per firm may increase, even if employment in the industry as a whole decreases. If, for example, the seven surviving firms and the new firm each hire 1,100 employees, this means that the industry as a whole will have 8,800 employees—fewer than before the minimum wage increase—and yet a study of the seven surviving firms would show a 10 percent increase in employment in the firms surveyed, rather than the 12 percent decrease for the industry as a whole. Since minimum wages can cause unemployment by (1) reducing employment among all the firms, (2) by pushing marginal firms into bankruptcy, or (3) discouraging the entry of replacement firms, reports based on surveying only survivors can create as false a conclusion as interviewing people who have played Russian roulette.

  {xx} This is not always true: Some state and local governments have paid private businesses to carry out some functions traditionally done by government employees, such as garbage collection and running prisons. The federal government has also outsourced some of its functions to private companies, both in the United States and overseas. The extent to which these things can be done is, however, limited by political reactions.

  {xxi} There are exceptions to virtually every rule. People who bought bonds in California’s electric utility companies, as a safe investment for their retirement years, saw most of the value of those investments vanish into thin air during that state’s electricity crisis of 2001. The state forced these utilities to sell electricity to their customers for less than they were payin
g their suppliers. As these utilities went billions of dollars into debt, their bonds were downgraded to the level of junk bonds.

  {xxii} Although fatality rates from motor vehicle deaths are highest for drivers 20 to 24 years of age, the declining fatality rates end from 55 to 59 years of age, and then rise again, with drivers aged 80 to 84 having fatality rates from motor vehicle deaths being similar to drivers aged 16 to 19. (Insurance Information Institute, 2012 Insurance Fact Book, p. 155.

  {xxiii} Elimination of the ability of private employers to cease employing people at a given age had further economic repercussions, the most obvious being that it now became harder for younger workers to move up the occupational ladder, with older employees at the top blocking their rise by staying on. From the standpoint of the economy as a whole, that was a loss of efficiency. The elimination of a “mandatory retirement” age meant that, instead of automatically phasing out employees when they reached the age at which productivity usually begins to decline, employers now faced the prospect of having to prove that decline in each individual case to the satisfaction of third parties in government, in order to avoid an “age discrimination” lawsuit. The costs and risks of this meant that many older people would be kept employed when there were younger people who could perform their duties more efficiently. As for those older individuals whose productivity did not decline at the usual age, employers had always had an option to waive retirements on an individual basis. Neither for the employer nor the employee was there in fact a mandatory retirement age.

  {xxiv} Those familiar with calculus will recognize the former as a derivative and the latter as an integral.

  {xxv} Imagine a Third World country with 100 million people, one-fourth of whom average $1,000 a year in per capita income, another fourth average $2,000, another fourth $4,000 and the top fourth $5,000. Now imagine that (1) everyone’s income rises by 20 percent and (2) the two poorest classes double in size as a result of reduced mortality rates among those most vulnerable to malnutrition and inadequate medical care, while the two top classes remain the same size. If you work out the arithmetic, you will see that per capita income for the country as a whole remains the same, even though every individual’s income has risen by one-fifth. Obviously, if the income had risen by less than one-fifth, per capita income would have fallen, even though each individual’s income rose.