Book Review: Basic Economics

This is a long overdue blog post about the book Basic Economics; A Citizen’s Guide to the Economy written by Dr. Thomas Sowell. Dr. Sowell is a world-renowned economist who has had an amazing academic career. He is a proponent of the Chicago School of Economics, which is a neoclassical school of thought that has full confidence in a free market, price-coordinated economy. This was honestly an eye-opening book that has a vast amount of knowledge if one were to read the book carefully. The book is pretty high-level and conceptual, but the implications are practical in nature (i.e. you can actually apply some of the theory in real life). The book really lifts the lid on how capitalism works under the hood, both its virtues and its flaws. No system is perfect, but Dr. Sowell argues that the free market system will always be better than any other system. Here are the top five lessons that I learned from Basic Economics:

1. Economics is the study of scarce resources that have alternative uses: This definition of economics is what the Chicago School advocates for; it’s really what gives the Chicago School a conservative bend. Economics is all about allocating and distributing resources to their most high impact uses. Everything has a cost and nothing is ever free. If you use resources for a specific purpose, then the true cost is the opportunities lost to use those resources somewhere else (i.e. opportunity cost). Given that resources are scarce, the whole point of economics is the study of how to distribute and use resources in a way that has the most high impact. Yes every resource is scarce in a market economy, otherwise economics as a study is pointless.
2. Prices are the indicators of supply and demand: A free market system is ultimately coordinated by prices. People will always want to buy low and sell high, whereas merchants will always want to sell high and buy low. Prices are the best indicators of supply and demand for scarce resources that have alternative uses. If something is high in demand and low in supply, then that should naturally reflect a higher price. Conversely if something is low in demand and high in supply, then that will naturally reflect a lower price. Prices should never be controlled by central planning or government agencies because people have unique experiences. Only the market that’s represented by the actions of ordinary people can price resources most efficiently, not policies implemented by government bureaucrats who simply can’t understand the experiences of ordinary people. Dr. Sowell believes that no other economic system has beaten/nor will beat the power of free-market capitalism in raising the livelihoods of a country’s citizens at a national level.
3. Free markets is predicated on competition: The free market system is predicated on competition and competition is what breeds productivity and efficiency. This type of system rewards businesses that deliver value and people that are useful. At the same time, the system is very unkind to businesses that don’t deliver value and people who aren’t always upskilling. The truth is that specialized skills matter a lot in a capitalistic economy. In this type of system, capital is flush and the only way to stay relevant and get some of that capital (i.e. money for yourself) is through the number of useful skills you have. You have to deliver value, otherwise someone else will! Competition applies to individuals as well as businesses. Businesses that don’t consistently deliver value (regardless of what they’ve done in the past) will eventually die.
4. Inflation will always eat away at purchasing power over time: One dollar today will always be worth more than one dollar in the future. As defined in the book: “The ‘present value’ of an asset is in fact nothing more than its anticipated future returns, added up and discounted, for the fact that they are delayed.” When inflation rises, interest rates are often bound to also rise. When interest rates rise, the labor market often shrinks and contracts. Always use your money in a way that’s smart such that you acquire assets that will stand the test of time and weather the effects of inflation! Inflation is basically like an invisible tax, where the government is taking a cut out of the purchasing power of your capital. Given how inefficient government is in implementing anything, Dr. Sowell believes that small government is the standard that any country should strive for. A big government that taxes it’s citizens inordinately is simply a recipe for disaster.
5. It’s important to share your knowledge and explain things in a simple manner: I really appreciated this book because Dr. Sowell explained really complex economic concepts in a simple manner that was easy and digestible. Never once did I feel truly confused reading this book and there was so much wisdom in the book about economics, capitalism, government, labor practices, and policy. This was truly an inter-disciplinary book that anyone could learn something from because the explainations were that good. This is a skill and definitely something that I need to get better at: the ability to explain things simply is the number one sign that you truly understand something. Moreover, just by talking about this type of stuff with others helps solidify my own understanding! Maybe I could share my knowledge with others. I really enjoyed reading this book overall and have learned so much. Thank you Dr. Sowell!