A Review of :     Basic Econmics: A Citizen's Guide to the Economy
                             by Thomas Sowell
                             Basic Books, 2001, 366 pp., $30.00

Review by Jim Davis

One can learn more about economics by reading Thomas Sowell's Basic Economics: The Citizen's Guide to the Economy than by taking two semesters worth of college-level micro and macro economics courses.

What makes this book particularly interesting is that there are no complicated mathematical equations or words that only economists know the meaning; no charts, no graphs, only pure logic, backed by easy to understand real life examples. This is perhaps the best book written on economics since Henry Hazlitt's 1946 Economics in One Lesson.

And as a Harlem-born black man, Sowell does not see any need to beat around the bush to placate the politically correct. He is always right to the point.

For those unfamiliar with Sowell, he is one of the social, cultural, and economic intellectual heavyweights to emerge during the past fifty years. And he is a particularly rare breed, an economist who writes in a clear, concise, interesting manner.

If you have read any of his widely syndicated weekly commentary columns or any of the 29 books he has published, you already know that he is one of the premier advocates of free markets, equality before the law, and a defender of individual liberties. This book is no exception.

It is hard to criticize the content of this book because Sowell appears to have put so much substance into the work. Here is a 70-year-old former economics professor, who, having 29 books and hundreds of articles published, writes his first pure economics text. He obviously gave it a lot of thought.

One gets the impression that he wrote this as a sequel to Adam Smith's 1,000-plus page The Wealth of Nations (1776), the classic that created the science of economics. It took Smith only 17 years to write that book.

And 225 years later, a noted professor still offers his students an automatic "A" if they can point out one error of logic in Smith's classic work. No one has gotten the automatic "A" yet.

Dr. Sowell's achievement is that he appears to have shortened by two-thirds Smith's analysis. One expects that Sowell's work will also stand the test of time, that is, 225 years from now, students of economic principles will be saying that Thomas Sowell got it all right.

Toward the end of Basic Economics Sowell points out that "if one is truly interested in the well being of others, rather than in the excitement or a sense of moral superiority for ourselves," we must have an accurate knowledge of history and economics. He quoted the historian Paul Johnson:

"The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false."

Sowell recounts how many government programs have had unintended consequences, that is, they did more harm than good. He says these consequences were predictable from the outset, if people had looked at the incentives created, rather than the goals proclaimed.

Dr. Sowell organized this work to make it easily usable as a resource. He appears aware that very few people have the interest or intellectual stamina to read a book on economics. Therefore he makes it easy for you to pick up the book, check the table of contents, and find an analysis of the topic that has just caught your attention.

For example, if you recently heard the nightly news spin on the energy crisis in California, and that there are price controls there to keep energy "affordable," you go to chapter three, "Price Controls." There you will find out what has happened again and again when governments imposed price controls to solve a problem. Shortages were created virtually every time price controls went into effect, from rent control to the gasoline shortages in the 1970s.

And Sowell explains the principle and resulting incentive created that causes the predictable result to occur. "To understand the effects of price controls, it is necessary to understand how prices rise and fall in a free market. Prices rise because the amount demanded exceeds the amount supplied at existing prices. Prices fall because the amount supplied exceeds the amount demanded at existing prices."

He readily acknowledges that people tend to do more for their own benefit than for the benefit of others. Therefore, if the government makes it impossible for the energy producers to make a profit through price controls and overly restrictive regulations, then they are not going to expand their production. Shortages will always occur as demand increases.

The big advantage of the free market is that you do not have to convince anybody of anything. You simply compete with them in the marketplace and let that be the test of what works best.

For those who think the government (socialism) can do things better, Sowell explains that while capitalism has a visible cost (profit) that does not exist under socialism, socialism has an invisible cost (inefficiency) that gets weeded out by losses and bankruptcy under capitalism. Profit is a price paid for efficiency.

And efficiency of people's work is what determines their prosperity. People in other countries with different economic systems appear to work much harder than most Americans with far less to show for their efforts. Efficiency is the difference.

True, some of these economic differences are due to technology, education or to favorable or unfavorable geographical and historical conditions. But Sowell argues persuasively that much of our success is a result of having a free-market price-based economy, with strong financial incentives, and ruthless elimination of bad decisions.

Sowell shows why the role of government should primarily be to maintain law and order, protect property rights, facilitate commerce, and provide for our common defense.

He explains why, under popularly elected governments, the political incentive is to do what is popular even when the economic consequences are worse than doing nothing, or doing something that's less popular. For example, in 1971 the first peacetime wage and price controls were instituted with disastrous results. Ranchers stopped shipping their cattle, farmers drown their chickens, and consumers emptied the shelves of supermarkets, creating shortages. Farmers stopped producing because they would lose less money by not providing food for our tables. The government forced them to not provide food.

Another government gimmick is inflation. For thousands of years, governments around the world have resorted to inflation in order to avoid the political dangers that raising taxes can create. Inflation is a hidden tax. Its effect is to take part of the purchasing power of money that people have saved and quietly transfer it to the government that issues the new money.

One of Sowell's more interesting chapters was "Popular Economic Fallacies." One fallacy he mentions is that American goods cannot compete with goods produced by low-wage workers in poor countries. He points out that high-wage countries have been exporting to low-wage countries for centuries. The reason for the fallacy is that many people confuse wage rates with labor costs. When a worker in the United States receives twice the wages as a worker in a poor country but produces five times the output, our higher wage worker still produces at a lower labor cost. The key is efficiency.

Sowell suggests that, "Any lofty talk about non-economic values usually amounts to very selfish attempts to impose one's own values, without having to weigh them against other people's values. Taxing away what other people have, in order to finance one's own moral adventures, is often depicted as a humanitarian endeavor, while allowing others the same freedom and dignity, so that they can make their own choices with their own earnings, is considered to be pandering to greed."

Most great fortunes did not happen because of greed. Ford, Rockefeller, and Carnegie all figured out ways to provide goods and services at lower prices, not higher prices. That's how they made their money. So did Wal Mart.

Thomas Sowell's Basic Economics should be required reading for every person running for political office and anyone (especially journalists) who has influence in electing our officials. Why? Because virtually every piece of legislation has an economic impact, even though it might not be immediately visible. Opinion makers need to understand the economic effects of government policies. So do the rest of us.

Reading this book will help you be a more informed citizen. Perhaps of greater importance, acquiring the knowledge in this book could also help you go through life the "easy way," as opposed to the "hard way." Reality is the crutch for those who cannot cope with fantasy.