Customer Reviews

Basic Economics: A Common Sense Guide to the Economy

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This is simply the best book on understanding rudimentary economics available. This book takes a sophisticated subject and makes it very clear and understandable. While not as detailed as a textbook on the subject would be, it gets across the main theories of economics with real examples that can be understood and related to by almost anyone. This is simply the best and most readable source available to get a basic understanding of economic principles.

Everyone without a degree in Economics should read this book. This is a very easy and practical way to understand basic economic principles. Sowell is a master at making seemingly complex concepts into something very understandable by removing all the unecessary jargon and replacing it with real life examples we can all understand. I'e read this book twice. The second reading two years later than the first. I got as much out of it the second time as I did the first. I'll share this book around the family, but will definately be getting it back again.

When one thinks of economics, one is typically confronted with the kind of malaise that Jimmy Carter once spoke of. However, Sowell's book is filled with concrete examples of how to apply some basic and interesting principles of economics in daily life, and he explains why these principles are so fundamental to our lives. I think all high-school graduates with any sense should read this before signing up for credit cards or getting a job, and certainly any college student looking for work as well. A fantastic read, which is certainly difficult to do when one is speaking about the economy.

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Incentives Matter
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The first and most important lesson in economics is this: incentives matter. What is an incentive? It is something that people want, and that usually means money. Making money is an incentive. The nice thing about free markets is that the incentives lead to efficient outcomes. That's what Adam Smith meant when he talked about the invisible hand. Markets are more than self-regulating. They are self-regulating and lead to outcomes that are good for everyone.

A good way to appreciate the invisible hand is to look at what goes wrong when the government interferes in markets. The classic case is rent control. That's when the government passes a law making it illegal for landlords to raise the price of rent. Normally when a bunch of people move to a city there is a temporary squeeze on housing. The demand goes up so the price goes up too. That's where the wisdom of "incentives matter" comes into the picture. High prices mean high profits. Entrepreneurs who build new apartments will get a chance to cash in on some of those windfall profits. High prices lead to an increase in the supply of apartments. The supply goes up and the price goes back down.

What happens with rent control? Since it is illegal to raise prices there is no incentive (there's that word again) for entrepreneurs to build new apartments. The supply can't go up to meet the demand. In fact the supply may go down because landlords may take existing rental units off the market because they are unprofitable. Now let's consider the demand side of the equation. Rent control perversely makes the demand go up. With high prices consumers have to economize. Rent a studio instead of a one-bedroom. Empty nesters may move into a smaller apartment. Other people will get a roommate. This does not happen because the price is kept artificially low. Supply down, demand up. The housing squeeze happened because supply was higher than demand, and rent control made the root cause of the problem even worse. The outcome is shortages. There aren't enough apartments to go around. One consequence of rent control is increased homelessness.

Rent control also leads to discrimination. Progressives believe that the government can be an effective check on the power of the wealthy, but it often amplifies their power. Since there are more renters than apartments, landlords can take their pick. A racist landlord can afford to turn down black applicants and only rent to whites. Without rent control laws the supply and demand would be in balance. A racist landlord who turns down a qualified black applicant might have to wait a month or two before a qualified white applicant comes along. Not many racists are willing to lose a couple thousand dollars in rent to indulge their racism. Now, these days there aren't many racist landlords but all landlords would prefer to rent to the wealthy than to the poor and working class. Studies on rent control show that these apartments are usually captured by upper-middle class professionals. The poor are driven into the "shadow market". It includes the black market (people who rent out rooms under the table) and other apartments granted an exemption from rent control. The downside is that prices in the shadow market are higher. Thus rent control creates an "insider/outsider" dynamic in which wealthy insiders pay lower prices for rent and the poor pay higher prices.

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Limits of Incentives
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Sowell explains this kind of thing very well. I don't think there is anything in his book that is actually wrong. Where I disagree with Sowell is the things that he leaves out. The First Fundamental Theorem of Welfare Economics is a mathematical proof that free markets will reach the most efficient outcome possible. It is often taken as a proof of the invisible hand, but it has some assumptions that are not generally true in the real world. In light of this, many progressives take the theorem as proof that government interference is widely needed to keep the economy on track! These assumptions are (1) perfect competition, (2) no free riders, and (3) people are rational. The short answer is that imperfect competition is not a real problem. Experimental economics teaches us that in the real world markets reach efficient outcomes under a much wider variety of conditions than you would expect from the First Fundamental Theorem. An oligopoly of just four firms will generally lead to an efficient outcome and even a two-firm duopoly has a surprisingly little amount of market power. See the nice entry on experimental economics in the CONCISE ENCYCLOPEDIA OF ECONOMICS, THE for more detail. Sowell does a good job of explaining this. He points out that even if a single firm dominates the market, the threat of rival firm with a small market share will keep them honest.

Sowell does not do a good job with the free rider problem, and it is a much bigger deal. Whenever groups of people have to work together it is possible for some people to shirk on the job or otherwise cheat or exploit the group. If you already know some economics then you will be tempted to object, "that's why we have private property." You can't free rider when it is your own property at stake. That works in some cases but cooperation is still necessary. The two biggies are firms and governments. Firms can only work when people cooperate together for the greater good. If people are honest and work hard the firm will prosper. If people are corrupt, steal from their employer, or shirk on the job the firm will go under. This, in a nutshell, is one of the biggest reasons why the third world is poor. When people's sense of allegiance doesn't extend past their tribe or family then they won't work hard or be honest when they deal with strangers. An internalized work ethic is essential to modern capitalism. Now, some people may object, "that's why we have managers. It is there job to monitor the workers." But that falls to the problem of "who will monitor the monitors?" Mangers have even more power than individual workers and their job performance is not as easily measured. So managers have both the means and opportunity to shirk. Monitoring helps, but it is not a silver bullet. The only time it truly succeeds is with a small business. The owner works as the manager and monitors the workers. The owner has an incentive (there's that word again) to do a good job because the harder his employees work the higher his profits. (Note that this means being a good manager, not a ruthless manager). There is a great review of the literature in The Wisdom of Crowds. Governments are just like really big firms with a lot more power and a lot less competition. Take all the problems we see with firms and amplify them and now you see the problem with government. So its not as simple as "let's put the government in charge." But still, free market incentives do not lead to efficient outcomes. A work ethic does.

The next assumption is that people are rational. Economists have created a mathematical model of rational decision making. This leads to the notorious Homo economicus. The modern discipline of behavioral economics teaches us that real people do not behave like Homo economicus. In some cases this is actually a good thing. People have a sense of fair play and will punish free riders even at a cost to themselves. This minimizes the free rider on an informal peer-to-peer level. (See my review of Nudge: Improving Decisions About Health, Wealth, and Happiness for another example based on the hawk-dove game. It leads to the basis of property rights). In other cases people simply make self-destructive choices. Hyperbolic discounting is the classic case. This means that people can't defer gratification. They are playful grasshoppers instead of hard working ants and pay the price once the winter comes. This is a case where the pursuit of self-interest leads to clearly bad outcomes because people cannot stick to healthy decisions. For most of us that means falling off our diet or skipping the gym, but for others it means drug addiction.

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Further Reading
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Little of this is in Sowell's book. The upshot is that the world is more complicated than neoclassical economics makes it out to be. Nevertheless, I still recommend this book with qualifications. But if you are serious about learning some real economics you will need to deeper. I recommend the following syllabus:


1. Basic Economics
2. The Wisdom of Crowds. Learn about what markets do really well, and about the free rider problem.
3. Filthy Lucre: Economics for People Who Hate Capitalism. As the name implies, this is a left-leaning book. But the economics is well-done. The only thing I disagree with is his analysis of how adverse selection trumps personal responsibility as a blanket justification for the welfare state. For example, Heath cites Robert Moffit's 1992 research showing that welfare does not cause extra out-of-wedlock childbirths. But subsequent scholars disagreed and Moffitt himself changed his opinion when he revisited the topic in 1998. See The Marriage Problem: How Our Culture Has Weakened Families
4. Rationality in Economics: Constructivist and Ecological Forms Ok, I'll admit it. My review has been critical of libertarian economics. That does not mean that you can't be a libertarian, it just means you have to be more sophisticated. The Nobel Prize winning economist Vernon Smith invented experimental economics and has fully digested (or created) these modern developments in economics and makes a libertarian case that Hayek would love. The only downside is that this book has a ponderous and scholarly writing style. But you'll need it if you want your economics to be (A) sophisticated and (B) strongly free market oriented.
5. Games in Economic Development by Bruce Wydick. This is probably my favorite book on economics. It covers many cutting-edge topics and makes game theory accessible. Wydick is a Christian and he gets into social capital as well as spiritual capital.

This is simply an excellent read, taking the complicated subject of economics and making it totally understandable. Mr. Sowell, much like Hayek and Friedman, helps you understand how free markets, capital, supply and demand, and pricing are the true keys to freedom. This is a complete explanation as to how we use our talents, in a free society, to create wealth and provide products and services that others want or need. Beyond simple economics, this book helps you see how we all relate to one another through our economies, good and bad.

In the introduction to A Brief History of Time, Stephen Hawking wrote that society gains in knowledge not when scientists make key advances, but when these advances are widely understood among the public. Just as that book was meant to inform general public about advances in physics and cosmology, Sowell's Basic Economics is meant to inform the general public about economics. There's only one difference: Economics is not rocket science.

The keys to understanding economics don't lie in peer review journals or extensive mathematical prerequisites, they lie in using basic principles that we're all familiar with. Sowell explains economics with everyday concepts that anyone could understand. He has a sharp analytic mind that seemed to cut right through issues and keep me absolutely hooked, and he's a master at avoiding unnecessary jargon. We all deal with money, buy things, work, and follow politics, be it at least from a distance, and Sowell explains economics upon these everyday principles.

What makes this book spectacular, however, is that you never get a sense that Sowell is dumbing down the material or talking down to you. He extensively uses news articles from The Economist and The Wall Street Journal - both those that agree and disagree with his view. The purpose of this is to convey the message that economics is all around you, you just have to look in the right way. If you're new to economics, you'll never quite view the news in the same way, and this is regardless of your political persuasions.

Using little more than news and "common sense", Sowell conceptualizes the economy in a manner that you can grasp immediately. Quite simply, he uses what you're already familiar with and proceeds from there, rather than trying to teach you obscure terms about the macroeconomy. His bottom-up approach to the economy begins with prices, and the in-depth info that they convey. He then connects the price that you pay for an item at the grocery to the price that an employer pays for labor. And in such a fashion, Sowell jumps from one area to another, using intuitive knowledge that you already have and applying it to areas where you never thought to apply it. I was particularly fond of his section on Time and Risk, where he used a discussion about risk and insurance in order to go into speculation and banking.

This book won't give you any advanced abstract theory or a comprehensive view of economics as a science. Basic Economics also lacks the neatness and tidyness of a textbook. Some chapters do seem to wander, and every now and then the book did feel loosely put together. But this is all because Sowell errs on supplying extra examples in order to show the extent of his principles' implications. There were no clear distinctions between neighboring chapters, but this was due to the extent of the connections that Sowell makes in the book. And it's these connections that turn out to one the books largest strengths; after all, in the real world, there are no clear distinctions between related concepts. My largest criticism is that aside from the news articles, Sowell doesn't give any recommended books or avenues for the reader to further pursue.

But Sowell does give you an intuitive intro to economics. While Basic Economics would be considered light reading compared to any textbook, Sowell is really aiming much deeper than a textbook ever could: "For those who are willing to stop and think, basic economics provides some tools for evaluating policies and proposals in terms of their logical implications and empirical consequences. If the book has contributed to that end, then it has succeeded in its mission."

The phrase, "required reading" is thrown around a lot by the zealots of one particular novel or series. The term is purely subjective, and I rarely yield to their fervor when someone says, "everyone needs to read this book." Fiction is a wholly personal experience, the derived enjoyment purely reliant on each readers interpretation of the text. Basic Economics, however, is something entirely different. This book should be required reading for all Americans. I can say unequivocally that I have not read a more illuminating or insightful text in my life. Thomas Sowell is an economics professor at Stanford and an ardent supporter of objective and empirical approaches when studying the economy. Basic Economics is his attempt at stripping down economics to their most basic principles, supply and demand, profits and losses, etc; In doing so, he reveals many of the fallacies surrounding a free market economy, and contrasts a market economy to both socialist and communist systems.

The strength of Basic Economics lies in the way Dr. Sowell takes the inherently complex nature of macroeconomics and breaks it down into digestible, easy to understand parts. Naturally a scholar of Dr. Sowell's caliber is well-versed in the minutia, the formulas, and general complexities of economics, but his straight-forward approach reveals his passion for instilling in the so-called "everyman" a working foundation in the economic structure he/she is a part of every day. Naturally one may think a book about economics to be "boring", but this is far from the truth. He continually relates abstract theories into concrete examples, allowing the reader to relate to real-life scenarios many of which we deal with on a daily basis.

Politics and economics are inevitable dance partners, and Dr. Sowell does an outstanding job of relating policy decisions to their economic ramifications. The politicizing of the economy is a veritable mind field of demagoguery and crafty rhetoric, and the author is very keen to their consequences. His main argument against the regulation of the economy by politicians, is that a politician works to be elected and to remain in power once he or she has attained it. They don't look at the long term ramifications of something like agricultural subsidies, as they only care about catering to their constituency. Never mind that agricultural subsidies cause artificially high food prices, inhibits our ability to trade with countries around the world, and thereby harming the U.S. economy as a whole. But, politicians don't care, because the totality of the economy is not represented by one influential constituency, unlike the farmers.

Agricultural subsides are but one example of how the short sidedness of politicians has a grave impact on the economy at large. Dr. Sowell systematically breaks done other government efforts, and how oftentimes their intended results actually cause converse reactions. In the end Basic Economics equips the typical American with a working knowledge of how our economy functions unlike any other book before it. If everyone read this book, society would be more aware of how seemingly innocuous actions have outstanding reverberations on the entire economy. As we approach a pivotal election, we would be wise to break down the heady rhetoric employed by both sides of the aisle and reach an educated conclusion to their actual intentions and their consequences as a result.

This is a very insightful book. It will be helpful for anyone trying to really understand the way the market works. It thoroughly explains why many things go wrong economically in our country and what the solutions would be if people knew the truth about economics. It's really not hard to read and is very interesting in many places. A definite must for anyone that is thoughtful about economic matters.

Sowell describes fundamental principles in language that anyone who has earned a high school degree can understand. He illustrates the principles with clear and compelling examples. The book contains a wealth of information that explains why good intentions so often lead to bad results in economic matters such as rent controls and "excess profits." The 3 chapters in Part I Prices and Markets are worth the price of the book. There is a priceless sentence on page 544: "...no listing of economic fallacies can be complete, because the fertility of the human imagination is virtually unlimited." Sowell provides further examples of this fertility in his other books, especially "Applied Economics" and "Economic Facts and Fallacies." If I were to make a list of the top 10 books an educated person should cherish, Basic Economics would be on the list.

I recommend this book to everyone. It's easy to read, and difficult to put down. Sowell's explanations are really clear, and helpful. Moreover, the information is presented in a way that is easy to remember, and recall later. The concepts really are "basic," (hence the title) however -despite their rudimentary nature- Sowell shows how "basic economics" is still misunderstood in ubiquitous numbers, and by a myriad of historical smarties, too. If you'd like to learn "basic economics" then I recommend you dodge the textbooks, and buy this item instead. It's jargon free.