Basic Economics

I recently read the book, Basic Economics by Thomas Sowell.

This is a great book on economics I think everyone should read. The logic of economics is important to guide understanding of the World around us and basic human behavior.

Here are some concepts he describes (often using entertaining examples):

Prices - Set by Supply and Demand

Prices convey information - they provide insight into the availability of resources or scarcity. Their change can suggest insight into the state of things (maybe there is more now or less).
Price largely determines the allocation of resources
Price does not cause scarcity but a reflection of the scarcity
- Price are used for transactions and also provides incentives for people to utilize those resources
- Price guides producers to make things consumers want
Wages also demonstrate the allocation of resources

Scarcity vs Shortages

Scarcity is when there aren't enough resources.
Shortage is a price phenomenon
When the price is artificially controlled (like with rent controls), demand is high and producers can get away with lower quality items. Price controls bring prices up by decreasing supply: examples provided in the book include New York City rent control and 1970s price control on gasoline

Production and price regulation

When prices are high: Producers are more likely to produce more
When prices are low: Producers are more likely to produce less
Making things artificially cheap often means many will be wasted

Risk and Resources

Prices and fees are often high in low-income districts because it takes more resources and risk compared to higher income areas, not because of greed.

Profits and Losses

Profits give incentives for companies to sell and create and stay ahead
When companies get too big, it becomes hard to manage and be creative

Efficiency in the market

Scarce resources always go the most efficient use
Middle man often exists because they can handle a particular phase more efficiently

Minimum Wage Laws

These laws:
- Benefit those who already have a job
- Harm those who are unemployed and are from outside looking in

Money and Banking

Money is not wealth -> it is a way to transfer wealth or incentives to create wealth
Inflation happens when the government prints too much money to pay back debt or money circulation is too fast, money loses value.
Deflation happens when money printing is outpaced by the growing output, making debts harder to pay off and people less likely to purchase since price keeps going down

International Trade

Absolute advantage: a nation ability to produce Resources more cheaply than others
Comparative advantage: the ability to produce resources given the opportunity cost
International transaction and investment is not a zero-sum game. It creates wealth and opportunities for both countries
- Lower wages in poorer countries are not necessarily exploitation but opportunities for both parties to grow
- Immigration is not the same. Some immigrants might contribute more wealth while some might contribute more crime

Other

Since resources are scarce, fulfilling the needs of one party often means harm the benefits another
We need to distinguish those who are genuinely poor and those who are young and don’t have much yet
Incentives matter: Think about tips at restaurants, rent control, etc
Taxes: Either don't tax goods or resources or tax all equally.
- It distorts the prices of goods and services.
- If doing it for the poor, it would be better to just give them money as it would not distort the prices of the goods and services.

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