Basic Economics by Thomas Sowell

Bart Simpson defining economics on the chalkboard
Not the basic cover

Disclaimer: I know next to nothing about economics, which is why I read a book called ‘Basic Economics’. I wrote down a sliver of what is in the book, mainly what is new and/or interesting to me. A key takeaway, if you don’t even want to skim this sliver, is that Economics, like life, is not a zero sum game.

Chapter 1: What is Economics

See image above.

Scarce: want > available.

A focus on consequences rather than intentions.

Chapter 2: The Role of Prices

Prices are like messengers of news.

Prices act as incentives to allow resources to flow to their most valued uses

Chapter 3: Price Controls


Fixed rent
-Less people to a living space because they can afford the controlled rent -> Higher          demand for housing and increased prices
-Less profitability for builders so they stop building -> Lower supply of housing.
-Homes not under rent control (larger, more expensive ones) stay profitable, so supply      rises and the rich get a discount.

Chapter 4: Overview of Prices

Incremental substitution: Band-aids are essential for health and more important than music in general. But having music is more desirable than a 20 year supply of band-aids.

Principles of economics are obvious, but the implications are not.

Chapter 5: The Rise and Fall of Businesses

The fit survive and more people benefit because of it:
Big groceries destroyed small groceries with the advent of refrigerators and cars.      Consumers got cheaper food and more options.

Chapter 6: The Role of Profits and Losses

Socialism removes the incentive to be efficient…the weak survive and more people suffer because of it. (Not weak in the sense of children and the elderly…but activities that use resources inefficiently)

Not clear about these
Cost = The sum of gains and losses
In capitalism, cost is profit
In socialism, cost is innovation

Advertising can enable economies of scale and actually bring down prices

Diseconomies of scale: A point from which scaling up will make prices rice

Inventory: It is a waste to have large inventory sitting around being unused. That is why infrastructure is essential, knowing you will have x part arrive on y day means less inventory sitting around doing nothing.

Chapter 7: Economics of Big Business

ltd: limited liability: Corporation’s legal liability is limited to its own corporate assets…If your company goes bust, you shouldn’t necessarily go bankrupt. This encourages risk taking.

Giving regular (those who don’t own much stock) shareholders more power leads to bad business because they have less to lose.

Monopoly vs Cartel: Monopoly is when one business has dominant control over an industry. A cartel is a group of businesses that agree to act as a monopoly (keep prices high)

Cartels rarely succeed because cheating the members of the cartel is incentivized (if you secretly lower your prices, you sell more).

Chapter 8: Regulation and Anti-Trust Laws

Commissions set up to regulate industries often end up being controlled by those industries themselves. It makes sense so have power over the thing that has power over you.

It is hard to define competitors. 1. Air and train travel compete for business even though they are not obviously in the same industry. 2. Golf clubs and strip clubs…

Predatory pricing (the act of reducing your prices so much that your competitors go out of business and then you raise the price to higher than previous levels) almost never works. It is extremely risky and even if your competitors go out of business, your business is far weaker and therefore susceptible to new competitors or other risks that would otherwise not be an issue.

Chapter 9: Market and Non-Market Economies

Capitalism is basically consumerism…there are incentives to please the customer See Amazon’s guiding philosophy to know this is true

Chapter 10: Productivity and Pay

Income differences are more due to age rather than class, and this is not reflected in most news stories. Different ethnic groups are often of different age spreads.

Massive incomes that put people in the .1% in a given year are often due to temporary spikes, like getting an inheritance or selling a house.

Chapter 11: Minimum Wage Laws

Labor, like any other resource, will face a surplus with minimum wage laws (price up -> demand down).

Older people benefit from these laws: when you have to pay extra you might as well get someone more experienced. Makes it harder for the young to get their foot in the door.

42% of minimum wage workers are dependents; this makes the living wage argument less convincing.

Chapter 12: Special Problems in Labor Markets

Labor is more complicated than inanimate resources. Consider conditions, security, collective bargaining, exploitation.

Mandatory benefits can lead to a preference for overtime rather than hiring more employees.

Multinational companies that hire low wage workers in third world companies are often demonized for treating their workers like shit. But they are better than the alternative, working for local companies that most of the time pay far less, or no job at all.

Exploitation: Difference between wealth an individual creates and is paid. Not always intuitive, ex: some basketball player generates 50 million in profit for Nike, but his contract ‘only’ pays him 30. He is exploited for 20 million.

Chapter 13: Investments

Investing: Sacrificing real things today in order to have more real things in the future.

Financial institutions, and often the entire ethnic group that tend to run them, are often viewed negatively by the public. On the surface it can seem like they are just hoarding money. The truth is, financial institutions are, generally, economic lubricant that take on risk.

Speculator: Agrees to buy something at a fixed rate later. ex. Buy peas at $2/lb and sell at market rate after the worldwide harvest determines price. Assumes risk from the farmer.

Inventory is a substitute for knowledge. ex. No food would need to be thrown out if it was known how much everyone would eat.

Annuity: ex. 70 year old man buys annuity for 100k and receives $700 a month for life.

Chapter 14: Stocks, Bonds, and Insurance

Bonds are legal commitments to pay fixed amounts of $ on a fixed date.

Bond prices and interest rates are inversely correlated. If you can get a good rate of return, bond prices have to be lowered to incentivize people to buy them over stocks.

Moral Hazard: people do riskier things knowing they are insured.

Government insurance tends to be worst than private since there is less incentive. ex: If State Farm shows up first to the scene of a hurricane, the news crews will be all over them and they will acquire more customers. If FEMA shows up first they will get positive press, but monetarily nothing significant will occur.

Chapter 15: Special Problems of Time and Risk

Time is $: House builders keep paying interest on their loans while waiting for government approval. This extra cost is passed on to home buyers.

Uncertainty leads to a decrease in investing…who knows if you will get positive returns.

People have foresight. ex. When South Africa’s government decided to redistribute land from white folks to black folks, the landowners heavily neglected their land before they were forced to hand it over. The new black owners often faced more financial difficulties than before

Chapter 16: National Output

Fallacy of composition: what applies to a part applies automatically to the whole. ex: Massive unemployment in the coal industry does not mean mass unemployment as a whole.

Gross Domestic Product (GDP): Sum of everything produced within a nation’s borders.
Gross National Product (GNP): Sum of everything produced by a country’s people, regardless of where they are.

Quality of output is not usually reflected in statistic. ex. a 2018 car is WAY better than a 1998 car bought for the same amount of $ then. This is true for most things we buy.

Chapter 17: Money and the Banking System

Gresham’s Law: Bad $ drives good $ out of circulation. ex. Cigarettes used as currency in prison: the good ones are smoked while the bad ones stay currency.

Inflation is like a bad alternative to taxes: just print more money. This affects the rich less since asset prices increase with inflation.

Doubling the $ supply will probably more than double prices as people spend as much as they can, losing confidence in the currency.

Fractional reserve banking: Holding a fraction of the reserves needed to cover deposits. Economic Lubricant!

Federal Reserve: Tells banks what % can be kept fractional and sets the interest rate on its loans to banks.

Chapter 18: Government Functions

What government can (not necessarily does) do well:
-Charge external costs. ex. Using coal will lead to external parties paying when climate change kicks in. The government can charge the responsible party for this in the present.
-Mandate external benefits. ex. Mud flaps on cars prevent shit from flying onto other cars.
-Indivisibilites: Military protection

Chapter 19: Government Finance

Tax revenues and bond sales are the largest source of $ for the US government.

Balanced budget: All current spending covered by taxes
Budget surplus: Tax Revenue  > Spending
Operating at a deficit: Tax revenue + bond sales cover spending
National Debt: Bonds to pay back

Lower tax rates can lead to increased tax revenues as people invest more.

Regressive tax: Taxes that collect a higher % from the poor than the rich. ex: Sales tax as opposed to property tax.

In 2011, 46% of US national debt was owned by foreigners.

Chapter 20: Special Problems in the National Economy

Political choices are offered less often and are ‘package deals’. ex. I can buy a blue bike with a red bell with glowing rims. Meanwhile I can vote for guy a, b, or c, each of whom is a package of shit.

Chapter 21: International Trade

Import/Export mismatches are not inherently + or – . ex. During the Great Depression, the US had an export surplus.

Benefits of Int. trade
-Absolute Advantage: ex. Coffee needs a particular climate, and it is far cheaper to grow it there than to generate a similar climate somewhere else.
-Comparative Advantage: ex. A doctor who used to work in fast food might make a better sub more quickly then some teenager at Subway, but it is a far better use of his time to spend a minuscule amount of $ he earned practicing medicine to have the teenager make his sub.

Chapter 22: International Transfers of Wealth

Remittances: $ sent back to home country.

Rich countries tend to invest in rich countries, since they are less likely to lose their $ than poor countries.

The US has been a debtor nation since the beginning, excluding WW1.

Foreign aid is good for physical capital, but human capital is far more important. Europe rebuilt itself very quickly after the world wars. You can’t just throw money at third world countries to fix problems.

Chapter 23: International Disparities in Wealth

Too many factors to pinpoint the exact Whys.

An example of a clearly pro-wealth feature: Geography conducive to connectedness (deep waterways, coasts)

Chapter 24: Market Myths

The ‘market’ is not a thing, it is people engaging in transactions.

Economic myths often survive because economics find them too silly to acknowledge.

Brands are a measure of security: The brand has to be responsible with the product, if their product shits the bed than people won’t buy from them.

General wealth saves lives: Better buildings stay standing after earthquakes. A better transportation infrastructure means ambulances get to the hospital faster.

Chapter 25: History of Economics

Pass…The author doesn’t go too deep here. Rabbit hole for another time.