Saturday, January 16, 2010

Personal Reading Notes: Basic Economics by Thomas Sowell - Chapters 1 and 2

When I last went to the library to return books that were due, I was returning Sowell's Economic Facts and Fallacies.  I briefly ran through the stacks to see what else I might be able to pick up and I ended up grabbing the second edition of Basic Economics 3rd Ed: A Common Sense Guide to the Economy by Thomas Sowell.
Chapter 1

Sowell begins by defining the term "Economics".  Let this be an example to anyone who seeks to write non-fiction.  It is important to agree on fundamental premises before you begin any kind of discussion of your subject.   Sowell attributes his definition to Lionel Robbins:  "Economics is the study of the use of scarce resources which have alternative uses."  Sowell expands on scarcity and alternate uses and closes Chapter 1 by noting that there are basic principles which objectively apply to all economic systems (as apart from subjective opinions) and sets the discussion of these fundamental principles as the scope of his book.  This distinction is interesting to me because it is the essential which sets knowledge apart from hair-brained ideas.

Chapter 2

What follows in Part 1 is a definition for prices and for costs and a discussion of the role that prices play in the allocation of resources in an economy.  Below are my notes on key points that Sowell makes:
  • Fundamental premise: "Prices play a crucial role in determining how much of each resource gets used where."
  • Prices do not cause scarcity: " is not prices that cause [scarcity], which would exist under whatever other economic or social arrangements might be used instead of prices"
  • Price fluctutations guide consumers and producers alike.
    • consumers may see lower prices if a resource becomes abundant; higher, if scarce.
    • producers can use prices to determine whether something has been overproduced or underproduced relative to demand
    • A free market system is a profit-and-loss system.
      • Sowell stresses the loss part because people are often blindly focused on the profit part
      • losses tell manufacturers what to stop producing without the need to know why consumers prefer one thing over another
  • prices and costs
    • Prices
      • prices can help deal with A vs. B decisions 
      • they can also deal with incremental decisions:  milk can be used to produce cheese, ice cream, and yogurt.  how much of each?
      • by buying more cheese, the price of cheese increases and cheese producers will bid more milk.  prices convey this information.
      • In a price-coordinated economy, "resources tend to flow to their most valued uses"
      • "Prices coordinate the use of resources, so that only the amount is used for one thing which is equal in value to what it is worth to others in other uses.  That way, a price-coordinated economy does not flood people with cheese to the point where they are sick of it, while others are crying out in vain for more yogurt or ice cream."
      • "The quantity supplied varies directly with the price, just as the quantity demanded varies inversely with the price."
        • People demand more at a lower price and less at a higher price.
    • Costs
      • "From the standpoint of society as a whole, the "cost" of anything is the value that it has in alternative uses"  (regardless of whatever particular economic system is used)
  • "India remained committed to a government-controlled economy for many years after achieving independence in 1947.  However, in the 1990s, India 'jettisoned four decades of economic isolation and planning, and freed the country's entrepreneurs for the first time '... There followed a new groth rate of 6 percent a year making it 'one of the world's fastest-growing big economies".  (note to self:  India has long been a model that liberals use for poverty and income disparity.  As such, it has been a target of mine for deeper exploration on the root causes of that poverty.)
  • "Knowledge is one of the most scarce of all resources and a pricing system economizes on its use by forcing those with the most knowledge of their own particular situation to make bids for goods and resources based on that knowledge, rather than on their ability to influence other people"
    • Price fluctuations are a way of letting a little knowledge go a long way.
  • On Greed and pricing: "high prices are often blamed on 'greed'... To treat prices as resulting from greed implies that sellers can set prices where they wish, that prices are not determined by supply and demand.  ...the competition of numerous buyers and numerous sellers results in prices that leave each individual buyer and seller with very little leeway. Any deal depends on both parties agreeing to the same terms.  Anyone who doesn't offer as good a deal as a competitor is likely to find nobody willing to make a deal at all."
  • On the benefits of permitting Price spikes during a crisis:  "When a crop failure in a given region creates a sudden increase in demand for imports of food into that region, food suppliers elsewhere rush to be the first to get there in order to capitalize on the high prices that will prevail until more supplies arrive...  What this means from the standpoint of the hungry people in that region is that food is being rushed to them at maximum speed... probably much faster than if the same food were being transported to them by salaried government employees"