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Sowell summarizes the flip side of this economic fallacy to make the logical error more apparent:
To say that prices are due to greed is to imply that sellers can set prices by an act of will. If so, no company would ever go bankrupt, since it could simply raise its prices to cover whatever its costs happened to be.
Driving the idea that the “rich” are out to “exploit” the less fortunate is the fact that often the same goods one can buy in a rich suburb are more expensive when sold in the inner cities. Self-proclaimed advocates of the poor will point to this as evidence of malevolent, “predatory” capitalists taking advantage of those who supposedly cannot afford to travel to discount stores. They do not factor into their thinking the fact that any number of causes can affect the price a business charges. Smaller food markets in inner cities both have to order stock in smaller quantities and spend more on security. Thus, of course the prices are going to be higher than at some suburban Costco far away from crime.
1. Profits often go up because a business has figured out a way to make something that’s actually at a lower price than someone else.
Sowell declares that profits are the most misunderstood idea in economics. He cites socialists such as George Bernard Shaw and Karl Marx who regarded profits as “overcharge” and “surplus value.” But profits are only half the story in a price-driven economy. The more important other half in Sowell’s view is losses:
The hope for profits and the threat of losses is what forces a business owner in a capitalist economy to produce at the lowest cost and sell what the customers are most willing to pay for. In the absence of these pressures, those who manage enterprises under socialism have far less incentive to be as efficient as possible under given conditions, much less to keep up with changing conditions and respond to them quickly, as capitalist enterprises must do if they expect to survive.
Contrary to the idea from the previous point that businesses will raise prices to raise their profits, actually the opposite is how businesses succeed. An entrepreneur who can take an expensive product and figure out how to make it for less (a more efficient use of scare resources) will enrich the lives of the poor who now have access to it. Where a few decades ago computers were bulky devices available only to the affluent now exponentially more powerful and less expensive cell phones are commonplace amongst those on welfare and food stamps. And in the process the profits for the technology industry have only grown.
That’s the hidden pattern that Sowell reveals throughout Basic Economics: the more efficiently a society utilizes its scarce resources the more everyone benefits. And humans have yet to find a more efficient system than a free market economy coordinated by prices, profits, and losses.
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