The 3 Most Important Lessons in ‘Basic Economics’

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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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  • Russ P.

    This guy should be tutoring Obama in remedial elementary economics.

    • StephenD

      Hell, it should be mandatory for all of Congress to pass his course!

  • jbtrevor

    Like: gotta get this book

    • http://twitter.com/#!/daveswindle DavidSwindle

      You will love it. I certainly did.

  • steve the ale guy

    Mr. Sowell is with out a doubt the best economic thinker out there. He uses rational thought and has a disdain for race baiting and class warfare. In one book he will make more valid points than Obama or Krugman will in their entire slanted careers. Cannot imagine why the MSM ignores him.

    • Maxie

      " Cannot imagine why the MSM ignores him."
      Because he's " :…the best economic thinker out there. He uses rational thought and has a didain for race baiting and class warfare."

  • Ben

    Sowell`s book`s success surprise me ,the communist economy`s former resident. The lack of the understanding of businessman`s psychology and mechanisms of free market actions -all that is called capitalism of the western citizens is wonderful.
    The capitalism`s association with "greed" looks for me as the collectivistic,religious hate of lone greedy "capitalist".I understand Ayn Rend`s description of American society full of capitalism`s hate .I`m happy that Sowell`s book will lower the level of capitalism-hate.

  • paddydonovan

    Love to see Stewart or Olberman try and tangle with this guy. They would'nt have the guts, except maybe Stewart ( who would go into " comic mode " when he's being slaughtered )

  • waltjr

    Thomas Sowell is one of the most underrated intelligent and yet common sense person the Conservative movement has.

    Great article David, very well researched and written.

  • Rifleman

    Sowell reminds me of my dad, and I'll miss both dearly when they are gone

  • Raymond in DC

    I encountered on one technology blog a reference to "evil" corporations among which he named the oil/gas companies, insurance companies, power companies, major banks and mortgage companies, and a few more I don't recall – you know, all those providing the goods and services his modern lifestyle requires. Perhaps it all comes down to envy – resentment that they are more successful than he is, yet he can't do without them.

  • Fred Dawes

    The Rats understand all of this but need us all in the third world for race and political reason.

  • http://www.prisonplanet.com/more-proof-the-department-of-homeland-security-and-tsa-are-actively-destroying-america.html Phyl

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