Tuesday, February 17, 2015

Basic Information

One of my recent book acquisitions is the new Fifth Edition of Dr. Thomas Sowell's Basic Economics.  As I have said before, it is probably a good thing I did not read Bastiat and Sowell when I was young or I might have pursued a career as an economist.  I am happier with computers.  What I may do, though, is review parts of Basic Economics here.  A lot of what Dr. Sowell is saying in the early chapters is commonsense.  We know this; we're just not sure how we know it. 

One point is about information.  I'm an information man.  That's what I've worked in almost exclusively for the last forty years, so it interests me.  We need to make decisions about resource allocation and productivity.  Economics endeavors to answer the questions that lead to those decisions in the most efficient manner. 

If we look at goals, what we are trying to achieve, we are likely to follow one decision path.  However, if we look at results and consequences, we will chose a different path.  Big-government, centrally-planned economies are goal-oriented.  A true free market economy looks at results in the real world.  As Sowell say:  Life does not ask us what we want.  It presents us with options.

Economics is really a lot like climate science.  Both have elaborate models.  Neither has a model sufficiently complex to simulate reality, and, if they did, they could not figure out how to work it. 

Sowell begins by talking about the importance of fundamental concepts such as price.  In a free market, prices contain vital information.  They convey the underlying reality of demand and availability.  Apart from outside interference or manipulation, a higher price reflects the relative scarcity of whatever is sought, from prime real estate to gold to first-class seats on a plane. 

But the information value of prices can be distorted by interference from, for example, speculators or government subsidies.  Price distortions may cause disruptions in profit and loss information as well.  Profit and loss are both of value to producers.  As Sowell points out, they are not merely transfers of money but packets of data which tell the producer to make more of something (profit) or less (loss). 

When governments control supply and pricing, shortages of high-demand goods inevitably develop along with excess supplies of things no one wants or needs -- Chevy Volts, for instance.  Sowell cites cases from the old Soviet Union, but it doesn't matter who or where or even how government gets involved, profit and loss become less meaningful, and producers make bad decisions.  We see it now in the realm of "green energy".  Windmills and solar arrays are great for individual home energy production.  They are not cost-effective in distributed system on a mass scale.  They are too costly, in terms of energy, to build, set up, and maintain for the amount energy they produce.  Neither are they efficacious when it comes to moving electricity through large diameter lines over long distances.  Yet because those who build wind and solar electrical generating facilities can get all kinds of tax incentives, breaks, and government-backed low-interest loans -- in other words, tax-payer dollars -- they are not getting accurate feedback from their profit and loss balance sheets.

The government, though, is anti-coal and pro-"renewables"; therefore, it has no problem altering policy and distorting information in order to achieve its goals.  This is true even when those goals are completely spurious. 

Anyway, Sowell talks more about the inability of even "genius" planners to adequately understand all the ramifications and potential consequences of their attempts to control production and get the world to behave according to their models: 
The problem was not that particular planners made particular mistakes in the Soviet Union or in other planned economies.  Whatever the mistakes made by central planners, there are mistakes made in all kinds of economic systems -- capitalist, socialist or whatever.  The more fundamental problem with central planning has been that the task taken on has repeatedly proven to be too much for human beings, in whatever country that task has been taken on. (* pp. 17-18)

Next, Sowell discusses an example of how the free market works in deciding, efficiently and effectively, how much milk is produced and how it is allocated to various uses such as cheese, ice cream or yogurt:
No one is at the top coordinating all of this, mainly because no one would be capable of following the repercussions in all directions.  Such a task has proven too much for central planners in country after country.  (* p. 20)

There is play in the free market.  People speculate and try to game the system, or corner a market.  There are sometimes shortages and price hikes and other errors.  The difference is that a free market is ultimately self-correcting, and self-correcting in a much shorter time frame than centrally planned economies.  By taxes and deficit spending, governments can ignore their mistakes and miscalculations much longer.  After all, they have a goal.  Results can be ignored.

* Quotes from  Basic Economics, Fifth Edition, copyright 2015 by Thomas Sowell, Basic Books.


  1. I love that book. Excellent post, Dwaine.
    When the majority of voters keep voting for politicians that are never held accountable and never pay a price for their failures we all pay the price with our liberties, property, and even our lives.

  2. Good review so far Mush.

    The difference is that a free market is ultimately self-correcting, and self-correcting in a much shorter time frame than centrally planned economies.

    Excellent point. It seems that these days, the politicians never allow the corrections to occur to their voting block. Screws things up for the rest of us.

    Did you happen to read Fred Reed's February 7th post, "Economics Compacted"? It's very good.

  3. Thank you, gentlemen.

    I haven't seen that one of Fred's. I'll check it out.