Basic Economics

So I read a bit on my Fla vacation of a week or so ago.

First, I finished Tom Sowell's Basic Economics.

It was quite good. I think I shall attempt to lend it to my more economically illiterate friends.

The basic tack he takes is to describe the workings of the economy in layman's terms and using approachable examples. He takes particular time in each chapter walking through common economic misperceptions explaining why they seem to make sense but then showing how when you fully think through their implications they are wrong. Indeed, he devotes an entire chapter to just these fallacies and has also published an entire separate book on the subject.

The main point that he repeatedly returns to is that to evaluate a policy it is important to not just look at its intended effects but also the incentives it will create and, if possible, the results in previous instances where the policy was attempted. (And history being as long and varied as it is, it's almost always possible. Despite popular belief to the contrary, there is precious little new under the sun, particularly when it comes to governmental action.)

The idea being that just because you have noble intentions and your policy seems straightforwardly directed to meeting them, it may well be creating incentives that will work in just the opposite direction. An example he uses is rent control (which is a subset of price controls more generally). It sounds like a great and simple idea: housing is too expensive, make it cheaper. That way poor people will be able to afford it.

But what it does, in fact, is make it less attractive to build and maintain housing. Thus, over time, you get less housing and the housing you have falls into worse and worse states. Often very expensive housing is not covered under rent-control laws (the thinking being why try to keep costs down on mansions or whatever) this, of course, makes it more attractive to build luxury housing than affordable housing and so you get more and more luxury housing and less and less affordable housing, exactly the opposite of what you intended.

Prices, in general, are very important. They represent easily understandable information about reality. This is why attempts to change them without changing the underlying reality always cause unintended problems. To go back to the housing situation, high rents in an area are telling you that lots of people want to live in an area that does not have enough housing to fit them all. Artificially constraining the price of housing does not correct this imbalance: instead it exacerbates it by causing more people to try to live there because the price seems low, thus you end up with a housing shortage. Left alone, the high rents would be attractive to builders who would come in and build more housing, the greater housing would mean that there would be fewer people-per-place to bid it up and voila, cheaper housing. Now this might cause other issues that you are trying to avoid, like turning your sleepy town into Manhattan but life is all about trade offs.

In fact, if I could sum up the importance of economic thinking in a nutshell that would be it: that there are really no 'solutions.' Because we live in a reality of finite resources, there is only an endless set of trade offs.

At any rate. This book report got kind of off topic so I'll cut it here. Short version: well-written, useful book. I give it two snaps up in a circle.