The Beginning of Economic Wisdom

The Beginning of Economic Wisdom

Mini Teaser: Two primers on economics reveal a lingering philosophical divide in the intellectual imagination of our time.

by Author(s): Michael Novak

Perhaps the most bracing feature of Basic Economics is that Sowell starts out, on page one, with that most central of adulthood's themes: constraints, limits, tough choices, losses as well as gains. He defines economics in the classic words of Lionel Robbins: "Economics is the study of the use of scarce resources which have alternative uses." We are limited in our powers, our knowledge and in the time we have to learn, consider, act and follow through. On all sides we experience constraints. But the most significant limit to our desires is scarcity: "People want more than there is." Because there are alternative uses of resources, we must make choices; we cannot have all alternatives, we must deprive ourselves of some good things in order to gain others. Journalists in the New York Times, Sowell wryly observes, are continually shocked that middle-class Americans--some even with swimming pools of their own--are "Just Getting By", are "Constrained by Credit Card Debts", and still face "Dreams Deferred and Plans Unmet." It is too bad that middle-class Americans don't just get manna from heaven. It is sad that so many of them find the constraints of adulthood a bitter disappointment.

From chapter to chapter (25 in all), Sowell returns often to his fundamental theme: There is scarcity and there are alternative uses for resources--so deal with it. He depicts both intelligent and foolish ways to deal with choices among alternatives, specializing in showing that the courses of action most often proposed by influential media outlets are among the least intelligent ones. (It would be a useful exercise for some enterprising graduate student to abstract from this book the hundred or so key fallacies that Sowell unmasks, developing a kind of anti-catechism of utopian economics.)

The seven parts of Sowell's book each conclude with an overview chapter, so in a sense Sowell himself makes clarity easy. To convey the sweep of his thought, let me list his seven headings: Prices; Industry and Commerce; Work and Pay; Time and Risk; the National Economy; the International Economy; and Popular Economic Fallacies. That last chapter takes up "non-economic" values, "purchasing power" and "business and labor."

Because of recent brouhahas concerning globalization, Sowell's chapters on the international economy bear special virtue. The fallacy with which Sowell opens these chapters comes from, yes, the economic reporting of the New York Times, concerning NAFTA in 1993: "Abundant evidence is emerging that jobs are shifting across borders too rapidly to declare the United States a job winner or a job loser from the trade agreement." Here the Times embraces two fallacies. First, there is no fixed sum of jobs, some of them "shifting" one way or the other. Second, trade is not a zero-sum game in which one country wins and the other loses. A country engages in trade because it wants to gain; another country agrees to trade with the first because it, too, expects to gain. When both countries become more prosperous because of trade, both gain jobs. In the six years following 1993, for example, the U.S. auto industry, which Congressman David Bonior of Michigan had predicted would "vanish" under this agreement, actually gained 100,000 jobs. Mexico probably gained even more.

Sowell also presents eloquent discussions of the differences among "comparative advantage" and "absolute advantage", and of "economies of scale." Since time and resources are finite for everyone, concentration of sound effort is a gain. It is an absolute advantage when, because of climate, geography or the mixture of skills in its population, one country may be able to produce cheaply something that another cannot produce nearly so cheaply, or even at all. Bananas can be grown in North America, but only in greenhouses and at prohibitive expense; they can be bought at a fraction of that cost from the Caribbean.

Yet even when one country can produce practically everything more cheaply than another, it may still find it advantageous to concentrate on those products in which its advantages are significantly greater. For example, even if the United States can produce both shoes and shirts more cheaply than Canada, it may find it more efficient to concentrate on producing the one in which it has a huge advantage, and buying from its partner the one in which it has a lesser advantage. In that way, both countries concentrate efforts to the maximum advantage of each.

Economies of scale lead nations to trade, too, inasmuch as some countries are so small that their internal market cannot support production that requires large expenditures of capital or labor, unless they find partners whose needs complement their own. Thus, South Korea and Taiwan could not manufacture many things they do without access to far larger markets outside their borders. The Dutch retailer Royal Ahold has more than two-thirds of its sales outside the Netherlands, and the Swedish retailer Hennes and Mauritz has more than four-fifths of its sales outside Sweden. The U.S. retailer Wal-Mart exports much more than either Royal Ahold or Hennes and Mauritz, but still four-fifths of its sales are in the huge U.S. market, which affords it ample economies of scale. U.S. auto companies can manufacture and export automobiles to Australia far cheaper than Australian companies facing a far smaller market could manufacture at that price. Since all resources, including labor, are scarce, no country can make everything. Concentration of effort upon selected alternative uses of resources brings higher rewards than diffusion of effort. International economics is the science of predicting the costs and benefits of such alternative uses, given the constraints of scarcity and finitude.

The fallacy of "exporting high-paying jobs overseas" also remains a hardy perennial. How can that be? Largely because excitable commentators forget the realities of scarcity, finitude and the need for concentration--and the advantages to be gleaned from focusing on competitive advantages. For more than two centuries now, higher-wage countries (Great Britain in the 19th century, the United States in the 20th) have been exporting to lower-wage countries while continuing to gain in national wealth, and also in numbers of jobs and higher prosperity. The comparative American talent in the field of computers, which Americans pioneered, is invention and innovation, especially in software. Concentrating where Americans are strongest and rewards are greatest, Americans could easily afford to allow other peoples overseas to manufacture much of the hardware for the industry. This is not to say that adaptation within and between industries is always smooth, easy and without cost. Economics, in whose very definition scarcity is a dominating landmark, is not an especially rosy discipline.

Sowell is unusually good, if perhaps too succinct, on "International Transfers of Wealth", especially in showing us how to interpret scary terms such as "debtor nation." In any given year, Japanese Toyotas or Hondas may be the best-selling car in the United States, while no U.S. car has ever been the best-seller (or even remotely close) in Japan. So, true enough, the Japanese usually have a huge trade surplus with the United States. As an accounting mechanism, registering only the physical things that move across boundaries, the United States is a "debtor nation." But the U.S. economy produces more services than goods, including most of the software that runs the computers in Japan and elsewhere. These exports often do not show up in the accounting. Meanwhile, the Japanese and others build factories in the United States with their surpluses. (They do this, among other reasons, so as not to have to pay for shipping their cars across the ocean.) In addition, the comparative advantage of our political and civil institutions, and the inventiveness of our economy, make investment in the United States more secure and rewarding than in most other places.

True, foreign investment in the United States (the largest share comes from the British, by the way, not the Japanese) is accounted for as a "debt." But distinguish, Sowell keeps insisting, between words and things. As an accounting convention, Japan profits from selling to us, and Japanese investment of these profits over here may be referred to as "debts." But real salaries are then being paid here to Americans who are producing more things with these funds than we otherwise could. The United States is not getting poorer. On the contrary: between 1980 and 1990, the U.S. Gross National Product (GNP) rose from $2.7 trillion to $5.6 trillion. By 2001, it had nearly doubled again, to $10.1 trillion. In the world of real effects, then, such phenomena resemble what happens when we deposit money in our account (and the bank goes deeper into "debt" to us), not what happens when we charge things on a credit card.

Moreover, in this spurious sense, the United States has been a "debtor" nation for most of its history, and it didn't hurt. During the 19th century, foreigners put up much of the money for the Baltimore & Ohio, New York Central, Illinois Central and other railroads, and otherwise helped to turn this predominantly agricultural nation into a manufacturing colossus.

Sowell closes with some highly illuminating pages on remittances to foreign countries from immigrants working here, on foreign aid and on the myth of economic imperialism. His hardheadedness in facing up to scarcity, constraints and less-than perfect choices has a refreshing adult quality. Sowell not only covers much ground, he keeps his feet on it.

Essay Types: Book Review