Truth Really Matters

“Economics is the study of the use of scarce resources which have alternative uses.”

How simple and yet elegant, is this definition of economics by the British economist, Lionel Robbins, cited by Thomas Sowell in his book, Challakere Basic Economics: A Common Sense Guide to the Economy. Every American should read this book – there is no math, it’s all common sense with a plethora of real-life examples. Sowell starts out by noting that the Garden of Eden was a system for producing and distributing goods and services, but it was not an economy, because there was no scarcity. No scarcity implies no need to economize.

Sowell time and again reveals economic principles to be rooted in common sense, tied to the very nature of man and his earthly environment; in short they must flow from biblical principles, I would say, but I see no evidence that Sowell is a Bible-believing Christian himself. How tragic to be so in touch with reality and yet miss the Source of reality!

Sowell laments, that unfortunately, little of the principles explored by the profession of economics have penetrated the citizenry, leaving politicians free to implement outrageous policies people would never tolerate if they simply had been taught some basic economics in school. Or within the family. Dad, mom, since the schools don’t teach this subject, make sure your high schooler reads through Sowell’s book. Discuss his examples at the dinner table. (Rather than watch TV or play with your phones during supper.)

In the 1960s many African colonies achieved independence. The presidents of Ghana and the Ivory Coast famously bet on which country would be more prosperous in the coming years. Ghana had the initial advantage in standard of living and in natural resources, but the Ivory Coast president was committed to a free market while Ghana had a socialist, government-run economic mindset. By 1982 the Ivory Coast had pulled so far ahead that its poorest 20 percent had a higher per capita income than the majority of the people in Ghana.

In 1978, due to Mao’s policies, less than 10 percent of China’s agricultural products was sold in open markets; instead, farms delivered to the government which then oversaw distribution. By 1990, 80 percent was sold directly in open markets. This resulted in far more food for the cities and a 50 percent increase in farmers’ incomes. After Mao’s death in 1976, the growth rate achieved an astonishing 9 percent per year from 1978 to 1995. This spasm of free-market-ism occurred because the Chinese Community Party lost control of the people. That didn’t last and so China, under CCP oppression, is once again in deep trouble.

Why do free markets work so much better? Knowledge, too, is a scarce resource. A free market system creates prices by forcing those with the most knowledge of their own needs and priorities (customers) to interact efficiently with those who produce the goods and services. A centralized (socialist) system depends on the abilities of both sellers and buyers to influence people on planning commissions, along with politicians and bureaucrats. It is impossible for ‘planners,’ no matter how well-intentioned, to wisely fix millions of prices they have no day-to-day knowledge about. Yet mom knows how much money she has in her purse, and how much she needs to acquire in milk, eggs, baby formula, diapers, and gasoline. The producers of those items are painstakingly aware of how much people are willing to pay. Furthermore, prices, like every other variable in a national economy, depend on a myriad of factors, including weather, local geography, spoilage, competition, innovation, perceived quality, etc.

A national economy is like a gigantic analog computer. Particular people are experts about their needs and their ability to produce; aggregated, the knowledge and skills across the free economy constitute genius.

Sowell cites a New York Times article on the woes of middle-class Americans. It seems that the desires of middle-class Americans exceed what they can comfortably afford. What a shock! That’s what ‘scarce’ means – everybody wants more, regardless of how much they already have. Yet it is obvious that the typical, average American lifestyle would be considered unbelievably rich by most people around the world.

In fact, consider what riches are available to a typical westerner, that were not available at any price to a king or a tycoon a century or two ago: air conditioning, televisions, computers, a world of entertainment at your fingertips, painless dentistry, safe anesthesia, rapid transportation . . . we are ridiculously wealthy compared to almost all of human history.

The Scriptural principles against greed are evident. Hebrews 13:5 – “Let your conversation be without covetousness; and be content with such things as ye have: for he hath said, I will never leave thee, nor forsake thee.” Also, in the sermon on the mount, check out Matthew 6:25-34 regarding all the stuff of daily life. Jesus cautions, “But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you.” Yes, we can and should enjoy the fruits of our labor – Eccl. 5:18. But the priorities of life, according to the Bible, go far beyond the mere stuff we buy.

Thomas Sowell is in his 90s now; I imagine he must be incredibly frustrated at the continued policy nonsense perpetrated on Americans, especially with regard to a misunderstanding of pricing. The historical examples we can learn from abound. Price controls have often been used by governments to keep food prices down, leading – ironically and tragically – to hunger and even starvation, in 17th century Italy, 18th century India, France after its Revolution, Russia after the Bolshevik revolution, and in several African countries after independence in the 1960s. Where once these African nations were food exporters, government pricing policies created desperate shortages.

Russia is blessed with much fertile soil – called “Black Earth country” – but city-dwellers suffered hunger while farmers were impoverished. What was the problem? A lack of a market to connect the farmers to the cities. Russian officials forbade food shipments across local boundary lines to insure low prices and political support in their locale. They protected their political careers while the nation as a whole starved.

Sowell: “Too often a false contrast is made between the impersonal marketplace and the supposedly compassionate policies of government programs . . . The difference is that one system involves each individual making choices for himself or herself, while the other system involves a small number of people making choices for millions of others.” It is impossible for central planners to choose as wisely for individuals as it is for the people themselves. Freedom = free markets.

Sowell repeatedly emphasizes that all resources are scarce because there are always more people who want a thing than there are things, whether beach houses, sports cars, luxury homes, steaks, land, or designer jeans. We compete indirectly with others by prioritizing the limits of our own checkbook, but this is “very different from seeing your desires for government benefits thwarted directly by the rival claims of some other group.” We self-ration by prices and what we have in the bank. Within those constraints we make decisions based on our own preferences, which cannot possibly be known to a bureaucrat in another region. If control is taken away from us by the force of government power, the consequences are economically and psychologically depressing.

Sowell cites some examples: When medical care is free or well-subsidized, people will go to the doctor for minor ailments. When farmers receive plentiful water from government-subsidized irrigation projects, they will grow crops requiring large amounts of water that they would never grow if they had to pay the full costs of the water. In either case, society pays the full costs.

Similarly, apartments occupied cheaply by rent control means that others have trouble finding housing, even though they would be willing to pay a higher price for rent under a free market. Mandated cheap rents inhibit investors and builders from constructing new apartment buildings. Apartments deteriorate when landlords cannot afford maintenance for a fixed rent price.

Another way to look at it is that price controls result in rationing. If prices are suppressed, producers have less incentive to produce more. The products that are available at the artificially low price may go to whomever shows up at the store first when a shipment arrives. In some countries political favoritism or bribery may determine who gets access. Long lines form on rumors of a pending shipment. You can find a lot of historical video footage of stores in the Soviet Union with bare shelves and ridiculously long lines outside.

Real-life consequences matter more than intentions and economic policies must be considered in both the short and the long terms. I call this the reality principle. Rent controls on apartments may produce serious shortages after a few years, but price controls on gasoline or eggs may produce shortages within days. Sowell: “Life does not ask us what we want. It presents us with options. Economics is one of the ways of trying to make the most of those options.” Sowell also likes to point out that in political and economic life there are no solutions – only tradeoffs. Such tradeoffs and options are best left in the hands of the people closest to the problems.

Mikhail Gorbachev was the last President of the Soviet Union. In a private conversation he asked British Prime Minister Margaret Thatcher, “How do you see to it that people get food?” She responded that she didn’t. Prices saw to it. The British people ate far better than the Soviet people did, even though the Brits had been importing much of their food for over a century. People chose to pay import prices to eat what they wanted.

Sowell asks us to imagine how massive a bureaucracy would be to insure the city of London got all the food in all the varieties people consume every day. But you don’t need the bureaucracy when prices operate within a free market. All those potential bureaucrats can be employed elsewhere, generating products, services, and income that enables the nation to import what it needs from lands where the soil is more fertile and there is more rain and sunshine.

Thatcher wrote in her memoirs that Gorbachev “had little understanding of economics,” despite his position as the leader of the largest nation on earth. But this is also true of most politicians and leaders in America and the West. Margaret Thatcher grew up in a family that ran a small shop. She experienced microeconomics and the reality principle watching her father run the shop.

Two Soviet economists assessed the results of a central-planning decision to increase the price of moleskins. Hunters responded by capturing more and profiting quickly. Industry was not able to use the increase, though, so most of the moleskins were left rotting in warehouses. The Ministry of Light Industry began to request the price be lowered, but the planners were too busy to decide quickly. After all, they had to keep track of 24 million other prices.

Sowell observes that though a government agency would be overwhelmed with tracking 24 million prices, a country with a couple of hundred million people can do so because only a few individuals would find each particular price relevant, and can adjust quickly to changing conditions. The Soviet Union had immense resources, educated and trained people, but it lacked an economic system that could make efficient use of its resources.

It is common sense that setting prices produces effects that provoke a re-think on those prices. If a price is too low, a free market causes more to be demanded and less to be supplied. A price set too high causes more to be supplied than demanded (like moleskins).

During the Great Depression of the 1930s the U.S. government fixed agricultural prices at high levels to support farmers. This resulted in vast amounts of food destroyed, all the while malnutrition was a serious problem and hunger marches broke out in cities. For example, in 1933 the feds bought 6 million hogs and destroyed them. Huge quantities of farm produce were plowed under to maintain high prices. Milk was flushed down sewers. And American children suffered diseases from malnutrition.

India has often suffered from the “misallocation of scarce resources which have alternative uses.” In 2002 the Indian government spent more on the storage of surplus produce than on rural development, irrigation, and flood control combined. Their public stock of food grains grew to a whopping 80 million tonnes, while millions of Indians did not have enough to eat.

The original argument for American price-support programs was to save family farms, but most of the taxpayer’s money went to big agricultural corporations, up to millions of dollars each, while the average ‘family farm’ received a few hundred bucks. Most of the handouts from the 2002 farm bill (a bipartisan effort) went to the wealthiest 10 percent of farmers, including David Rockefeller, Ted Turner, and a dozen Fortune 500 companies.

Wars can be won or lost by defying the reality of human nature. In the 16th century Spain blockaded Antwerp. High food prices provoked the bold to smuggle food into the city, enabling the inhabitants to hold out. The Antwerp authorities decided to fix food prices lower, with severe penalties for price gouging. The smugglers couldn’t profit at the new prices, so they quit taking the risk. Result? Food shortages and the surrender of Antwerp.

Sowell discusses how mental resources also suffer scarcity. When a society allows only a ruling elite, a particular political party, or a hereditary nobility to make decisions, it despises and discards the knowledge and talents of most of the people. In contrast, a farm boy once walked eight miles to Detroit to look for a job – he eventually created the Ford Motor Company and changed the world with mass-produced automobiles. And we all know the story of two young bicycle mechanics who created the aviation industry. “A society which can tap all kinds of talents from all segments of its population has obvious advantages over societies in which only the talents of a preselected few are allowed to determine its destiny.” Furthermore, “economies under the thumbs of kings or commissars have seldom matched the track record of economies based on competition and prices.”

A recurrent biblical theme is expressed by Solomon in Eccl. 5:18: “Behold that which I have seen: it is good and comely for one to eat and to drink, and to enjoy the good of all his labor that he taketh under the sun all the days of his life, which God giveth him: for it is his portion.” All that we find “under the sun” is the gift of God, and God says that it is proper for us to enjoy the fruits of our labor – not to have them confiscated arbitrarily by the powerful. And yet in the same chapter, Solomon offers perspective that goes beyond simple economics, in 5:10-12 . . . Don’t love ‘the stuff’ too much; wealth acquisition for its own sake is vanity. Too much wealth will rob your sleep.

1 Timothy 6:6-10 summarizes the big picture on greed-motivated wealth . . . “But godliness with contentment is great gain. For we brought nothing into this world, and it is certain we can carry nothing out. And having food and raiment let us be therewith content. But they that will be rich fall into temptation and a snare, and into many foolish and hurtful lusts, which drown men in destruction and perdition. For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.”

Reality bit Lenin and the Bolsheviks. Just before the Revolution, Lenin declared that in running any enterprise, including Russia, administration would be easy, using “extraordinarily simple operations” that “any literate person can perform,” “supervising and recording, knowledge of the four rules of arithmetic, and issuing appropriate receipts.” But over the next few years his economy cratered, threatening “ruin, starvation, and devastation” with frequent peasant uprisings.

Lenin had to turn to the “old class” of capitalist business men for common-sense administration, and open up markets to revive the economy. Fast forward a hundred years – a 2013 New York Times story reported how, “with the Russian economy languishing, President Vladimir V. Putin has devised a plan for turning things around: offer amnesty to some of the imprisoned business people.”

Profits are despised by socialists. Karl Marx called profit a “surplus value.” Nehru, India’s first Prime Minister, said it’s a dirty word. Nevertheless, after more than a century of socialist experiments (still ongoing), it is painfully clear that people in socialist countries have a harder time affording the products they desire than people in capitalist countries.

Sowell observes that “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.” This is such an obvious truth – so in sync with the reality of the human nature that God gave us – that it is remarkable that anyone debates it. Leonid Brezhnev, the Soviet premier in the 1970s, admitted that his nation’s enterprise managers avoided innovation “as the devil shies away from incense.” But, Sowell asks, why should a communist manager stick his neck out with new methods or products when he has no incentive? And if he fails, he is likely to lose his job or worse. Stalin often equated failure with sabotage; saboteurs were typically executed.

The gross inefficiencies of socialism are usually vaporized in capitalism by profits and losses. “The fact that most goods are more widely affordable in a capitalist economy implies that profit is less costly than inefficiency.” In free markets, the business owner is an unmonitored monitor . . . he is closer to the operations of the business and is highly motivated to succeed, far beyond whatever a socialist bureaucrat or commissar could be. The owner will work extraordinary hours to make his business work. Socialist bureaucrats go home at 5 pm without a care for how the business day went.

For critics, profits are often associated with greed. Sowell notes that most of the great fortunes in American history resulted from someone figuring out how to reduce costs so they could charge lower prices, gaining a mass market. Examples include Henry Ford with cars, Rockefeller with oil, Carnegie with steel, and retail giants like Sears, Penney, and Walton.

Competitive pricing is vital to motivate innovation. India employed tough anti-monopoly laws, ostensibly to foster competition, but this prevented successful industrialists from expanding their enterprises past arbitrary limits. Accordingly, these businesses expanded operations outside India. The laws also tended to protect India’s businesses from both domestic and international competition. This reduced incentives for efficiency. India’s economy atrophied until they repealed the laws in 1991.

Later in the 1990s, when Tata Steel faced losses due to increased shipping prices, they responded by closing inefficient factories and investing in mine upgrades and new steelworks. By 2004 productivity increased from 78 tons of steel per worker to 264 tons. In 2007 the company was judged to be the world’s lowest-cost steel producer – but none of the improvements would have occurred under the previous protectionist environment.

Minimum wage laws are a bane to employment throughout the world. Sowell cites a South African factory which announced a few job openings. Hundreds stood in line under the hot sun; after the few jobs were filled, it was hard to convince the crowd that no more jobs were available. In other African countries lower wages enabled companies to hire more workers, but South Africa had a high minimum wage, above the productivity level of the workers in this particular industry. The company was hiring more workers for its plant in Poland, where it could earn a profit. Indonesia also benefited from flexibly lower wages. South African workers were, indeed, twice as productive as workers in Indonesia, but were paid five times as much – when jobs were available. But most South African jobs were priced out of the market by ‘compassionate’ politicians, “vowing not to let their nation become the West’s sweatshop.”

Politicians in Europe love job security laws, allegedly to reduce unemployment. Such laws tend to increase unemployment, however. Can you already anticipate why? France, ‘blessed’ with Europe’s strongest job security laws, often suffers double-digit unemployment, which in the U.S., would cause alarm. South Africa is much worse, with rates from 25 – 30 percent common. The Economist explains, “Firing is such a costly headache that many prefer not to hire in the first place.” When labor is too expensive, then, like any commodity, there is less demand for it.

Sowell applies the concept of present value to natural resources. The present value of an asset includes the future benefits, discounted for the fact that they are delayed. In 1960 analysts figured that the U.S. had only a 13-year supply of domestic petroleum at the current rate of usage. The known petroleum reserves were about 32 billion barrels. In 1973 the known reserves were over 36 billion barrels. What happened? As existing supplies were used up, rising prices led to more investments in oil exploration, which were not profitable to make when prices were low.

When the present value of a barrel of oil in the ground rises, it makes sense to go get it, even if it costs more to drill than it once did. “At any given time, it never pays to discover all the oil that exists in the ground or under the sea. . . . What does pay is for people to write hysterical predictions that we are running out of natural resources.” Sowell notes that it also pays off in personal notoriety and in political power.

As a Christian I have perfect confidence that God has provided us what we need in resources to live comfortably. Of course, we are charged with stewardship responsibilities. There are consequences for waste and abuse of our environment. Our modern civilization is built on resources that we had no understanding of, or even awareness of, a couple of hundred years ago. Modernity is built on oil, uranium, rare earths, and discovery of useful alloys and the laws of electromagnetism. It does all seem to be coming to a climax, though, doesn’t it? In the meantime, let’s be good stewards. A basic understanding of economics is part of that.

One of the factors that makes Sowell so readable is that he weaves together so many aspects of history and culture. He observes that both Britain and Japan are island nations that lagged behind their continental neighbors for centuries before giving up on isolation, and absorbing cultural, economic, and technological wisdom from outside, eventually dominating their spheres of influence. An Italian scholar once posed the question, “How, in the first place, did a peripheral island rise from primitive squalor to world domination?”

Sowell contrasts the Arab Middle East, once more advanced than Europe, which came to despise learning from others, and then fell way behind. The Arab world (300 million people in 22 countries) translates less than one book per million people into Arabic every five years. Greece, with 11 million people, translates five times as many into Greek. In Hungary the number is 519 and in Spain, 920. Sowell notes that many of the Arab elite speak English and so have no need for translation – this factor tends to increase the disparity in opportunity between the elite and the common folks in Arab countries.

In Sowell’s concluding chapter he emphasizes the distinction between goals and incentives. It’s easy to proclaim laudable goals. During the 1930s Great Depression, the “Law to Relieve the Distress of the People and the Reich” bequeathed dictatorial powers to Adolf Hitler, creating more distress and disaster than the Germans had ever experienced before.

Sowell writes that we should demand of any goal the following: What specific things are to be done to achieve the goal? What does the policy reward and what does it punish? What constraints does it impose? What are the likely consequences of these constraints, rewards, and punishments? In the past, what have been the consequences of similar policies? After all, history does repeat itself many times, but few pay attention.

I do highly recommend Sowell’s book. I’ve just touched on a tiny portion of the wisdom he conveys. Once you read Basic Economics, you’ll watch the news from a different perspective – a truly common-sense perspective, in touch with reality; namely, a biblical perspective.

• drdave@truthreallymatters.com