Table Of Content

(continued from front flap) Economics Praise for $39.95 US / $46.00 CAN Sowell new section on the special role of corporations in the economy BASIC ECONOMICS has been added to the chapter on government and big business, hy are homeless people sleeping on the among other additions throughout the book. “Clear and concise. . . . Among economists of the past thirty years, Sowell stands very proud indeed.” sidewalks of New York in the winter, when Basic Economics, which has now been translated into six —Wall Street Journal W the abandoned apartment buildings in languages, has grown so much that a large amount of material the city have four times as many dwelling units as there are “Basic Economics is not only valuable for a general lay-person audience; it would also beneft lawyers, politicians, and in the back of the book in previous editions has now been put homeless people in the city? Why did Russians have to import yes, economists, as well.” —Washington Times online instead. Te central idea of Basic Economics, however, food to feed people in Moscow, when Russia itself had vast remains the same: that the fundamental facts and principles of “Basic Economics is a healthy main course disguised as a rich dessert. Te expanded Fourth Edition now weighs amounts of some of the richest farmland in Europe within easy economics do not require jargon, graphs, or equations, and can in at well over 600 pages. Readers will celebrate the girth. Tom Sowell’s smooth writing, irresistible logic, BASIC driving distance? Why did unemployment reach 25 percent be learned in a relaxed and even enjoyable way. deep knowledge and fawless economics make each page an explanatory treat to experts and novices alike.” and American corporations as a whole operate in the red for —Tomas Hazlett, Professor of Law & Economics two years in a row during the Great Depression of the 1930s? and Director, Information Economy Project, George Mason University All these very diferent, but equally puzzling and needless tragedies grew out of a failure to understand and apply basic ECONOMICS “Badly needed. . . . Anyone who has been subjected to biased and dreary economics textbooks should read Basic economic principles. Explaining these principles for the Economics as a bracing corrective.” —Claremont Review of Books general public in plain English, with neither graphs nor equations nor jargon, is the goal and achievement of “Basic Economics reveals in every chapter why Tomas Sowell is one of America’s greatest thinkers. It is must- Basic Economics by Tomas Sowell. Thomas Sowell reading for anyone who wants the truth about how the laws of economics govern so many of the events has taught economics at Cornell, UCLA, Amherst, and other in our daily lives.” —Arthur C. Brooks, President, American Enterprise Institute and author of His lively examples are drawn from around the world academic institutions. He is currently a scholar in residence at Te Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future A Common Sense Guide to the Economy and from centuries of history because the basic principles of 6S-:1 2/-41 x/8 9”-1/2” economics are not limited to modern capitalist societies and the Hoover Institution, Stanford University. He has published B: 1-3/4 “Basic Economics demonstrates Professor Sowell’s ability to make economics understandable to a person who hasn’t apply even to situations where no money changes hands, such in academic journals and in such popular media as the Wall set foot in an economics class. It’s a book rich with explanations and examples of everyday economics issues.” as caring for wounded soldiers on a battlefeld. Te focus of BASIC Street Journal, Forbes, and Fortune, and he writes a syndicated —Walter E. Williams, John M. Olin Distinguished Professor of Economics, George Mason University HC Basic Economics is not on how individuals make money but on column that appears in newspapers across the country. “Te unyielding truths of economics befuddle social engineers of al stripes. Sowel, in exemplary fashion, strips how societies create prosperity or poverty for their peoples by BLACK the way they organize their economies. Prosperous countries +PMS 485 the mystery from those truths, making them intuitive—even obvious.” —David Boaz, Executive Vice President, Thomas S owell with few natural resources, such as Japan and Switzerland, Cato Institute and author of Libertarianism: A Primer FINISH: are as common as poor countries with rich resources, such as Gloss Tis edition of Basic Economics has supplemental materials Russia and Mexico. available for review and download from tsowell.com. $39.95 US / $46.00 CAN fourth edition Te fourth edition of Basic Economics is both expanded and ISBN 978-0-465-02252-6 5 3 9 9 5 updated. A new chapter on the history of economics itself has A Member of the Perseus Books Group fourth edition been added, and the implications of that history examined. A www.basicbooks.com 01/11 9 78 0 4 6 5 0 2 2 5 2 6 (continued on back flap) BASIC ECONOMICS e-Title:Layout 1 9/28/2010 2:23 PM Page i B A S I C E C O N O M I C S A Common Sense Guide to the Economy THOMAS SOWELL Fourth Edition e-Title:Layout 1 9/28/2010 2:23 PM Page ii Copyright © 2011 by Tomas Sowell Published by Basic Books, A Member of the Perseus Books Group All rights reserved. Printed in the United States of America. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information, address Basic Books, 387 Park Avenue South, New York, NY 10016-8810. Books published by Basic Books are available at special discounts for bulk purchases in the United States by corporations, institutions, and other organizations. For more information, please contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street, Suite 200, Philadelphia, PA 19103, or call (800) 810-4145, ext. 5000, or e-mail e-Title:Layout 1 9/28/2010 2:23 PM Page iii A few lines of reasoning can change the way we see the world. Steven E. Landsburg iii e-Title:Layout 1 9/28/2010 2:23 PM Page iv e-Title:Layout 1 9/28/2010 2:23 PM Page v C O N T E N T S Preface vii Acknowledgments ix 1 What is Economics? 1 PART I: PRICES AND MARKETS 9 2 The Role of Prices 11 3 Price Controls 39 4 An Overview 66 PART II: INDUSTRY AND COMMERCE 93 5 The Rise and Fall of Businesses 95 6 The Role of Profits—and Losses 118 7 Big Business and Government 149 8 An Overview 183 PART III: WORK AND PAY 205 9 Productivity and Pay 207 10 Controlled Labor Markets 234 11 An Overview 268 v e-Title:Layout 1 9/28/2010 3:04 PM Page vi Basic Economics PART IV: TIME AND RISK 293 12 Investment and Speculation 295 13 Risks and Insurance 327 14 An Overview 353 PART V: THE NATIONAL ECONOMY 367 15 National Output 369 16 Money and the Banking System 386 17 Government Functions 414 18 Government Finance 444 19 An Overview 479 PART VI: THE INTERNATIONAL ECONOMY 497 20 International Trade 499 21 International Transfers of Wealth 523 22 An Overview 549 PART VII: SPECIAL ECONOMIC ISSUES 563 23 Myths about Markets 565 24 “Non-Economic” Values 591 25 The History of Economics 618 26 Parting Thoughts 646 Questions 655 Sources 671 Index 743 vi e-Title:Layout 1 9/28/2010 2:23 PM Page vii P R E FAC E his is a book for the general public or for beginning students in Teconomics. Just as many people do, this book has put on weight with the passing years, as new chapters have been added and existing chapters expanded for clarification and updated to stay abreast of changing developments in economies around the world. This edition has a new chapter on the history of the development of economics itself and the issues raised by that history. It also has added an extensive section on the economics of corporations in the chapter on big business and government, as well as other new material in other chapters. Readers’ continuing interest in these new editions at home, and a growing number of translations into foreign languages overseas,* suggest that there is a widespread desire for readable information on economics, as distinguished from the jargon, graphs, and equations that are all too common in many writings on the subject. Through its various editions, the fundamental idea behind Basic Economics remains the same: Learning economics should be as uncomplicated as it is informative. Most of us are necessarily ignorant of many complex fields, from botany to brain surgery. As a result, we simply do not attempt to operate in, or comment on, those fields. However, every voter and every politician that they vote for affects economic policies. We cannot opt out of economic issues and decisions. Our only options are to be informed, uninformed, or misinformed, when making our choices. Basic Economics is intended to make it easier to be informed. The fundamental principles of economics are not hard to understand but they are easy to forget, especially amid the heady rhetoric of politics and the media. The vivid real-life examples used * Previous editions have been translated into Chinese, Hebrew, Japanese, Swedish, Korean, and Polish. vii e-Title:Layout 1 9/28/2010 2:23 PM Page viii Basic Economics throughout this book make these principles indelible, in a way that graphs and equations might not. In keeping with the nature of Basic Economics as an introduction to economics for the general public, the usual footnotes or end-notes are left out. However, those who wish to check up on some of the surprising facts they will learn about here can find the sources at the end of this e-book. For instructors who are using Basic Economics as a textbook in their courses, or for parents who are homeschooling their children, more than a hundred questions are also available in the back section, with pages listed after each question, showing where the answer to that question can be found in the text. My e-mail address is e-Title:Layout 1 9/28/2010 2:23 PM Page ix AC K N OW L E D G M E N T S ike other books of mine, this one owes much to my two extraordinary Lresearch assistants, Na Liu and Elizabeth Costa. In addition to their tracking down all sorts of information for me, Ms. Costa did the copy- editing and fact-checking of the manuscript, which Ms. Liu then converted into galleys and helped to index, after which the resulting Quark file was sent to the publisher, who could have the book printed directly from her computer file. The new chapter on the history of economics was read by distinguished emeritus Professor William R. Allen of UCLA, a former colleague whose insightful comments and suggestions were very much appreciated, even when I did not make full use of all of them. Needless to say, any errors or shortcomings that remain after all these people’s efforts can only be my responsibility. And of course none of this would be possible without the support of the Hoover Institution and the research facilities of Stanford University. ix