Applied Economics: Thinking Beyond Stage One

Rating:
Summary: A Beginner's Guide to Applied Economics
Review: +++++

Have you ever wondered about...

1. California's electricity crisis: how blackouts and higher costs for consumers were the result of the state government's attempt to keep consumer prices artificially
low.
2. Planned economies: how they may turn decent people into criminals.
3. Central planning: how it drove the Soviet economy into the ground and why it doesn't work.
4. A free labor market: how it benefits not only the worker but also the economy.
5. Price controls: why they fail.
6. Geography: the important role it plays in the economies of places around the world.
7. Rent control laws: why cities with them have higher rents than cities that don't.

If you have wondered about such things as well as other economic matters, then this may be the book for you.

This seven chapter (where each chapter averages thirty pages), non-technical, easy-to-read book, by professor and economist Thomas Sowell, has the purpose of focusing on "dealing in depth with particular real world problems [and] using economic principles to clarify why and how things have happened the way they have." The real world economic problems discussed that each have a separate chapter are as follows:

(1) medical care
(2) housing
(3) discrimination
(4) development of nations.

"Because these are political, as well as economic issues, some political principles will need to be considered as well" instead of focusing on the above four economic topics in isolation. Sowell introduces the reader to this idea in his first chapter entitled:

(5) Politics versus Economics.

As well, "neither economics nor politics is just a matter of opinion and both require thinking beyond the immediate consequences of decisions [that is, both require thinking beyond stage one] to their long-term effects." In other words, economic decisions made to improve a problem may make the problem worse in the long-term if proper thinking has not gone into the initial economic decision. Thus, most of the chapters indicated above will discuss thinking beyond stage one.

I have thus far mentioned five chapters. There are two more chapters. One chapter deals with the economics of labor where free labor and labor that's not free are compared. This chapter is entitled:

(6) Free and Unfree Labor.

The other chapter is concerned with the economics of insurance where uncertainty and risk are discussed. This chapter is entitled:

(7) Risky Business.

Five of the seven chapters end with an excellent "implications" section. This is where Sowell takes what has been previously discussed and draws certain inferences and even conclusions.

This book contains no illustrations. I feel simple diagrams would have been helpful in reducing the book's wordiness. As well, a summary listing all the economic principles that were applied in each chapter (perhaps at the end of each chapter) would have been helpful, especially for those unfamiliar with such principles.

Finally, even though I disagreed with Sowell on some issues (such as on safety movements), I still feel that this is a good book that shows how certain economic principles are applied to some basic but important economic issues.

In conclusion, this is an excellent, solidly written book suitable for those who feel that economics is difficult to understand!!

(published 2003; preface; 7 chapters; main narrative 220 pages; bibliographical references; index)

+++++


Rating:
Summary: Best book on politics
Review: Although Thomas Sowell harbors some conservative views, he does a great job of giving us empirical evidence to back up his theories behind political and economical issues. I am a recent college graduate with a degree in economics; therefore, I have heard a lot of this stuff before. However, Mr. Sowell does an excellent job of persuading his readers due to his articulate writing. For those that enjoy this book I highly recommend reading Mr. Sowell's columns on Townhall.

Rating:
Summary: Great foundation for those who lack basic economic knowledg
Review: Excellent book. The United States as a whole would be far better off if everyone read this book. It would be a lot tougher for demagogues to sway public opinion regarding economic matters.

One reader's criticism was that there were no facts. Those people who do not believe in the free market will not want to accept certain statements from Sowell. If one wants to argue the merits of a free market versus government-controlled markets, this isn't the book. (Yes, unbelievably there are people who still think that socialism; communism and central planning are superior to free markets)

"This book will not satisfy hard-core economic junkies, and Sowell does not pretend it will. His target audience is the average citizen who has little or no economics background, but would like the tools to think critically about economic issues. "

I would also recommend the classic "Economics in one lesson" by Henry Hazlitt and Sowell's "Basic Economics". "Capitalism and Freedom" by Milton Friedman is another great book.

If one wants to read one of the best (and longest) economic books ever written, then I recommend "Human Action" by Ludwig von Mises (downloadable at www.mises.org)

Rating:
Summary: How not to be fooled by the politicians
Review: Great book written for non-economics students to understand the long term effects of popular issues. The chapter on housing costs simply but brilliantly explains the folly of rent control, zoning control, hi-rise prevention, etc. and how they hurt the common person.

Great read if you don't want to remain in the fog of the political vote buyers.

Rating:
Summary: Interesting reading but the NOT Economic FACTS
Review: I was hoping to find more substance in the book but I did not. There are NOT FACTS to back his claims nor data to prove his theories.

The book presents basic Economics but for advanced readers of Economics, it will not work.

It lacks the foundations of a solid book... FACTS.

But two stars is plenty.

Rating:
Summary: Sowell's analysis is as penetrating as a laser beam.
Review: If the United States were to implement a "required reading" prerequisite to voting, this is the book I would choose for such a requirement. Sowell's thinking is crystal clear, his analysis is linear, and his conclusions, once you read them, are hard to argue with. In my opinion, Sowell is dead-on on just about every subject he tackles. This is a brilliant man.

Prof. Sowell's main thesis is simple enough: we must look at the actual consequences of policies rather than merely the intentions. Unfortunately, on issue after issue, Sowell shows us that many of our so-called "elites" focus only on good intentions, because intentions are what the voters see first (the wreckage of bad policy comes later).

Nationalized health care, which is a reality in many liberal democratic states, and something that the United States may be moving towards, epitomizes Sowell's basic thesis. What could involve better intentions than the notion that everyone should be able to receive all the health care resources that they need? Alas for complacency! Sowell makes a pretty strong case that when such policies are put into practice, shortages, a degradation in services, and an end to innovation are the consequences.

Sowell is right-of-center; unabashedly so, and of course this may turn off some readers. But really, anyone will enjoy reading this book because Sowell's clarity of writing equals his clarity of thought--the book is a joy to read simply for its straightforwedness. This is a book capable of challenging one's belief system. Not many books can do that, but this is one of them.

Rating:
Summary: A Great Follow-up to "Basic Economics"
Review: Political decision-making looks at policies and programs in terms of their desired goals, such as a "living wage", "affordable housing," and "rent control," whereas economic decision-making focuses on the inherent incentives and constraints at work in pursuit of such goals, as well as their actual consequences over time. Looking at public policy decisions simply from the perspective of the former prevents us from preventing many "unintended" consequences - which, from the perspective of the latter, would have been foreseeable by simply taking the necessary time and effort to look beyond stage one.

This is the premise of Thomas Sowell's new book, Applied Economics: Thinking Beyond Stage One (Basic Books, 2004). In this follow-up to his 2000 book Basic Economics, where he lays the foundation for understanding economic principles by explaining them in layman's terms, Dr. Sowell applies these principles to real-world case studies to explain how and why things have happened the way that they have. He examines the long-term economic consequences of many politically popular decisions motivated by what he calls "stage-one thinking."

Consider the following example to raise taxes on corporations located in a city or state to finance government projects:

State One: Such a decision might win political points for the mayor or governor, and may even increase his/her chances for re-election.

Stage Two: The headquarters of corporations hit by the higher taxes may decide to shift production to places where taxes are lower, thereby reducing the locally earned income on which taxes are paid by both the corporations and their local employees.

Stage Three: As corporations grow over time, they will locate in places where taxes are lower, transferring employees willing to move and replacing those who are not by hiring new people.

Stage Four: Eventually, the corporate exodus from the high-tax city or state will cause total tax revenues to be less than what they were before the tax increase. Yet, by this time years will have passed and the politicians responsible for the increase will probably escape the political consequences of their decisions.

Citing New York City - which has the highest tax rate of any city in the country - as an example, the author wittingly puts it, "... killing the goose the lays the golden egg is a viable political strategy, so long as the goose does not die before the next election and no one traces the politician's fingerprints on the murder weapon." This is classic stage-one thinking at work.

Price controls are very popular politically, but their negative consequences, though well documented, are never taken into account by those who do not think beyond stage one. Dr. Sowell cites the government-controlled health care systems of Japan, Korea, France, Britain, and Canada, and looks at the consequences of land use restrictions and rent control policies in the state of California to drive home this point.

In the chapter on "the Economics of Discrimination," Dr. Sowell discusses the actual costs of discrimination and the incentives and constraints that drive those costs. To give a concrete example, the late Cincinnati Reds baseball team owner Marge Schott was known to espouse racist beliefs - and often expressed them publicly to the consternation of baseball officials and everyone else within earshot. However, she was also a shrewd businesswoman who knew that, no matter what her personal feelings about blacks were, not hiring star black baseball players would have been financial suicide. She may have been a bigot, but from a business perspective she wasn't stupid.

The last chapter discusses how a nation's economic development is the result of a whole host of historical, political and geographic factors, showing how and why different parts of the world have developed differently over time, with no given factor explaining the large economic disparities between the world's countries and societies. People who desire simple and emotionally satisfying explanations for such disparities based on melodramatic "exploitation" theories, would be well served to pay close attention.

Whereas Basic Economics lays the foundation for understanding economic principles, Applied Economics puts those principles in action in the real world. It is too bad that more of our nation's intellectuals and decision-makers do not live in the real world. Fortunately, Thomas Sowell does, which makes our world all the better for it.

Rating:
Summary: Great Book for the Libertarian or Conservative
Review: Sean Hannity just recommended this book, and it is a great read. Might I also recommend Sowell's book, "A Conflict of of Visions"

Rating:
Summary: Very very ammoral economics
Review: Sowell doesn't mention that indignity, disempowerment, and hunger accompany capitalism worldwide. No one sensibly denies this, yet even among those who despise capitalism, most fear that suffering would increase without it. While some certainly find capitalism odious, few celebrate an alternative and those who do generally favor "market socialism," But there's a great alternative. To transcend capitalism, we can advocate equity, solidarity, diversity, self-management, and ecological balance. What institutions can propel these values in domestic economics, as well as get economic functions done well?
To start, we should advocate public/social property relations in place of privatized capitalist property relations. In the new system, each workplace is owned in equal part by all citizens. This ownership conveys no special right or income. Bill Gates doesn't own a massive proportion of the means by which software is produced. Instead, we all do--or symmetrically, if you prefer, no one does. At any rate, ownership of productive property becomes moot regarding distribution of income, wealth, or power. In this way the ills of private ownership such as personal accrual of profits yielding huge wealth, disappear. But that's it. We haven't accomplished anything more than that, only a removal. We must go much further.
Next, workers and consumers are organized into democratic councils with the norm for decisions being that methods of dispersing information to decision-makers and at arriving at preferences and tallying them into decisions should be such as to convey to each actor about each decision, to the extent possible, influence over the decision in proportion to the degree they will be affected by it. Councils exist at many levels, and have subunits such as work groups and teams and individuals, as well as supra units such as workplaces and whole industries. Councils are the seat of decision making power. Actors in councils are the decision-makers. Votes could be majority rule, three quarters, two-thirds, consensus, etc., and would be taken at different levels, with fewer or more participants, all as appropriate depending on the particular implications of the decisions in question. Sometimes a team or individual would make a decision pretty much on its own, though within a rubric of other encompassing decisions that were made more broadly. Sometimes a whole workplace or even industry would be the decision body. Different voting and tallying methods would be employed, as needed for different decisions. There is no a priori single correct choice. There is, however, a right norm to try to efficiently and sensibly implement: decision-making input should be in proportion as one is affected by decisions.
Next, what about the organization of work? Who does what tasks in what combinations? Each actor does a job, of course, and each job is composed of a variety of tasks, of course. What changes from current corporate divisions of labor to a preferred future division of labor is that the variety of tasks each actor does is balanced for its empowerment and quality of life implications. Every person participating in creating new products is a worker. Each and every worker has a balanced job complex. The combination of tasks and responsibilities you have accords you the same empowerment and quality of life as the combination I have accords me, and likewise for each other worker and their balanced job complex. We do not have some people overwhelmingly monopolizing empowering, fulfilling, and engaging tasks and circumstances. We do not have other people overwhelmingly saddled with only rote, obedient, and dangerous things to do. For reasons of equity and especially to create the conditions of democratic participation and self-management, we establish that when we each participate in our workplace and industry (and consumer) decision-making, we each have been comparably prepared by our work with confidence, skills, and knowledge to do so. The typical situation now is that some people who produce have great confidence, social skills, decision-making skills, and relevant knowledge imbued by their daily work, and other people are only tired, de-skilled, and lacking relevant knowledge due to their daily work. Balanced job complexes do away with this division of circumstances. They complete the task of removing the root basis for class divisions that is begun by eliminating private ownership of capital. They eliminate not only the role of owner/capitalist and its disproportionate power and wealth, but also the role of intellectual/decision making producer who exists over and above all others,. They retain the needed tasks, but they apportion them and also rote and unempowering responsibilities more equitably and in tune with true democracy and classlessness.
But how much are people paid? We work. This entitles us to a share of the product of work. But how much? This new vision says that we ought to receive for our labors an amount in tune with how hard we have worked, how long we have worked, and with what sacrifices we have worked. We shouldn't get more by virtue of being more productive due to having better tools, more skills, or greater inborn talent, much less by virtue of having more power or owning more property. We should be entitled to more consumption from society's product only by virtue of expending more of our effort or otherwise enduring more sacrifice in its creation. This is morally appropriate and also provides proper incentives due to rewarding only what we can affect, not what we can't. With balanced job complexes, for eight hours of normally paced work Sally and Sam will receive the same income,. This is so if they have the same job, or any job at all. That is, no matter what their particular job may be, no matter what workplaces they are in and how different their mix of tasks is, and no matter how talented they are, if they at a balanced job complex, their total work load will be similar in its quality of life implications and empowerment effects, so the only difference specifically relevant to reward for their labors is going to be length and intensity of work done, and with these equal as well, the share of output earned will be equal. If length of time working or intensity of working differ somewhat, so will share of output earned. And who mediates decisions about the definition of job complexes and about what rates and intensities people are working? Workers do, of course, in their councils and with appropriate decision-making say using information culled by methods consistent with employing balanced job complexes and just remuneration.
There is one very large step left to proposing an alternative to capitalism, even in broad outline. How are the actions of workers and consumers connected? How do decisions made in one workplace and all others, and by collective consumer councils, as well as by individual consumers, all come into accord? What causes the total that is produced by workplaces to match the total consumed collectively by neighborhoods and other groups and privately by individuals? For that matter, what determines the relative social valuation of different products and choices? What decides how many workers will be in which industry producing how much? What determines whether some product should be made or not, and how much? What determines what investments in new productive means and methods should be undertaken and which others delayed or rejected? These are all matters of allocation, among others that are too numerous to list in their entirety here. Existing options for dealing with allocation are central planning (as was used in the old Soviet Union) and markets (as is used in all capitalist economies with minor or greater variations). In central planning a bureaucracy culls information, formulates instructions, sends these instructions to workers and consumers, gets some feedback, refines the instructions a bit, sends them again, and gets back obedience. In a market each actor in isolation from concern for other actors well being competitively pursues its own agenda by buying and selling labor (or the ability to do it) and buying and selling products and resources at prices determined by competitive bidding. Each actor seeks to gain more than other parties in their exchanges. The problem is, each of these two modes of connecting actors and units imposes on the rest of the economy pressures that subvert the values and structures we favor. Markets, for example, even without private capitalization of property, distort valuations to favor private over public benefits and to channel personalities in anti-social directions diminishing and even destroying solidarity. They reward primarily output and power and not only effort and sacrifice. They divide economic actors into a class that is saddled with rote and obedient labor and another that enjoys empowering circumstances and determines economic outcomes, also accruing most income. They isolate buyers and sellers as decision-makers who have no choice but to competitively ignore the wider implications of their choices, including effects on the ecology. Central planning, in contrast, is authoritarian. It denies self management and produces the same class division and hierarchy as markets built first around the distinction between planners and those who implement their plans, and extending outward to incorporate empowered and disempowered workers more generally. Both these allocation systems subvert the values we hold dear, rather than propelling them. What is the alternative to markets and central planning.
In place of top-down imposition of centrally planned choices and in place of competitive market exchange by atomized buyers and sellers, we opt for cooperative, informed choosing by organizationally and socially entwined actors each having a say in proportion as choices impact them and each able to access needed accurate information and valuations and having appropriate training and confidence to develop and communicate their preferences. This choice is consistent with council centered participatory self-management, with remuneration for effort and sacrifice, with balanced job complexes, with proper valuations of collective and ecological impacts, and with classlessness. To these ends, activists favor participatory planning, a system in which worker and consumer councils propose their work activities and consumer preferences in light of accurate knowledge of local and global implications and true valuations of the full social benefits and costs their choices will impose and garner. The system utilizes a back and forth cooperative communication of mutually informed preferences via a variety of simple communicative and organizing principles and vehicles including indicative prices, facilitation boards, rounds of accommodation to new information, and so on - all permitting actors to express their desires and to mediate and refine them in light of feedback about other's desires, arriving at compatible choices consistent with remuneration for effort and sacrifice, balanced job complexes, and participatory self managing influence

Rating:
Summary: An Election Year Must Read
Review: Sowell takes the key political issues and challenges the reader to analyze not only their short term (Stage One) political impact but to also think ahead to their long term (Stage Two, Three, etc) economic impact. He reminds the reader that politicians do not think beyond Stage One because they will be praised (and elected) for the short term benefits but will not be held accountable much later when the long term consequences appear. He lays out the Stage One benefits of each political issue and then predicts the long term consequences that politicians don't address. Price controls on drugs and health care may have an immediate benefit, but the consumer will pay years later as health care quality decreases and new drug research declines. Reducing the price does not reduce the cost. Does raising the minimum wage really help entry level workers? What happens in the long term when communities raise taxes on businesses? Is free health care really free, or better?
We need to look beyond Stage One and separate politics from economics on the hot election year issues.