Thomas Sowell’s book, Basic Economics: A Citizen’s Guide to the Economy is just what the name implies—a beginner’s guide to economic theory. I found the book to be excellent. I should’ve read it years ago, since it would have peaked my interest in money matters a bit more.
Several quotes stood out:
Speculation is Superior to Gambling
Speculation is often misunderstood as being the same as gambling, when in fact it is the opposite of gambling. What gambling involves, whether in games of chance or in actions like playing Russian roulette, is creating risk that would otherwise not exist, in order either to profit or to exhibit one’s skill or lack of fear. What economic speculation involves is coping with an inherent risk in such a way as to minimize it and to leave it to be borne by whoever is best equipped to bear it.
Gambling is like marrying a woman that you’ve known for three months (something the Major has done). Essentially, you’re creating a risk. You’re making a commitment to somebody that’s a virtual stranger. You don’t have the all the information yet; in my case, I found out that my wife was an alcoholic.
We gamble out of stupidity; but also, it’s a “lack of fear” as Sowell points out. We test the natural laws of the universe, believing that our intuition is superior. Occasionally, we get lucky and win. But most of the time we lose.
Conversely, speculation is like marrying a woman that you’ve known for three years. You minimize a risk (AKA, speculate). Her negative traits have already come to light, but you feel that you can manage them. You’ve seen the worst in her and feel that you can overcome the risk.
Smart people are speculators. They understand that risk is inherent in life, but they learn to manage it. Their good luck appears accidental to those around them: the product of a lucky break or even nepotism. But in reality, they calculated their decisions better. They like to skydive, but they also like parachutes.
The Federal Reserve Has Created More Problems than it Solved
The Federal Reserve system was established in 1914 as a result of fears of such economic consequences as deflation and bank failures. Yet, the worst bank failures in the country’s history occurred after the Federal Reserve was established (p. 24)
Sowell brings up something that few Americans even question anymore—whether or not the Federal Reserve is a good thing. He believes that it was a bad thing. It’s interesting to note the creation of the Federal Reserve: 1914. This was, of course, at the start of World War 1. Obviously, there were concerns about political stability at the time.
Fifteen years later (1929), the stock market crashed and we had the Great Depression. The Federal Reserve was unable to stop the problem they said they would solve. We’ve had several economic downturns ever since: take 2008, for example, when the housing market collapsed.
It’s a powerful lesson—a time of crisis can lead to bad decision-making. And this bad decision can then become a way of life.
When You Help Someone Economically, You Often Hurt Another Person
Nothing is easier for the media or for politicians than to present “human interest” stories about someone whose family has been farming for generations and who has now been forced out of the kind of life they knew and loved by the impersonal economic forces of the marketplace. What is forgotten is that these impersonal forces represent benefits to consumers who are just as much persons as the producers who have been arbitrarily selected as the focus of the discussion. The temptation is always there to try to solve the problem of those whose plight has been singled out for attention, without regard for the effects elsewhere. (p. 27)
That’s the crux of charity: the natural Christian tendency to “help thy neighbor.” Sowell points out how the media will manipulate this altruistic desire, promoting a hard-luck story that’s designed to shift the government coffers in a different direction.
The appeal to pathos is ubiquitous. We saw it before the Affordable Care Act was passed (countless stories about a poor person who could not afford medical care). Of course, moving money into someone’s pocket is often done by removing it from somebody else’s. This proved to be true with the ACA. The money that was used for people without health insurance was taken from another source – those who actually had insurance. This resulted in higher rates for those who were already covered.
Somebody always has to pay: the question is who.
Basic Economics is an excellent read. I think should be taught on the high school level; moreover, it would make a good read for Economics 101 courses at the college level. It explains the essential concepts with plain language, simple analogies, and logical organization.
I highly recommend the book.
See Related Article: Adam Smith on the Economic Differences Between Europe and Pre-Colombian America