Basic economics

Thomas Sowell
Posted: Jan 26, 2001 12:00 AM

ONE OF THE REASONS for the confusion surrounding so many economic issues -- such as the current electricity crisis in California -- is an underlying confusion about what economics itself is all about. To many people, economics is about money. But economies and economics would exist if money had never been invented. The same principles would apply if we had a barter economy.

A distinguished British economist named Lionel Robbins put it this way: "Economics is the study of the use of scarce resources which have alternative uses." Whenever someone builds a bridge -- whether under capitalism, socialism, feudalism or whatever -- the real cost of that bridge is whatever else could have been built with the same material and the same labor. Money doesn't even have to be involved.

Money is a great convenience, of course, in the process of making decisions about allocating scarce resources. But the ultimate outcome depends upon the underlying realities, not the pieces of paper called money. The government could easily print twice as much money, but the country would not be twice as rich.

The reason there is an electricity crisis in California is because so many people are so confused about economics that they think price controls can make something available and affordable. But price controls do nothing more than change the monetary signals, without changing the real costs of anything.

Those costs have to be paid, one way or another, under any form of economic or political system. If electricity prices are not paid in the rates charged the consumers, then they are going to have to be paid in taxes. If the public is so foolish, and the politicians so irresponsible, that these costs are not paid, then look for lights to keep going out in California.

When the government holds the price down, that virtually guarantees that the supply will be reduced and shortages will follow. It doesn't matter whether it is electricity, housing, petroleum, food or whatever. Price controls have a centuries-old track record of causing shortages in countries around the world. But those who are ignorant of economics are surprised when the same thing happens in California in the 21st century that happened in the Roman Empire a couple of thousand years ago.

Bad as it is when the lights go out in California, it has been worse in countries that have put price controls on food because people have literally starved to death after food was made "affordable" by government fiat. Even countries with a history of having surplus food to export have found themselves hungry after price controls caused farmers to stop growing as much food.

It has been the same story with rent control. Housing shortages have followed rent control as the night follows the day -- whether in New York, Paris, Hanoi, Melbourne or points in between. History tells us that such things happened, but economics tells us why they happened.

Price controls are only one of many counterproductive policies growing out of confusion about the nature of economics. Fallacies are the norm in media and political discussions of international trade. That is why sweeping predictions that the North American Free Trade Agreement (NAFTA) would lead to devastating losses of American jobs were so completely belied by a huge increase in American jobs after NAFTA was passed.

Popular understanding of economics is at least two centuries behind economists' understanding of the economy. The economics profession has failed to educate the public on basic principles.

The net effect has been highly sophisticated analyses on the frontiers of economics and utter ignorance of the most elementary principles by millions of people outside the profession. Even people with Ph.D.s in other fields are often either ignorant or -- worse yet -- misinformed and confused about economics. But of course that does not stop them from advocating their pet economic policies.

It is a lot easier to criticize than to do better, as I discovered when I began to write a book called Basic Economics: A Citizen's Guide to the Economy., without using the graphs, equations and jargon normally used in books for economics students. This book took a decade to write, whereas it took me only one year to write a conventional textbook for economics students back in 1970.

Did I succeed? We will find out. "Basic Economics" has just been published.