Thursday, December 10, 2009

On Economics, thoughts taken from Basic Economics by Thomas Sowell, Chapter 1

As I considered reading Basic Economics, by Thomas Sowell, I anticipated a book about money. I was surprised to learn that "economics" is not about money at all, but about resources. Currency is only a system by which the value of resources is measured.

According to Sowell, economics is defined as:

The allocation of scarce resources which have alternative uses.

This definition can be broken down into three parts:
  1. Allocation
  2. Scarce resources
  3. Alternative uses

Allocation

Allocation is similar to method. Everyone who desires the use of a resource will not be able. This is one of the harsh realities with which we are all faced, and it is unreasonable to deny it, though many do. As the Titanic was sinking, this harsh reality came into play with the shortage of life boats. The modern and popular concept of equality was a foreign one, and absurd too, given the blatant realities on the deck of that ship. In fact, the only way to enforce that reality would have been to deny anyone access to the life boats. Ultimately, we all know how that decision was made, which was that the men chose self sacrifice in favor of the women. In any case, allocation is the method which determines who the beneficiaries of resources for a given society or situation will be, and it will ultimately depend on the governmental/economic system within which the resources are being allocated.

Scarce Resources

The value of a resource will depend on the demand for that resource verses its scarcity or availability. It only stands to reason that the lower the availability of a given resource, the higher the number of people there will be who will be denied its benefit, such as in the the previous example of the Titanic. Scarce simply means that there are limits on the availability of all resources.

Alternative uses

The lifeboat analogy breaks down here unless perhaps we create a hypothetical question of whether the boats might have just as well been broken up and used for a signal fire. But then the question would have been about the alternative uses for the specific resource, wood, as opposed to lifeboats. Would it have been better to use the wood for a signal fire or allow it to continue in its use as a lifeboat?

Wood, as a raw resource can also be used alternately in pianos, or in the construction of furniture, among other things. The question of "which alternative?" is answered by the system within which the question is asked? The goal with any system is to avoid a situation like a warehouse full of unwanted pianos while there is a shortage of wood for building furniture for which there is a demand? Meeting this goal will again depend on the method, or governmental/economic system, and in fact in some systems it may not be avoided at all. In the the old Soviet Union, with its central planners deciding what resources would be used for what, it was common for resources to be miss-allocated resulting in an abundance of things people didn't want while with a simultaneous shortage of things people did want. The thousands of central planners were no match for the allocation of scarce resources with alternative uses that happens daily and automatically in a free market system as millions of private individuals make millions of purchasing choices.

Free market = free choice

The free market describes just that, the freedom to choose. And although the average person living in a free market economy probably doesn't think about it, every time a choice is made to purchase one thing over another, that choice impacts the allocation of scarce resources which have alternative uses. If more people want dressers than pianos, the demand for dressers will allow the furniture manufacturer to bid higher prices for the scarce resource, wood, thereby driving up the cost of building pianos as well as the cost of purchasing furniture. As a result of demand the price of the piano and dresser will increase until a sort of equilibrium is reached between supply, demand, and cost. The end result will be that more of the scare resource, wood, will be directed toward dressers as opposed to pianos. But, of coarse, nothing is ever static in an economy. It is for these reasons that no government will ever meet the challenge of managing it.

As Christians

As Christians it is important that we understand economic concepts lest we be led astray by our own envy, or by noble sounding arguments from those who stand to benefit from laws that regulate the economy. All economic systems are ultimately the arrangements of trade-offs. No system will lead us back into Eden and as such there will be faults and problems with any system; the first and foremost springing from man's sinful nature. We are also still under the curse. This means that we have to earn our way by the sweat of our brow; that is, the old adage that you can't get something for nothing, still applies. So when someone promises something different, we should have the discernment to know better.

Note: I have a fear of insulting the reader's intelligence in posting some of my attempts at writing This article was written some time ago and wasn't posted for just such a fear. I have noticed however that many people say that they don't understand economics, so I reconsidered that earlier decision. If you're still reading, I would sure appreciate any feedback on whether or not this article was helpful or informative.

4 comments:

Craig and Heather said...

I wasn't offended.

Actually, I have an e-friend who was recently reading this book and recommended it as worthwhile. I've not yet read it myself and appreciate your taking time to review here.

This:
I was surprised to learn that "economics" is not about money at all, but about resources. Currency is only a system by which the value of resources is measured.

...was a wonderful statement, IMO. And we can take this reality a step further in how this world's economy relates to Christianity.

God's economy is not of this world. His currency is spiritual Truth--but we are encouraged to use "unrighteous mammon" (the currency of this world in all it's many forms) in order to purchase from Him treasure that will never corrode.

He offers a great exchange rate, I'm thinking :)

We'll never be able to truly re-capture Eden in this age. But, when Christ makes all things new, there will be a glorious unveiling of His eternal system which we all ought to be eagerly and diligently helping Him to build today.

My 2 cents.

Heather

Dan said...

Heather

Sorry it took so long to respond. I would highly recomend this book. It is an easy read, though it is a long one, but you will finish it without too much effort and have gained a much greater understanding of whys behind the knowns.

Indeed his exchange rate is out of this world ;-). I like that. Thanks again for stopping by.

christian soldier said...

Thank you- I admire Thomas Sowell and am a bit weak in big picture of economics-
I did have good training from the entrepreneurial 1/2 of my family tree -as to stewardship principals-based on the need to save resources like 'money'-ex:
"use all of that bottle of ____---what you throw away are wasted $$$!" etc...:-)

BTW-as to your post of getting children out of public school---I totally agree-
Homeschool - anyone!?!!
26 years ago- for my unborn child---made that decision and have never looked back!

As always-great - thought provoking posts!
C-CS

Justin said...

As a Christian concerned with economics, you might enjoy my blog cancelourdebt.blogspot.com. It is based on the application of the biblical principle of Jubilee to the modern economic system.