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The Explanatory Power of Economic Logic

Mises Daily: Monday, March 15, 2004 by

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Thomas Sowell’s latest book is a well-written application of economic thinking to several popular topics in contemporary political discourse. Although the book is best suited for the newcomer to free market ideas, even mature Austrian economists would benefit from its insights and excellent anecdotes.

Sowell’s overall message is that "thinking beyond stage one" is necessary to understand the true causes (and cures) of social ills. Whether the issue is housing, health care, or Third World development, Sowell shows that the traditional government "solutions" are always counterproductive. In many respects, Sowell’s book is an updated Economics in One Lesson.

Slavery

In his discussion of the economics of slavery, Sowell is at his finest. (Admittedly, part of the appeal here is that—as a black man—Sowell can make factual statements without first offering numerous disclaimers and apologies.) He shows how economic analysis can explain why the US slave population reproduced itself while Brazilian ones didn’t: it was cheaper for Brazilian slave owners to import new slaves rather than lighten the workload of pregnant ones (pp. 62–63).

In a section entitled "The Economics of Freedom," Sowell explains why self-ownership is more economically efficient than slavery, and how government intervention hindered manumission. Sowell concludes that "the very need to pass laws to keep slavery from self-destructing piecemeal was further evidence of its economic deficiencies, quite aside from its violations of moral and humanitarian principles" (p. 67).

I was very pleased to see Sowell discuss other types of coerced labor that are usually ignored in mainstream discussions. He brings up jury duty, and mentions a Wall Street Journal report of how a certain Michael Kanz was minding his own business in Wal-Mart, when all of a sudden "a woman wearing a gun walked up and told him to follow her orders—or face the consequences. It wasn’t a mugging, but a jury summons to report to court within an hour" (p. 50).

Another example of slavery is the Soviet gulag system. Sowell reports the grim death tolls in these forced labor camps, but also explains their terrible inefficiency (pp. 53–55). Those running the camps didn’t own the output of their de facto slaves, and hence had no personal interest in using their labor resources economically.

Coordination

The Hayekian economist will be very pleased with Sowell’s discussion of the price system:

The term "planning" is often used to describe an economic system where the key decisions are made by political authorities. . . . However, there is just as much planning engaged in by owners and managers of private enterprises under capitalism. The difference is in who is planning for whom. In a free market economy, millions of consumers, business owners and managers, investors, and others have their own plans—each for his or her own well-being, leaving the overall coordination of these plans in the economy at large to changing prices . . . (p. 17)

Later on, Sowell explains that "what [capitalist] economies actually do . . . is depend upon price movements to move resources, finished products, and people themselves to where they are in demand, without any central authority trying to control the whole process" (p. 23). Indeed, at times Sowell sounds so Hayekian, that his omission from Sowell’s bibliography seems scandalous. But rather than feeling slighted, I hope Austrians will be pleased that the ideas discovered by their school of thought have now become commonplace.

Anecdotes

As mentioned earlier, one of the best features of Sowell’s book is his use of interesting and relevant examples to illustrate general principles. To explain a particular point about decisions in the face of uncertainty, he cites the case of Japanese fighter pilots who didn’t wear parachutes, because the constraint on their flexibility in dogfights would make them more likely to get shot down in the first place (p. 154).

When discussing the very real risks faced by check-cashing businesses, Sowell cites the case of Banco Popular, which lost $66,000 when a fly-by-night employer skipped town after emptying the account on which the paychecks had been written. Because well-paid employees are likely to have more reliable employers, they often get free check cashing services, while the "working poor" must pay a premium for the added risk. Notwithstanding the apparent unfairness, Sowell’s example explains the phenomenon (pp. 133–34).

Objections

Naturally, I can’t write a book review without complaining about some things. In several places there were typos that should have been caught in a simple proofreading. (For example, on page 82 we learn that "the creation of a single new drug typically costs hundreds of million dollars . . .")

More serious, Sowell still has a limited view of the failings of coercive government.   When discussing the factors influencing the slave trade, he writes:

In ancient times, when Britain was a primitive island, fragmented into tribal regions, Julius Caesar raided Britain and brought British slaves back to Rome but, in later centuries, after Britain had a government, an army and a navy, it would be too costly a place to raid for the sake of capturing slaves. However, many parts of the world were more difficult to consolidate into large states, sometimes because of geographic factors. . . . These more vulnerable regions remained major sources of slaves . . . (p. 61)

In light of the rest of his book, which explains the failures of state action in countless projects and gives institutional reasons for this failure, one wonders why Sowell apparently believes that the government is effective when it comes to protecting people from slave raids. Why wouldn’t government navies and armies, for example, be just as profligate in their use of draftees as the Soviet gulags? Weren’t the anarchic Irish able to resist invasions for centuries, and weren’t the relatively "unorganized" American colonies able to defeat the mighty British Empire?

To take another instance, Sowell argues that

[g]overnment regulation of risky behavior—laws against storing flammable materials in homes or driving under the influence of alcohol, for example—can reduce the risks of moral hazard and laws requiring everyone who drives to have automobile insurance can solve the problem of adverse selection. (p. 152)

Although Sowell wisely goes on to qualify this argument (by saying that "it is by no means always clear" that government’s "beneficial interventions" will outweigh its "counterproductive interventions"), I challenge the claim that these laws are beneficial at all. If the roads were privately owned, then the owners could set whatever policies they desired.

If the laws against flammable materials were truly efficient, then insurance companies (in an "unregulated" market) would offer policies with lower premiums to customers who agreed to keep these items out of their homes. The customers would contractually agree to allow random checks by inspectors (working for the insurers) for these materials in the home, and would agree beforehand to fines if a homeowner were caught lying on his insurance application. Now if it turned out that offering such policies weren’t profitable—i.e. that no homeowner would give up his or her liberty from random inspections in exchange for lower insurance premiums—then it would just prove that the government laws are inefficient, after all.

Conclusion

Notwithstanding the above criticisms, Sowell’s book is an interesting application of economic ideas that will satisfy both the layman and the professional. I would recommend it to anyone interested in the issues discussed in this review.

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Robert Murphy is an adjunct scholar of the Mises Institute. He teaches economics at Hillsdale College.   robert_p_murphy@yahoo.com. See the  Murphy Archive. Discuss this article on the blog