Reading Notes on Basic Economics
This page is reading notes on Thomas Sowell's book Basic Economics. I've read this book twice in 2001 and 2003. Here're some notes i'm starting to put online.
This is just personal notes. It's not a highlight or summary of the book. I started this note thinking that it might be a standalone summary of each chapters for the whole book, however, currently it's like just 2% of that. You can search the web and find one page summery of the book, or read Wikipedia of summaries.
1. WHAT IS ECONOMICS
Economics is the study of the use of scarce resources which have alternative uses.
PART I
2. THE ROLE OF PRICES
• price is a self-maintaining supreme indicator of thing's value, with respect to the population on the whole.
• consumer buy more at low price and less at high price. Producer produce less at low price and more at high price. This is what fuels price.
• prices assures that the most valued resource goes to the one who need it most. That is, under a free market system, a thing's price is the indicator of its value, as judged by the whole population.
3. PRICE CONTROLS
How price works: prices rise when demand exceeds supply, at existing prices. This is called shortage. The “at existing price” is important because otherwise demand always exceeds supply. Demand and supply makes sense when there's a cost (price). For example, when laws fixes a price ceiling on housing, it will create a shortage, because the low price makes people hog units they otherwise would not. Shortage is NOT a low value of units/people ratio. That would be scarcity. Shortage is a low value of supply/demand, or when people desires much more (at the existing price).
Price falls when supply exceed demand, at existing price, called surplus.
p29: polls of economists have found virtually unanimous agreement that declines in products quantity and quality are the usual effects of price controls in general.
PART II: INDUSTRY AND COMMERCE
5 THE RISE AND FALL OF BUSINESS
talks about how big business do rise and fall. This is discussed partly to disclose some corporation history that people usually don't know anything about, and partly to illustrate that in a free-market system, the competition of merchants creates the most efficient use of resources.
Section: “Adjusting to changes” gives a short history of A and P grocery, Graflex, PAN-AM, Smith-Corona, and Sears, Motgomery, J C Penny, Wal-Mart. Free market competition gives the rise and fall of business, and the consumer always benefits.
Few points: (needs to verify)
• A and P grocery was once the largest retail chain in any field, anywhere in the world, with sales greater than the combined sales of leading contemporary retail giants Sears, Penney, and Montgomery Ward.
• Fortune 500 list of the biggest businesses in 1980 were no longer on that list just a decade later.
• Graflex Corporation was the most popular maker of cameras. But went down because the change of technology of cheaper lenses, made by Japan the number one camera makers.
• Smith-Corona dominated the type-writer industry, but began to lose money because technology changes that made desktop computers supplanting type-writers. Only when Smith-Corona adopted the change by making word-processors (a type-writer-like computer), that they are saved from extinction.
• Sears and Ward was a mail-order store in the 1800s before the automobile and trucks era. Mail order made them successful because shipping to local stores was expensive. In 1920, census showed for the first time that there are more American living in urban areas than rural. This shifted the landscape so that mall and department stores became popular. Robert Wood was a employee of Montgomery Ward, who got fired because he saw the change. James Cash Penney saw the department store idea and build some 300 to a thousand from 1920 to 1930. Sam Walton was a clerk of J C Penney and started his own retail that became Wal-Mart.
• credit cards, when first introduced, were resisted.
Some elements can be checked against wikipedia:
Giant “monopolies” that fell under the axe of free market:
Rise and fall of retail stores:
some other point to check:
section: The Coordination of Knowledge. Discuss about the scarcity of knowledge. The knowledge is imbued into prices. Which in the end entails the most efficient distribution system. As opposed to centrally planed systems.
• need to verify: Japan and Switzerland had far fewer natural resources than Russia.
• need to verify: During 1970s gasoline shortage, which was essentially created by government with price fixing. When that was ended in 1981, within months prices fell below previous government's price ceiling. This fall continued over the years until gasoline prices reached an all-time low in real-terms.
6 THE ROLE OF PROFITS -- AND LOSSES
Explains in detail that the role of profits is incentive. Communist thought profits as “surplus value”, and by communism they can get rid of this. Though they then lack incentive, which makes them highly inefficient.
profit is not greed. Cited fact (need to verify), quote:
In reality, most of the great fortunes in American history have resulted from someone's figuring out how to charge lower prices and therefore gain a mass market for the product. Henry Ford did this with automobiles, Rockefeller with oil, A＆P with groceries, Alcoa with aluminum, and Sears, Wal-Mart and other department stores with a variety of products.
In my readings, i find this true. Also, i find that the success of millionaires or celebrities, are often not due to underhand means as people like to think, but more due to dedication and relative merits of the individuals. This includes businessman, artists (including singers), or other motley success happenstances.
Fact: From 1978 thru 1998, American corporate profit rates fluctuated between a low of just above 6 percent to a high of about 13 percent. As a percentage of national income, corporate profits after taxes never exceeded 9 percent and was often below 6 percent over a thirty-year period ending in 1998.
When a store salesman says he got it for $10 and selling for $11, we'd think there's a profit of $1. This is “profit on sale”, its some kind of gross profit. There are costs about rent, electricity, employee payment, advertising and so on.
when a person goes to store and heard the price the merchant bought it, we want to judge how much the merchant asks with the price he bought it regardless other cost the merchant have to bear such as transportation and advertisement, rent, employment etc. We unconsciously feel this is justified because we can go directly the seller who sold to the merchant. The one-up selling might be just next door. Also, how do we know that the merchant isn't charging extra? Among sellers of the same product, any one can charge anything, so from a buyer's point of view we are only concerned about having the lowest price.
PROFIT RATES
Profits on sales are very different from profits on investment. If a store buys widgets for $10 and selling them for $15 each, some might say that it makes $5 in profits on each widget. But, of course, the store has to pay the people who work there, the utility company that supplies the electricity for the lights, cash registers and other electrical devices in the store, as well as other suppliers of other goods and services needed to keep the store running. What is left over after all these people have been paid is the net profit, usually a lot less than the gross profit. But that is still not the same as profit on investment.
The “profit on investment” takes also account of time, i.e. “turn over” rate.
compares the selling of bread vs piano. For bread there's low margin but high turn-over rate. For piano the reverse.
So we have these concepts:
• buy prices • sale price • other costs (advertisement, rent, electricity, labor etc.) • turn over rate; time.
Investment returns are often measured in terms of “annual rate of return”, which includes the time unit.
COST OF PRODUCTION SPECIALIZATION AND DISTRIBUTION 7 BIG BUSINESS AND GOVERNMENT 8 OVERVIEW PART III: WORK AND PAY 9 PRODUCTIVITY AND PAY 10 CONTROLLED LABOR MARKETS 11 OVERVIEW PART IV: TIME AND RISK 12 INVESTMENT AND SPECULATION 13 RISKS AND INSURANCE 14 OVERVIEW PART V: THE NATIONAL ECONOMY 15 NATIONAL OUTPUT 16 MONEY AND THE BANKING SYSTEM 17 ROLE OF GOVERNMENT 18 OVERVIEW PART VI: 19 INTERNATIONAL TRADE 20 INTERNATIONAL TRANSFER OF WEALTH 21 OVERVIEW PART VII: POPULAR ECONOMIC FALLACIES 22 “NON-ECONOMIC” VALUES 23 PRICES AND PURCHASING POWER 24 BUSINESS AND LABOR 25 OVERVIEW
Some quotes from Thomas Sowell's other books:
One of the most fashionable notions of our times is that social problems like poverty and oppression breed wars. Most wars, however, are started by well-fed people with time on their hands to dream up half-baked ideologies or grandiose ambitions, and to nurse real or imagined grievances.
It takes considerable knowledge just to realize the extent of your own ignorance.
The march of science and technology does not imply growing intellectual complexity in the lives of most people. It often means the opposite.