This posting is Part III in a series of postings about economic thoughts.
The excerpts in this posting are taken from Chapter 24, entitled Parting Thoughts, in Thomas Sowell’s book Basic Economics: A Citizens Guide to the Economy and discuss: (i) why policy goals are trumped by incentives they create; and, (ii) the role of knowledge in economics.
Why Policy Goals are Trumped by Incentives They Create

Many economic fallacies depend upon not thinking beyond the initial consequences of particular policies…
One of the recurring themes in our consideration of various policies and institutions…has been the distinction between the goals of these policies and institutions versus the incentives they create…
What must be asked about any goal is: What specific things are going to be done in the name of that goals? What does the particular legislation or policy reward and what does it punish? What constraints does it impose? Looking to the future, what are the likely consequences of such incentives and constraints? Looking back at the past, what have been the consequences of similar incentives and constraints in other times and places?…

The Role of Knowledge in Economics

In addition to the role of incentives and constraints, one of our other central themes has been the role of knowledge. In free market economies, we have seen giant multi-billion dollar corporations fall from their pinnacles…because their knowledge of changing circumstances, and the implication of those changes, lagged behind that of upstart rivals…The public benefitted from that, by getting what it wanted at lower prices…
In centrally planned economies, we have seen the planners overwhelmed by the task of trying to set literally millions of prices and keep changing those prices in response to innumerable and often unforeseeable changes in circumstances. It was not remarkable that they failed so often. What was remarkable was that anyone had expected them to succeed, given the vast amount of knowledge that would have had to be marshalled and mastered in one place by one set of people…
Given the decisive advantages of knowledge and insight in a market economy…we can see why market economies have outperformed other economies that depend on ideas originating within a narrow elite of birth or ideology. While market economies are often thought of as money economies, they are still more so knowledge economies, for money can always be found to back new insights, technologies and organizational methods that work…Capital is always available under capitalism, but knowledge and insight are rare and precious under any system.
Knowledge can be bought and sold in a free market, like anything else…
Knowledge should not be narrowly conceived as the kind of information in which intellectuals and academics specialize…
In reality, there is much that the intelligentsia do not know that is vital knowledge in the functioning of an economy. It may be easy to disdain the kinds of highly specific knowledge and implications which are often economically decisive by asking, for example: How much knowledge does it take to fry a hamburger? Yet McDonald’s did not become a multi-billion-dollar corporation…for no reason – not with so many rivals trying desperately and unsuccessfully to do the same…
…In all these cases, it was the knowledge that was built up over the years – the human capital – which ultimately attracted the financial capital to make ideas become reality. The other side of this is that, in countries where the mobilization of financial resources is made difficult by deficiencies in property rights laws, those at the bottom have fewer ways of getting the capital needed to back their entrepreneurial endeavors. More important, the whole society loses the benefits it could gain…
Success is only part of the story of a free market economy. Failure is at least as important a part, though few want to talk about it and none want to experience it…Economics is not about “win-win” options, but about often painful choices in the allocation of scarce resources which have alternative uses. Success and failure are not isolated good fortunes and misfortunes, but inseparable parts of the same process.
All economies…are essentially ways of cooperating in the production and distribution of goods and services, whether this is done efficiently or inefficiently, voluntarily or involuntarily. Naturally, individuals and groups want their own particular contributions to the process to be better rewarded, but their complaints or struggles over this are a sideshow to the main event of complementary efforts which produce the output on which all depend. Yet invidious comparisons and internecine struggles are the stuff of social melodrama, which in turn is the lifeblood of the media and politics, as well as for portions of the intelligentsia.
By portraying cooperative activities as if they were zero-sum contests…those with the power to impose their misconceptions on others through words or laws can create a negative-sum contest, in which all are worse off…
Those with a zero-sum vision who have seen property rights as mere special privileges for the affluent and the rich have helped erode or destroy such rights, or have made them practically inaccessible to the poor in Third World countries, thereby depriving the poor of one of the mechanisms by which people from backgrounds like theirs have risen to prosperity in other times and places.
However useful economics may be for understanding many issues, it is not as emotionally satisfying as more personal and melodramatic depictions of these issues often found in the media and in politics. Dry empirical questions are seldom as exciting as political crusades or moral pronouncements. But they are questions that must be asked, if we are truly interested in the well-being of others, rather than in excitement or a sense of moral superiority for ourselves. Perhaps the most important distinction is between what sounds good and what works. The former may be sufficient for purposes of politics or moral preening, but not for the economic advancement of people in general or the poor in particular…

Part IV to follow…
For previous postings on Economic Thoughts, refer to:
Part I: What is Economics?
Part II: Myths About Markets

This posting is Part III in a series of postings about economic thoughts.
The excerpts in this posting are taken from Chapter 24, entitled Parting Thoughts, in Thomas Sowell’s book Basic Economics: A Citizens Guide to the Economy and discuss: (i) why policy goals are trumped by incentives they create; and, (ii) the role of knowledge in economics.
Why Policy Goals are Trumped by Incentives They Create

Many economic fallacies depend upon not thinking beyond the initial consequences of particular policies…
One of the recurring themes in our consideration of various policies and institutions…has been the distinction between the goals of these policies and institutions versus the incentives they create…
What must be asked about any goal is: What specific things are going to be done in the name of that goals? What does the particular legislation or policy reward and what does it punish? What constraints does it impose? Looking to the future, what are the likely consequences of such incentives and constraints? Looking back at the past, what have been the consequences of similar incentives and constraints in other times and places?…

The Role of Knowledge in Economics

In addition to the role of incentives and constraints, one of our other central themes has been the role of knowledge. In free market economies, we have seen giant multi-billion dollar corporations fall from their pinnacles…because their knowledge of changing circumstances, and the implication of those changes, lagged behind that of upstart rivals…The public benefitted from that, by getting what it wanted at lower prices…
In centrally planned economies, we have seen the planners overwhelmed by the task of trying to set literally millions of prices and keep changing those prices in response to innumerable and often unforeseeable changes in circumstances. It was not remarkable that they failed so often. What was remarkable was that anyone had expected them to succeed, given the vast amount of knowledge that would have had to be marshalled and mastered in one place by one set of people…
Given the decisive advantages of knowledge and insight in a market economy…we can see why market economies have outperformed other economies that depend on ideas originating within a narrow elite of birth or ideology. While market economies are often thought of as money economies, they are still more so knowledge economies, for money can always be found to back new insights, technologies and organizational methods that work…Capital is always available under capitalism, but knowledge and insight are rare and precious under any system.
Knowledge can be bought and sold in a free market, like anything else…
Knowledge should not be narrowly conceived as the kind of information in which intellectuals and academics specialize…
In reality, there is much that the intelligentsia do not know that is vital knowledge in the functioning of an economy. It may be easy to disdain the kinds of highly specific knowledge and implications which are often economically decisive by asking, for example: How much knowledge does it take to fry a hamburger? Yet McDonald’s did not become a multi-billion-dollar corporation…for no reason – not with so many rivals trying desperately and unsuccessfully to do the same…
…In all these cases, it was the knowledge that was built up over the years – the human capital – which ultimately attracted the financial capital to make ideas become reality. The other side of this is that, in countries where the mobilization of financial resources is made difficult by deficiencies in property rights laws, those at the bottom have fewer ways of getting the capital needed to back their entrepreneurial endeavors. More important, the whole society loses the benefits it could gain…
Success is only part of the story of a free market economy. Failure is at least as important a part, though few want to talk about it and none want to experience it…Economics is not about “win-win” options, but about often painful choices in the allocation of scarce resources which have alternative uses. Success and failure are not isolated good fortunes and misfortunes, but inseparable parts of the same process.
All economies…are essentially ways of cooperating in the production and distribution of goods and services, whether this is done efficiently or inefficiently, voluntarily or involuntarily. Naturally, individuals and groups want their own particular contributions to the process to be better rewarded, but their complaints or struggles over this are a sideshow to the main event of complementary efforts which produce the output on which all depend. Yet invidious comparisons and internecine struggles are the stuff of social melodrama, which in turn is the lifeblood of the media and politics, as well as for portions of the intelligentsia.
By portraying cooperative activities as if they were zero-sum contests…those with the power to impose their misconceptions on others through words or laws can create a negative-sum contest, in which all are worse off…
Those with a zero-sum vision who have seen property rights as mere special privileges for the affluent and the rich have helped erode or destroy such rights, or have made them practically inaccessible to the poor in Third World countries, thereby depriving the poor of one of the mechanisms by which people from backgrounds like theirs have risen to prosperity in other times and places.
However useful economics may be for understanding many issues, it is not as emotionally satisfying as more personal and melodramatic depictions of these issues often found in the media and in politics. Dry empirical questions are seldom as exciting as political crusades or moral pronouncements. But they are questions that must be asked, if we are truly interested in the well-being of others, rather than in excitement or a sense of moral superiority for ourselves. Perhaps the most important distinction is between what sounds good and what works. The former may be sufficient for purposes of politics or moral preening, but not for the economic advancement of people in general or the poor in particular…

Part IV to follow…
For previous postings on Economic Thoughts, refer to:
Part I: What is Economics?
Part II: Myths About Markets

This posting is Part II in a series of postings about economic thoughts.
The excerpts in this posting are taken from Chapter 23 in Thomas Sowell’s book Basic Economics: A Citizens Guide to the Economy and discuss myths about markets, including: (i) morality and markets; (ii) prices; (iii) the role of profits; (iv) non-profit organizations; and, (v) “trickle down” theory.
Morality and Markets

The market is as moral or immoral as the people in it. So is the government. The fact that we call one set of people “the market” and another set of people “society” does not mean that the moral or other imperfections of the first set of people automatically justify having the second set of imperfect people over-ruling their decisions…the market…is people making their own individual choices and their mutual accomodations.
Once it was fashionable to contrast the selfishness of the isolated individual in a market economy with cooperative actions among people with a more communal spirit under various forms of socialism. One reason such rhetorical or ideological fashions no longer have the same effectiveness is the actual track record of socialist systems in practice. What also needs to be considered is the track record of market economies in creating widespread cooperation among people through individual incentives…
Is cooperation any less because the incentives behind it are the individual benefits of the participants?
Despite the painful facts of history, the idea persists in many places that political decisions are more moral than decisions made through the marketplace…
Empirical consequences, however, often matter less than deeply ingrained beliefs and attitudes. Whether in urgent or less urgent matters, many believe those with political power are better qualified to make moral decisions than are the private parties directly involved…
The idea that third party observers can impose morally better decisions often includes the idea that they can define what are “luxuries of the rich,” when it is precisely the progress of free market economies which has turned luxuries of the rich into common amenities of people in general, including the poor…

Prices

There seem to be almost as many myths about prices as there are prices…
Physically identical things are often sold for different prices, usually because of accompanying conditions that are quite different…
Part of the reason for the variations in price [is] the variation in the cost of real estate in the different communities…
Another reason is the cost of inventory…going to different stores meant having different probabilities of finding what you wanted…Cost differences reflected differences in availability, which is to say, differences in the costs of maintaining inventory, even when the particular commodities were physically the same. It also meant differences in the costs measured in the time that a customer would have to spend going from store to store to find all the items on a grocery shopping list.
Mistakes or miscalculations may sometimes cause the same thing to be sold for different prices under comparable conditions temporarily, but competition usually makes this a passing phenomenon…
One of the popular myths that has become part of the tradition of anti-trust law is “predatory pricing.”…
One of the most remarkable things about this theory is that those who advocate it seldom provide concrete examples of when it ever actually happened. Perhaps even more remarkable, they have not had to do so, even in courts of law…
A company that sustains losses by selling below cost to drive out a competitor is following a very risky strategy. The only thing it can be sure of is losing money initially. Whether it will ever recover enough extra profits to make the gamble pay off in the long run is problematical…it is by no means clear that eliminating all existing competitors will mean eliminating competition.
Even when a rival firm has been forced into bankruptcy, its physical equipment and the skills of the people who once made it viable do not vanish into thin air. A new entrepreneur can come along and acquire both – perhaps at low distress sale prices…enabling the new competitor to have lower costs than the old and hence be a more dangerous rival…
Bankruptcy can eliminate particular owners and managers, but it does not eliminate competition in the form of new people…Destroying a particular competitor without destroying competition can be an expensive endeavor…

The Role of Profits

Those who favor government intervention in the economy often depict those who prefer free competition as pro-business apologists. This has been profoundly wrong for at least two centuries. Adam Smith, the eighteenth-century father of free-market economics, was so scathingly critical of businessmen that it would be impossible to find a single favorable reference to them…
Skepticism about the business community has remained part of the tradition of free-market economists throughout the twentieth century as well, with Milton Friedman’s views being very similar to those of Adam Smith on this point.
Free market competition has often been opposed by the business community…business leaders and organizations have proven equally willing to seek government intervention to keep out foreign competition, bail out failing corporations and banks, and receive billions of dollars in agricultural subsidies, ostensibly for the sake of saving family farms, but in reality going disproportionately to large agricultural corporations…
…Business leaders are not wedded to a free market philosophy or any other philosophy. They promote their own self-interest any way they can, like other special interest groups…
…efficient uses of scarce resources by the economy as a whole depends on a system that features both profits and losses. Businesses are interested only in the profit half. If they can avoid losses by getting government subsidies, tariffs and other restrictions against imports, or domestic laws that stifle competition in various agricultural products, they will do so. Losses, however, are essential to the process that shifts resources to those who are providing what consumers want at the lowest prices – and away from those who are not…
Even people who understand the need for competition, and for both profits and losses, nevertheless often insist that it should be “fair” competition. But this is a slippery word that can mean almost anything…Like discussions of fairness in other contexts besides economics, this kind of reasoning ignores the costs imposed on third parties – in this case, the consumers who pay needlessly high prices to keep less efficient businesses operating, using scarce resources which have more valuable alternative uses.
Some people consider it a valid criticism of corporations that they are “just in business to make profits.” By this kind of reasoning, workers are just working to earn their pay. In the process, however, they produce all the things that give their contemporaries the highest standard of living the world has known. What matters is not the motivation but the results…the real question is: What are the preconditions for earning a profit?
One precondition is that profit-seeking corporations cannot squander scarce resources the way Soviet enterprises did. Corporations operating in a market economy have to pay for all their inputs – whether labor, raw materials, or electricity – and they have to pay as much as others are willing to bid for them. Then they have to sell their own end product at a price as low as their competitors are charging. If they fail to do both, they fail to make a profit. And if they keep on failing to amke a profit, either the management will be replaced or the whole business will be replaced by some competitor who is more efficient…
…It is in the absence of a profit-and-loss economy that there are few incentives to maintain the long-run productivity of an industrial enterprise or a collective farm, as in the Soviet Union…

Non-Profit Organizations

…what are called “non-profit organizations” can be better understood when they are seen as non-profit and non-loss institutions…
Non-profit organizations have additional sources of income, including fees from those who use their services…However, these fees do not cover the full costs of their operation – which is to say, the recipients are receiving goods and services that cost more than these recipients are paying…Such subsidized beneficiaries cannot impose the same kind of economic discipline as the customers of a profit-and-loss business who are paying the full cost of everything they get…
What changes incentives and constraints is the fact that the money received by a profit-and-loss business comes directly from those who use its goods and services, while the money received by a non-profit organization comes primarily from subsidized beneficiaries, from donors and – indirectly – from the taxpayers who pay the additional taxes made necessary by the tax exemptions of non-profit organizations. That gives the managers of non-profit organizations far more room to do what they want, rather than what either the public wants or what their deceased donors wanted when these organizations were set up.

“Trickle Down” Theory

People who are politically committed to policies of redistributing income and who tend to emphasize the conflicts between business and labor, rather than their mutual interdependence, often accuse those opposed to them of believing that benefits must be given to the wealthy in general or to business in particular, in order that these benefits will eventually “trickle down” to the masses of ordinary people. But no recognized economist of any school of thought has ever had any such theory or made any such proposal. It is a straw man…
In reality, economic processes work in the directly opposite way from that depicted by those who imagine that profits first benefit business owners and that benefits only belatedly trickle down to workers.
When an investment is made…the first money is spent hiring people to do the work…Money goes out first to pay expenses and then comes back as profits later – if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.
Even with successful and well-established businesses, years may elapse between the initial investment and the return of earnings…The real effect of a reduction in the capital gains tax is that it opens the prospect of greater future net profits and thereby provides incentives to make current investments…
In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a “trickle-down” theory…

Part III to follow…
For the previous posting on Economic Thoughts, refer to:
Part I: What is Economics? [Open full post]

This posting is Part II in a series of postings about economic thoughts.
The excerpts in this posting are taken from Chapter 23 in Thomas Sowell’s book Basic Economics: A Citizens Guide to the Economy and discuss myths about markets, including: (i) morality and markets; (ii) prices; (iii) the role of profits; (iv) non-profit organizations; and, (v) “trickle down” theory.
Morality and Markets

The market is as moral or immoral as the people in it. So is the government. The fact that we call one set of people “the market” and another set of people “society” does not mean that the moral or other imperfections of the first set of people automatically justify having the second set of imperfect people over-ruling their decisions…the market…is people making their own individual choices and their mutual accomodations.
Once it was fashionable to contrast the selfishness of the isolated individual in a market economy with cooperative actions among people with a more communal spirit under various forms of socialism. One reason such rhetorical or ideological fashions no longer have the same effectiveness is the actual track record of socialist systems in practice. What also needs to be considered is the track record of market economies in creating widespread cooperation among people through individual incentives…
Is cooperation any less because the incentives behind it are the individual benefits of the participants?
Despite the painful facts of history, the idea persists in many places that political decisions are more moral than decisions made through the marketplace…
Empirical consequences, however, often matter less than deeply ingrained beliefs and attitudes. Whether in urgent or less urgent matters, many believe those with political power are better qualified to make moral decisions than are the private parties directly involved…
The idea that third party observers can impose morally better decisions often includes the idea that they can define what are “luxuries of the rich,” when it is precisley the progress of free market economies which has turned luxuries of the rich into common amenities of people in general, including the poor…

Prices

There seem to be almost as many myths about prices as there are prices…
Physically identical things are often sold for different prices, usually because of accompanying conditions that are quite different…
Part of the reason for the variations in price [is] the variation in the cost of real estate in the different communities…
Another reason is the cost of inventory…going to different stores meant having different probabilities of finding what you wanted…Cost differences reflected differences in availability, which is to say, differences in the costs of maintaining inventory, even when the particular commodities were physically the same. It also meant differences in the costs measured in the time that a customer would have to spend going from store to store to find all the items on a grocery shopping list.
Mistakes or miscalculations may sometimes cause the same thing to be sold for different prices under comparable conditions temporarily, but competition usually makes this a passing phenomenon…
One of the popular myths that has become part of the tradition of anti-trust law is “predatory pricing.”…
One of the most remarkable things about this theory is that those who advocate it seldom provide concrete examples of when it ever actually happened. Perhaps even more remarkable, they have not had to do so, even in courts of law…
A company that sustains losses by selling below cost to drive out a competitor is following a very risky strategy. The only thing it can be sure of is losing money initially. Whether it will ever recover enough extra profits to make the gamble pay off in the long run is problematical…it is by no means clear that eliminating all existing competitors will mean eliminating competition.
Even when a rival firm has been forced into bankruptcy, its physical equipment and the skills of the people who once made it viable do not vanish into thin air. A new entrepreneur can come along and acquire both – perhaps at low distress sale prices…enabling the new competitor to have lower costs than the old and hence be a more dangerous rival…
Bankruptcy can eliminate particular owners and managers, but it does not eliminate competition in the form of new people…Destroying a particular competitor without destroying competition can be an expensive endeavor…

The Role of Profits

Those who favor government intervention in the economy often depict those who prefer free competition as pro-business apologists. This has been profoundly wrong for at least two centuries. Adam Smith, the eighteenth-century father of free-market economics, was so scathingly critical of businessmen that it would be impossible to find a single favorable reference to them…
Skepticism about the business community has remained part of the tradition of free-market economists throughout the twentieth century as well, with Milton Friedman’s views being very similar to those of Adam Smith on this point.
Free market competition has often been opposed by the business community…business leaders and organizations have proven equally willing to seek government intervention to keep out foreign competition, bail out failing corporations and banks, and receive billions of dollars in agricultural subsidies, ostensibly for the sake of saving family farms, but in reality going disproportionately to large agricultural corporations…
…Business leaders are not wedded to a free market philosophy or any other philosophy. They promote their own self-interest any way they can, like other special interest groups…
…efficient uses of scarce resources by the economy as a whole depends on a system that features both profits and losses. Businesses are interested only in the profit half. If they can avoid losses by getting government subsidies, tariffs and other restrictions against imports, or domestic laws that stifle competition in various agricultural products, they will do so. Losses, however, are essential to the process that shifts resources to those who are providing what consumers want at the lowest prices – and away from those who are not…
Even people who understand the need for competition, and for both profits and losses, nevertheless often insist that it should be “fair” competition. But this is a slippery word that can mean almost anything…Like discussions of fairness in other contexts besides economics, this kind of reasoning ignores the costs imposed on third parties – in this case, the consumers who pay needlessly high prices to keep less efficient businesses operating, using scarce resources which have more valuable alternative uses.
Some people consider it a valid criticism of corporations that they are “just in business to make profits.” By this kind of reasoning, workers are just working to earn their pay. In the process, however, they produce all the things that give their contemporaries the highest standard of living the world has known. What matters is not the motivation but the results…the real question is: What are the preconditions for earning a profit?
One precondition is that profit-seeking corporations cannot squander scarce resources the way Soviet enterprises did. Corporations operating in a market economy have to pay for all their inputs – whether labor, raw materials, or electricity – and they have to pay as much as others are willing to bid for them. Then they have to sell their own end product at a price as low as their competitors are charging. If they fail to do both, they fail to make a profit. And if they keep on failing to amke a profit, either the management will be replaced or the whole business will be replaced by some competitor who is more efficient…
…It is in the absence of a profit-and-loss economy that there are few incentives to maintain the long-run productivity of an industrial enterprise or a collective farm, as in the Soviet Union…

Non-Profit Organizations

…what are called “non-profit organizations” can be better understood when they are seen as non-profit and non-loss institutions…
Non-profit organizations have additional sources of income, including fees from those who use their services…However, these fees do not cover the full costs of their operation – which is to say, the recipients are receiving goods and services that cost more than these recipients are paying…Such subsidized beneficiaries cannot impose the same kind of economic discipline as the customers of a profit-and-loss business who are paying the full cost of everything they get…
What changes incentives and constraints is the fact that the money received by a profit-and-loss business comes directly from those who use its goods and services, while the money received by a non-profit organization comes primarily from subsidized beneficiaries, from donors and – indirectly – from the taxpayers who pay the additional taxes made necessary by the tax exemptions of non-profit organizations. That gives the managers of non-profit organizations far more room to do what they want, rather than what either the public wants or what their deceased donors wanted when these organizations were set up.

“Trickle Down” Theory

People who are politically committed to policies of redistributing income and who tend to emphasize the conflicts between business and labor, rather than their mutual interdependence, often accuse those opposed to them of believing that benefits must be given to the wealthy in general or to business in particular, in order that these benefits will eventually “trickle down” to the masses of ordinary people. But no recognized economist of any school of thought has ever had any such theory or made any such proposal. It is a straw man…
In reality, economic processes work in the directly opposite way from that depicted by those who imagine that profits first benefit business owners and that benefits only belatedly trickle down to workers.
When an investment is made…the first money is spent hiring people to do the work…Money goes out first to pay expenses and then comes back as profits later – if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.
Even with successful and well-established businesses, years may elapse between the initial investment and the return of earnings…The real effect of a reduction in the capital gains tax is that it opens the prospect of greater future net profits and thereby provides incentives to make current investments…
In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a “trickle-down” theory…

Part III to follow…
For the previous posting on Economic Thoughts, refer to:
Part I: What is Economics?

This posting is Part I in a series of postings about economic thoughts.
The excerpts in this posting are taken from Thomas Sowell’s book Basic Economics: A Citizens Guide to the Economy and define what is economics.
Chapter 1: What is Economics?

Virtually everyone agrees on the importance of economics, but there is far less agreement on just what economics is…economics is not personal finance or business administration…
To know what economics is, we must first know what an economy is. Perhaps most of us think of an economy as a system for the production and distribution of the goods and services we use in everyday life. That is true as far as it goes, but it does not go far enough…Without scarcity, there is no need to economize – and therefore no economics. A distinguished British economist named Lionel Robbins gave the classic definition of economics:

Economics is the study of the use of scarce resources which have alternative uses.

… But every era has always been an era of scarcity.
What does “scarce” mean? It means that what everybody wants adds up to more than there is. This may seem like a simple thing, but its implications are often grossly misunderstood…
However, it is not something as man-made as a budget that constrains them: Reality constrains them. There has never been enough to satisfy everyone completely. That is the real constraint. That is what scarcity means…
…nothing has been more pervasive in the history of the human race than scarcity and all the requirements for economizing that go with scarcity.
Not only scarcity but also “alternative uses” are at the heart of economics. If each resource had only one use, economics would be much simpler…How much of each resource should be allocated to each of its many uses? Every economy has to answer that question, and each one does, in one way or another, efficiently or inefficiently. Doing so efficiently is what economics is all about…
Economics is not about the financial fate of individuals. It is about the material well-being of society as a whole. It shows cause and effect relationships involving prices, industry and commerce, work and pay, or the international balance of trade – all from the standpoint of how this affects the allocation of scarce resources in a way that raises or lowers the material standard of living of the people as a whole…
…life does not ask what we want. It presents us with options. Economics is just one of the ways of trying to make the most of those options.
While there are controversies in economics, as there are in science, this does not mean that economics is just a matter of opinion…
All sorts of economies – capitalist, socialist, feudal, etc. – must determine in one way or another how the available resources are directed toward their various uses. But how well they do it can lead to poverty or affluence for a whole country. That is what the study of economics is all about and that is what makes it important.

Part II to follow…

This posting is Part I in a series of postings about economic thoughts.
The excerpts in this posting are taken from Thomas Sowell’s book Basic Economics: A Citizens Guide to the Economy and define what is economics.
Chapter 1: What is Economics?

Virtually everyone agrees on the importance of economics, but there is far less agreement on just what economics is…economics is not personal finance or business administration…
To know what economics is, we must first know what an economy is. Perhaps most of us think of an economy as a system for the production and distribution of the goods and services we use in everyday life. That is true as far as it goes, but it does not go far enough…Without scarcity, there is no need to economize – and therefore no economics. A distinguished British economist named Lionel Robbins gave the classic definition of economics:

Economics is the study of the use of scarce resources which have alternative uses.

… But every era has always been an era of scarcity.
What does “scarce” mean? It means that what everybody wants adds up to more than there is. This may seem like a simple thing, but its implications are often grossly misunderstood…
However, it is not something as man-made as a budget that constrains them: Reality constrains them. There has never been enough to satisfy everyone completely. That is the real constraint. That is what scarcity means…
…nothing has been more pervasive in the history of the human race than scarcity and all the requirements for economizing that go with scarcity.
Not only scarcity but also “alternative uses” are at the heart of economics. If each resource had only one use, economics would be much simpler…How much of each resource should be allocated to each of its many uses? Every economy has to answer that question, and each one does, in one way or another, efficiently or inefficiently. Doing so efficiently is what economics is all about…
Economics is not about the financial fate of individuals. It is about the material well-being of society as a whole. It shows cause and effect relationships involving prices, industry and commerce, work and pay, or the international balance of trade – all from the standpoint of how this affects the allocation of scarce resources in a way that raises or lowers the material standard of living of the people as a whole…
…life does not ask what we want. It presents us with options. Economics is just one of the ways of trying to make the most of those options.
While there are controversies in economics, as there are in science, this does not mean that economics is just a matter of opinion…
All sorts of economies – capitalist, socialist, feudal, etc. – must determine in one way or another how the available resources are directed toward their various uses. But how well they do it can lead to poverty or affluence for a whole country. That is what the study of economics is all about and that is what makes it important.

Part II to follow…

There are still many people who persist in propagating the myth that the Great Depression represented a failure of the capitalist system that could only be solved by active government intervention in the economy. Like all myths, the empirical data does not support that belief even as the belief has continued to reside in the superficial understandings of many people.
Lawrence Reed at the Mackinac Center for Public Policy wrote Great Myths of the Great Depression, a very approachable document for reading by the layman.
Milton Friedman won his Nobel Prize in Economics in part for his book, Monetary History of the United States, 1867-1960, in which he offered the first rigorous explanation of what caused the Great Depression.
In the third chapter of his book, Capitalism & Freedom, Friedman offers some highlights of what is in his more indepth study of the Great Depression:

However, in view of the importance which the Great Depression of 1929-1933 played in forming – or, I would say, deforming – general attitudes toward the role of government in economic affairs, it may be wroth indicating more fully…the kind of interpretation suggested by the evidence.
Because of its dramatic character, the stock market crash in October 1929, which terminated the bull market of 1928 and 1929 is often regarded as both the start and the major proximate cause of the Great Depression. Neither is correct. The peak of business was reached in mid-1929…
For something like the first year, the contraction showed none of those special features that were to dominate its later course. The economic decline was more severe than during the first year of most contractions, possible in response to the stock market crash plus the unusually tight monetary conditions that had been maintained since mid-1928…
…it is clear that the Reserve System should already have been behaving differently than it did, that it should not have allowed the money stock to decline by nearly 3 percent from August 1929 to October 1930…
The character of the contraction changed drastically in November 1930 when a series of bank failures led to widespread runs on banks, which is to say attempts by depositors to convert deposits into currency…
Prior to 1930, there had been no sign of a liquidity crisis, or any loss of confidence in banks. From this time on, the economy was plagued by recurrent liquidity crises…These [runs on banks] were important not only or even primarily because of the failures of the banks but because of their effect on the money stock…
This was precisely the kind of a situation that had led to a banking panic under the pre-Federal Reserve banking system…
…one of the major reasons for establishing the Federal Reserve System was to deal with such a situation…
The first need for these powers and hence the first test of their efficacy came in November and December 1930 as a result of the string of bank closings…The Reserve System failed the test miserably. It did little or nothing to provide the banking system with liquidity…It is worth noting that the System’s failure was a failure of will, not of power…the System had ample power to provide the banks with the cash their depositors were demanding. Had this been done, the bank closings would have been cut short and the monetary debacle averted…
The [economic] figures for the first four or five months of 1931…have all the earmarks of the bottom of a cycle and the beginning of revival.
The tentative revival was however short-lived. Renewed bank failures started another series of runs and again set in train a renewed decline in the stock of money. Again, the Reserve System stood idly by. In the face of an unprecedented liquidation of the commercial banking system, the books of the [Reserve System] show a decline in the amount of credit it made available to its member banks…
After more than two years of severe economic contraction, the System raised the discount rate…more sharply that it has within so brief a period in its whole history before or since….It was also accompanied by a spectacular increase in bank failures and runs on banks…
A temporary reversal of policy in 1932 involving the purchase of $1 billion of government bonds slowed down the rate of decline. Had this measure been taken in 1931, it would almost surely have been sufficient to prevent the debacle just described. By 1932, it was too late to be more than a palliative and, when the System relapsed into passivity, the temporary improvement was followed by a renewed collapse terminating in the Banking Holiday of 1933…A system established in large part to prevent a temporary suspension of convertibility of deposits into currency – a measure that had formerly prevented banks from failing – first let nearly a third of the banks of the country go out of existence and then welcomed a suspension of convertibility that was incomparably more sweeping and severe than any earlier suspension…
All told, from July 1929 to March 1933, the money stock in the United States fell by one-third…it is literally inconceivable that money income could have declined by over one-half and prices by over one-third in the course of four years if there had been no decline in the stock of money. I know of no severe depression in any country or any time that was not accompanied by a sharp decline in the stock of money and equally of no sharp decline in the stock of money that was not accompanied by a severe depression.
The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country…

ADDITIONAL INFORMATION:
In the comments section below, Marc has added some important links that further elaborate on the causes for the Great Depression. In addition to the Lawrence Reed piece from the Mackinac Institute referenced above, Marc guides us to:
The Government and the Great Depression by Chris Edwards, Director of Tax Policy at the Cato Institute
The Fed’s Depression and the Birth of the New Deal by Paul Craig Roberts and Lawrence Stratton
You can also learn more by reading FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression.
ADDITIONAL INFORMATION II:
Professor Don Boudreaux from Cafe Hayek has more.

Jon Coupal and Richard Rider have written Private and Public Sector Unions are not Equal, in which they say:

…When government watchdogs ask reasonable questions about the wisdom of promising high pay and lavish pensions that are far above what is
available to most private sector workers, union leaders accuse critics of being “anti-union.” In this manner, they hope to protect their efforts under the umbrella of America’s labor union movement. After all, the implication of calling someone “anti-union” is that the person favors sweatshops and employer tactics that use coercion to deny workers a fair wage in return for their labor.
However, government worker unions have little in common with the private sector unions that have spearheaded the American labor movement — aside from the “union label.”
Taxpayer advocates have no fundamental problem with private worker labor unions. There we see the proper balance between labor and management, between employees and owners. While some may disagree with an individual union’s policies and tactics — just as they may disagree with a company’s conduct — most understand that these unions are a part of a productive private sector…
But public employee labor unions are another matter. In essence, particularly on the local level, they select the “owners,” or at least the management. They expend manpower and money to see that “their” candidates are elected to office. This way, when it is time to sit down at the bargaining table to discuss wages and benefits, the union has representatives on both sides of the table. There is no balance — quite the opposite. The fox is guarding the henhouse. And the taxpaying citizens are on the menu.
A major difference between private and public entities is that the private firms have to earn their money through voluntary transactions. For all their rhetoric, private employee union leaders usually understand that it’s best that the companies they negotiate with be competitive enough to stay in business and thrive — and businesses can do that only if they provide a desirable good or service at a price the customers are willing to voluntarily pay.
On the other hand, public employee unions rely on the coercive power of government to tax anyone and anything within their jurisdiction…
Does this make the government union members “bad guys?” No, they are simply acting in their own, and their members’, self-interest. But they are playing a zero sum game, thanks to the involuntary nature of taxation. Every dollar that goes to a government worker has to be taken from someone else by the threat of force.
And remember, public employees have something that private employees do not — a civil service system. Indeed, there is good argument that collective bargaining for public employees is unnecessary because of all the employment protections they already receive. (Ever tried to fire a public employee?)
We need balance to protect the real owners of the public sector — the vast majority of citizens and taxpayers who do not work for a city, county or state government. It is time to break the government worker union hammerlock by giving the private sector a chance to provide government services at a substantial cost savings…

The authors’ description of the political dynamics surrounding public sector unions is explained further in The Radically Different Visions of Tax-Eaters Versus Taxpayers.