In Basic Economics, Thomas Sowell provides a clear treatment of the economic principles that underlie capitalist economics. First he explains the fundamental mechanisms of capitalism, then he shows how even educated people tend to misunderstand these basic concepts. This book is not just an introductory course in economics, it is an explanation of its counter-intuitive logic.
As Sowell defines it:
Economics is the study of the allocation of scarce resources that have alternative uses.
“that have alternative uses” – that is the key. Most people understand that capitalism is driven by profits. Producers are motivated to create companies and sell products because they can retain the difference between production costs and the price the customer pays. And customers will pay a higher price for products that are more valuable to them. That is simple enough. But Sowell explains further that producers compete with each other for inputs, the materials needed to make their products. To maximize profit, producers seek the lowest possible input costs, and so they use inputs, whenever possible, with the least valuable alternative use. They are less in demand and therefore lower in cost. This creates efficiency in the utilization of resources. The profit motive thus drives the match of the value of resources with the value the customer seeks. More valuable resources get used to produce what customers value most.
There is an all-to-common characterization of profit as a selfish cheating of the customer, motivated by ‘greed’. With Dr. Sowell’s reasoning, profit is a moral pursuit. A business that does not earn profit is needlessly employing scarce resources that could be used more effectively in some other way. The story of profit capitalism, then, is products being made the same or better, but with less resource inputs – doing more with less. A firm either produces a higher quality product using the same cost of inputs, or makes the same product using lower cost inputs. Resources get utilized efficiently, desired products are produced, needs are satisfied, fortunes are made, and wealth is created. And all with price and profit, not control and coercion.
Sowell is frustrated that the advantages that drive a capitalist economy are strangely dismissed, often, by the very people who enjoy its fruits. The failures of controlled economies should drive us to embrace the benefits of capitalist economics and profit.
The trend of the last century is encouraging:
The twentieth century began with high hopes for replacing the competition of the marketplace by a more efficient and more humane economy, planned and controlled by government in the interests of the people…But the most decisive evidence for the efficiency of the marketplace was that even those who were philosophically opposed to capitalism turned back toward it after seeing what happens when industry and commerce operate without the guidance of prices, profits and losses.