Applied Economics: Thinking beyond Stage One

By Newmark, Craig M. | Freeman, June 2005 | Go to article overview
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Applied Economics: Thinking beyond Stage One

Newmark, Craig M., Freeman

Applied Economics: Thinking Beyond Stage One by Thomas Sowell Basic Books * 2004 * 222 pages * $30.00

This book works well on two levels. First, it explains the basic principles of economics in an unusual way-without equations, graphs, and jargon. It could be read easily by an intelligent ninth-grader, but it is neither condescending nor dull. Sowell is a master storyteller. Second, Applied Economics compares how well markets work to how well governments do.

Sowell stresses two fundamental ideas. One is that we desire far more things than we could ever hope to produce. Since we can't have everything we want, we must, both individually and collectively, make choices. And when we choose one thing, we sacrifice the chance to obtain other things we want. Choices are often difficult to make, but unavoidable.

In chapters on the labor, housing, and medical-care markets, Sowell vividly illustrates that idea. For example, we can punish doctors who we believe have made mistakes, but we will discover that doctors are subsequently less willing to perform risky procedures.

The other fundamental idea is that in making their choices, people will respond to incentives, particularly prices. If the price of doing something rises, people will do less of it. If the price falls, people will do more of it. This simple idea provides powerful insight into individual behavior. Here, too, Sowell illustrates. If the government limits the price per visit doctors may charge, they will schedule more but shorter-and rushed-visits. If laws restrict the height of buildings, more buildings will be created, leading to more traffic and more sprawl. Sowell relates that Mikhail Gorbachev once asked Prime Minister Margaret Thatcher how she arranged for her citizens to get fed. She answered that she didn't arrange it; individuals responding to prices did.

Sowell shows that a key characteristic of markets is that they confront individuals with the costs of their actions. IfI fail to maintain my car, I'll bear the cost and inconvenience if it breaks down. Even if it doesn't break down, I'll suffer the decrease in value when I dispose of it. But when I decide which government policies to support or officials to vote for, I bear little of the cost of my actions.

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