Basic Economics: A Citizen's Guide to the Economy

By Thomas Sowell | Go to book overview

Chapter 14
An Overview

Time adds a new dimension to economics, as it does to other aspects of life. Future money is not the same as present money, even if there has been no inflation to reduce its purchasing power. A bond worth $105 a year from now is not worth buying for $100 today if the current interest rate is 6 percent.

Interest is the price of time and it affects not only financial transactions, but even such apparently unrelated things as the amount of a country's known reserves of natural resources. If the interest rate doubles, then the rising cost of exploring for oil and other natural resources will reduce the amount of exploration, which in turn means that the explorers will probably find less. To those who do not understand the role of interest rates in all this, it may appear that we are going to run out of these resources even sooner than they thought before. But that is precisely why it is necessary to take interest rates into account, so as not to be so easily stampeded by the media, politicians, and others with a vested interest in creating excitement or alarming the public.

With time comes risk. This inherent risk must be sharply distinguished from the kinds of risk that are created by such activities as gambling, mountain climbing, or playing Russian roulette. Economic activities for dealing with inescapable risks seek both to minimize those risks and shift them to those best able to carry them. A commodity speculator can reduce risks overall by engaging in a wider variety of risky activities than a farmer, for example. A wheat farmer can be wiped out if bumper crops of wheat around the world force the price far below what was expected when the crop was planted. But a similar disaster would be unlikely to strike wheat, gold, cattle, and foreign currencies simultaneously, so that someone who speculated in all these things

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Basic Economics: A Citizen's Guide to the Economy
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • Acknowledgements xi
  • Chapter I - What Is Economics? 1
  • Part I - Prices 5
  • Chapter 2 - The Role of Prices 7
  • Chapter 3 - Price Controls 21
  • Chapter 4 - An Overview 39
  • Part II - Industry and Commerce 57
  • Chapter 5 - The Rise and Fall of Businesses 59
  • Chapter 6 - The Role of Profits -- and Losses 73
  • Chapter 7 - Big Business and Government 89
  • Chapter 8 - An Overview 105
  • Part III - Work and Pay 125
  • Chapter 9 - Productivity and Pay 127
  • Chapter 10 - Controlled Labor Markets 149
  • Chapter 11 - An Overview 167
  • Part IV - Time and Risk 173
  • Chapter 12 - Investment and Speculation 175
  • Chapter 13 - Risks and Insurance 193
  • Chapter 14 - An Overview 207
  • Part V - The National Economy 213
  • Chapter 15 - National Output 215
  • Chapter 16 - Money and the Banking System 223
  • Chapter 17 - The Role of Government 237
  • Part VI - The International Economy 267
  • Chapter 19 - International Trade 269
  • Chapter 20 - International Transfers of Wealth 283
  • Chapter 21 - An Overview 297
  • Part VII - Popular Economic Fallacies 303
  • Chapter 22 - Non-Economic Values 305
  • Chapter 23 - Prices and Purchasing Power 315
  • Chapter 24 - Business and Labor 329
  • Chapter 25 - An Overview 343
  • Sources 347
  • Index 359
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