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Why is it important to understand Economics?

Philosophically, it seems like capitalism is corrupt. Look at how wealth is concentrated in a few hands. Look at the homeless situation. Can understanding economics do anything to help that?

Socialism seems more "worker friendly" than capitalism. It seems like sharing, like people looking out for each other. Why not choose that path?

As voters and as business owners and shareholders (at least in our retirement accounts), it's a good idea to understand the consequences of the actions of our government's and businesses' policies.

There is no country's economy in the world that is "purely capitalistic" or "purely socialistic." Countries that tried to have managed economies, like the former Soviet Union and China, discovered the only way they could efficiently feed and clothe their populations was to open up their economies and marketplaces. Most of those countries have adopted more capitalistic practices, and their populations have benefited with better standards of living. On the social services side, even the United States has had its social security system, Medicare, welfare, Medicaid and farm subsidies for decades.

In Basic Economics, Dr. Thomas Sowell, a scholar in residence at the Hoover Institution at Stanford University, attempts to explain the concepts of economics. He intentionally avoids using charts and graphs. The book is entirely text. The text of the book is about 634 pages, not light reading.

Dr. Sowell explains that economics is not about "right" and "wrong." It's about the natural consequences of taking certain actions and the efficient allocation of resources. Our economy tends to have the best results with minimal government controls, a free market economy.

Resources that are in demand and for which production is rewarded will tend to be produced. The priority of production depends on that demand and reward.

Many economic decisions by governments are dictated by political pressure. For example, right now renters are terrified to eliminate some of the subsidies and limitations enacted during the recession. They're afraid landlords will increase their rent beyond what they can afford to pay. They are demanding rent controls. Yet experience has shown that rent controls eliminate the incentive to build additional housing. The units that remain tend to go to affluent families who retain rental rights (like near Central Park in New York City). With artificially low rents, landlords might be unable to continue paying their mortgage payments and maintain their properties, so the properties deteriorate or might be foreclosed. Alternatively, landlords might convert residential rental property to commercial office space for which rent isn't controlled. Poorer tenants are unable to find housing they can afford. It's sort of a vicious cycle.

Everything isn't rosy in the competitive marketplace. Some business leaders aren't good corporate citizens and they attempt to manipulate the marketplace. That's the reason classics of business criticism, like The Jungle by Upton Sinclair, were written to expose unsanitary practices in the meat packing industry. Businesses have been known to illegally bribe politicians (perhaps with political contributions) to award subsidies or fat government contracts. Some government regulation and internal government audits are necessary when business managers and politicians misbehave.

Up to a challenge for summer reading? Get a copy of Basic Economics by Thomas Sowell and study it.

Buy it at Amazon: Basic Economics.

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