March 16, 2004

The Explanatory Power of Economic Logic

Robert P. Murphy on Thomas Sowell’s latest book Applied Economics: Thinking Beyond Stage One:

Sowell’s overall message is that "thinking beyond stage one" is necessary to understand the true causes (and cures) of social ills. Whether the issue is housing, health care, or Third World development, Sowell shows that the traditional government "solutions" are always counterproductive. In many respects, Sowell’s book is an updated Economics in One Lesson.

(...)

As mentioned earlier, one of the best features of Sowell’s book is his use of interesting and relevant examples to illustrate general principles. To explain a particular point about decisions in the face of uncertainty, he cites the case of Japanese fighter pilots who didn’t wear parachutes, because the constraint on their flexibility in dogfights would make them more likely to get shot down in the first place (p. 154).

When discussing the very real risks faced by check-cashing businesses, Sowell cites the case of Banco Popular, which lost $66,000 when a fly-by-night employer skipped town after emptying the account on which the paychecks had been written. Because well-paid employees are likely to have more reliable employers, they often get free check cashing services, while the "working poor" must pay a premium for the added risk. Notwithstanding the apparent unfairness, Sowell’s example explains the phenomenon (pp. 133-34).