Honolulu Advertiser

SECOND OPINION  by Cliff Slater

July 19, 2004

Economics lessons are needed

 If there is one book I would have Hawaii’s legislators and journalists read it is Thomas Sowell’s newest one, “Applied Economics,” which, while its title is somewhat daunting, turns out to be a fascinating discussion about the real outcomes of legislators’ good intentions. [1]

Sowell, who as a graduate student was a Marxist, dedicates the book to his graduate school teacher, Arthur Smithies, who would keep asking of Sowell’s proposals for legislative reform, “What then?” And with endless aggravating reiterations of, “And then?” make Sowell think through all the ramifications of his economic proposals until Sowell had found in the end that invariably, while his intentions were good, the outcomes would have been poor. [2]

Sowell takes on the issue of minimum wage by showing that it can even make sense to pay for a job. In the U.K. hotel doormen pay the hotels to work there because the tips are outstanding. But not in the U.S.; it’s illegal.

It can make sense for architectural graduates to work for top architects for free, for a while, since they will undoubtedly recoup far more in later years because of the superior training they will have had.

And it makes no sense to require that highly-tipped waiters in Hawaii’s better restaurants be paid minimum wages. But Hawaii law requires it and the cost is passed along to customers. And then Sowell gets to why the minimum wage harms the poorest of workers.

His chapter on why some nations become rich and others poor, also documents that many nations now poor, were once the richest. When China traded with the West in the 16th century, we had so little to offer in decent quality goods that the Chinese only accepted precious metals — mostly silver. Argentina only a hundred years ago was one of the world’s ten richest nations and today is poor. South Korea had the same per capita GDP as Ghana in 1957 but today sends Ghana aid.

The northern Europeans’ ascendancy from essentially savages in the time of ancient Rome to their position today has been through the gradual establishment of the rule of law, economic freedom and property rights, and Sowell spells out why that is essential for economic growth.

Sowell discusses how important property rights are to those who do not have any property. For example, in the U.S., it is quite common, if not the norm, for people to start businesses funded with mortgages on their homes. [3] They hire employees for their new business and the “And then?” is that it puts an upward pressure on wages from which all employees benefit. In Hawaii today we have hardly anyone working for minimum wage and that is because employers, in hiring, have bid up wages way beyond the minimum.

Now imagine if we had in the U.S. no secure property rights as is the case in most, if not virtually all, of the poor nations. If lenders have no security, what incentive is for them to lend? How do you fund business startups?

Were our Hawaii legislators to understand the principles behind the many examples Sowell gives, they would not even consider bottle cap legislation, minimum wage laws, and housing regulation, which are all well covered in his book. [4]

And then we could tell Sowell that it was no longer applicable in Hawaii to say, as he often does, that "The first lesson in economics is scarcity: There is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson on economics." [5]

Cliff Slater is a regular columnist whose footnoted columns are at: www.lava.net/cslater


[1] Sowell, Thomas. Applied Economics: thinking beyond stage one. Basic Books. 2004. It is a follow up to his earlier, Basic Economics also published by Basic Books.

[2] In his columns Sowell has illustrated the difference between good teachers, such as Smithies, and the bad ones, by the results they get from their students — not how popular they are.

[3] For an even more detailed explanation of the economic importance of property rights in third world countries, see de Soto, Hernando. The Mystery of Capital: why capitalism triumphs in the West and fails everywhere else. Basic Books. 2000.

[4] “Political thinking tends to conceive of policies, institutions or programs in terms of their hoped-for results — “drug prevention programs,” “profit-making” enterprises, “public-interest” law firms, “gun control” laws, and so forth.” P. 2. Sowell might well have added “rapid” transit and “Smart Growth” programs.

[5] Sowell, Thomas. Is Reality Optional? Hoover Institution Press. 1993.