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"Basic Economics" by Thomas Sowell. Not an easy read, but it deeply changed the way I think about incentive structures and the law of unintended consequences. It's a tough pill to swallow for people (like myself) who cling to utopian ideas, but the older I get the more I realize we must live in the world as it exists, with human nature as it really is. Dreaming of a better world is counter-productive if one does not engage with reality. We can build a better world, but only by being honest about the current state of things.

+1. Reading Sowell really challenged my utopian impulses, it's amazing how deep his thoughts are but how simply they're expressed, apparently he advised people in the bay area to stop protecting so much open space in the 1970s with the warning that this would increase housing prices dramatically eventually. In hindsight this seems so intuitive and obvious but he gets credit for not needing hind sight and anticipating the most salient consequences.

Economics in One Lesson by Henry Hazlitt is amazing too - https://mises.org/system/tdf/Henry%20Hazlitt%20Economics%20i...

Interesting fact: Economics in One Lesson is an extended meditation on Frédéric Bastiat's classic essay "That Which is Seen, and That Which is Not Seen." Part of Hazlitt's goal was to make Bastiat's ideas more modern and accessible. However, enough time has passed that some of his examples are a bit dated. I actually prefer the original. Bastiat is a splendid writer.


I think the Broken Window Fallacy is the core underpinning of this book.

Hazlitt wrote another good book Thinking as a Science.

Downloaded :-)

I also went looking for an audiobook version. Looks like Downpour has it DRM free: https://www.downpour.com/economics-in-one-lesson

Just a heads up - the theory explained in that book (Austrian school) is 100% fringe economics. It's very popular with libertarians, but not really considered to produce very useful outcomes by pretty much any other school of economics.

You either haven't read the book or you you misunderstand how much of the book is Austrian economics. Yes, modern Austrian economics is considered fringe. However, historically the foundational results of early Austrian economics has been fully integrated into mainstream economics. From Wikipedia (https://en.wikipedia.org/wiki/Austrian_School):

> Among the theoretical contributions of the early years of the Austrian School are the subjective theory of value, marginalism in price theory and the formulation of the economic calculation problem, each of which has become an accepted part of mainstream economics.

Hayek was considered partly Austrian and he got the Nobel Prize in Economics in 1974, well after this book was written. (https://en.wikipedia.org/wiki/Friedrich_Hayek)

The core lesson of the book is fantastic:

> The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

This is not fringe at all.

Probably the biggest reason the Austrian School is "fringe" (a fairer descriptor is "heterodox") is that there's no money in it.

Economics is a value free science, at least how Austrians practice it, but happens to show that government intervention is usually harmful. For example, Keynesians believe that the business cycle is an inherent failure of markets with no known cause and that government must intervene heavily to correct such errors. By contrast, the Austrian Theory of the Business Cycle takes nearly the opposite position -- that intervention, mainly in form of credit expansion causes booms. A bust is a correction of errors made during the boom and should not itself be corrected with more easy money, starting the cycle all over again.

Now, the vast majority of working professional economists derive all or much of their income from the government in one way or another. Many work for the federal government or the Federal Reserve Bank or consult with them. Or they work in government funded universities doing research with money from government grants.

Early last century, Hoover then FDR discovered and embraced John Maynard Keynes who offered a general theory that supported heavy government intervention. The Keynesian prescription just happened to provide an intellectual basis for policies that would require government to grow much larger and more powerful. Before long government began to fund more and more professional economist jobs. And no surprise, those jobs went to Keynesians.

A few decades later Milton Friedman (not an Austrian) said, "We are all Keynesians now" -- not as an admission that the theories were correct but a concession that in practical terms it's nearly impossible to work in the field and not be a Keynesian.

Do you have an opinion as to what you think is wrong with it, or just bandwagon fallacy?

What for example, do you think of Subjective Theory of Value or the Theory of Marginal Utility, which were developed by the father of the Austrian School, Carl Menger, in the latter part of the 19th century? Or the Austrian Theory of the Business Cycle, for which Friedrich Hayek won the Nobel Prize in 1974?

Have you read the book? There’s really not much about it that’s fringe or controversial.

Yes. It’s all very plausible sounding, neat, and internally consistent, but you can’t derive a useful macroeconomic model from it that matches real-world, empirical observations. (Of course, the same could be said for a lot of mainstream stuff).

Part of it is probably just the historical context - monetary systems in the modern economy are very different than the gold-standard, fixed exchange rate kind of environment the book was written in, for example, which changes a lot of how things operate. But even then I think it still would have suffered from the fallacy of composition, where you can’t start from a description of interaction between two people and just scale it up - the emergent behaviour is almost always surprisingly different.

Could you provide a concrete example where it breaks down?

With regards to Austrian economics, as far as I remember, the school is not even mentioned in Hazlitt's book, but you are right that he was heavily influenced by it. But the book and its propositions stand on their own, I think.

Although Sowell writes very convincingly and brings logical arguments at first sight, most of his statements on the free market are based on intuition rather than data. He consistently uses a handful of examples (minimum wage, housing market) and extrapolates those to other areas in the economy without substantiation. Always assuming a fully efficient market (which it is not, see different bubbles in past few decades), rational actors (i.e. ignoring human emotion and/or marketing effects that effect consumer spending) and full price elasticity of all goods/services/labor.

It's an interesting read, but be (very) skeptical. The world and economics is a bit more complex than the picture he portrays.

> assuming a fully efficient market (which it is not, see different bubbles in past few decades)

Well, I think it's part of the book to speak in favor of free markets as opposed to centrally planned "markets" (such as prices for money, e.g., interest rate).

If you're criticizing an underlying assumption, then of course I can also go ahead and criticize parts of mathematics for some of their axioms. Yet, that doesn't make mathematics wrong, only more limited in scope.

The Quest for Cosmic Justice is another great book by Sowell that challenges the utopian mindset that underlies many modern policy discussions. It contrasts utopian "cosmic" justice with the much more prosaic (but achievable) "human" justice

In similar veins, his 'A Conflict of Visions' and 'The Vision of the Anointed' are two stunning incisive books that show pretty directly why we are where we are now, as divided as we are now. Likely corresponds strongly with Haidt's 'The Righteous Mind', referred to elsewhere in this topic.

Fascinating! Just ordered it, thanks :-)

Nearly two decades ago Sowell sent me a signed copy after I emailed him challenging him on something he wrote in one of his columns!

Sowell's weak point it is that (and this is is not unique to Sowell, it's common to both nominal supporters of free markets and their opponents) there's too often an implicit conflation of the economic system that actually exists with a free market. The way he taught me to look at policy in terms of incentives more than makes up for any of that though.

Wish everyone would read this book and Economics in One Lesson by Henry Hazlitt.

+1. Thanks. My local library has a copy on hold for me now :-)

Sounds good. I'll give it a try

Edit: hehe the reviews suggest its quite the polarising tome.

Funny thing is, reality is based a lot in perception. For example, it was "reality" that the higgs boson didn't exist before 2012. It was simply part of a model.

I stumbled upon this book by an accident about a month ago. What an amazing surprise it was. 10 out of 10

The problem with just accepting how the world really is, is that it pushes many people into a state of stagnation, never really pushing the status quo. If you refuse to accept the society you live in today, then you have more incentive to change it tomorrow.

An understanding incentive structures and their design is one of the most important tools you'd need to make a significant change.

Nonsense. Acceptance of a realistic understanding does not preclude using that understanding to achieve your goals. It is certainly better then designing your policies based off a rejection of reality.

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