Economic Facts and Fallacies
by Thomas Sowell
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Book Reviews of Economic Facts and Fallacies
Book Review: Sowell Has the Facts and the Theory, but not the Answers
Summary: 4 Stars
I preface my review of Thomas Sowell's Economic Facts and Fallacies with two semi-personal accounts. First, many years ago my young wife and I took the subway to Boston Common to a Fair Play for Cuba demonstration (this was before we drove Castro into the USSR's arms with a trade embargo and other hostilities). Pete Seeger sang a Spanish Civil War freedom song, and when he was done, he said "We might have lost the war, but we had all the good songs." The crowd laughed, but I was dumb-struck. I swore that I would never be satisfied having good songs, especially if this got in the way of winning the battle for human rights and dignity. The point is not to be a Good Person with High Ideals. The point is to contribute to making a better society.
Second, all my life I have been a strong admirer of John Stuart Mill (I wrote a chapter of my Ph.D. dissertation on his model of individual utility). One of his most courageous acts was to be arrested for distributing birth control information in the poor neighborhoods of London. Why did he do this? Well, at the dawn of the Industrial Revolution in England, numerous "utopian socialists" had devised plans for human betterment, especially for the elimination of poverty through intentional communities. The great economist Thomas Malthus' Essay on Population purported to show the futility of poverty relief, arguing that increasing the consumption of the masses would simply lead to a higher birth rate, hence more pressure on food sources, leading to a return to poverty, only with a larger population. We know now that Malthus was wrong (Google "demographic transition" and "agricultural productivity"), but his argument seemed cogent at the time. Indeed, economics was called the "dismal science" because economists like Malthus and Ricardo continually developed ingenious arguments as to why social betterment was impossible. However, John Stuart Mill saw the fallacy in Malthus's argument: if increased consumption were accompanied by a means for birth control, then the masses could enjoy a higher standard of living. I admire Mill because he accepted a dismal economic analysis because he thought it correct, and then tried to solve the social problem involved (poverty) even given the veracity of the economic argument.
Thomas Sowell is a serious economist and a fine writer. There is not a single argument in this book that I think is either incorrect or even disingenuous. Everyone interested in economic and social policy should read this, and his other writings. Sowell is best as showing how statistics can mislead. For instance, he says "It is an undisputed fact that the average real income...of American households rose by only 6 percent over the entire period from 1969 to 1996...But it is an equally undisputed fact that the average real income per person in the United States rose by 51 percent over that very same period." (p. 125) Both are true because average household size decreased dramatically over the period, with more elderly couples and fewer children per married couple in the later period.
Nota bene: commentators who give the household change while ignoring the individual change are slimebags. You may say that they are well-intentioned, but that does not change the fact that they are liars out to mislead the uninformed. Sowell often manages to reveal the liars and slimebags for what they are. Moreover, this is a service to us all, for how are we to identify and solve social problems if we do not know what they are?
My only serious criticism of Sowell is that he is rather more like Thomas Malthus than like John Stuart Mill in temperament. He repeatedly attempts to say that a social problem is less serious than liberals believe, or that a problem cannot be solved by a social intervention. Sowell's deep understanding of the capitalist system is not deployed to generate novel, effective, solutions to problems. In this, he differs from his mentor, Milton Friedman, whose Capitalism and Freedom contained numerous creative interventions, including the negative income tax and school vouchers.
To whet the reader's appetite, here are a few of Sowell's positions. (1) Rent control is a stupid way to help the poor, because it drives down the supply of affordable housing; (2) Racial discrimination is not the cause of income differences between blacks and whites, which are virtually equal when correcting for IQ, education, experience, and other demographic variables; (3) the same is true for the role of gender discrimination in accounting for the lower incomes of women as opposed to men; (4) Slavery, racism, and discrimination are not the cause of the social pathologies associated with poor black inner-city neighborhoods; rather the causes lie in a variant of black culture inherited from traditional southern poor white culture; (5) Poverty in the third world is not caused by imperialism or wealth in the rich countries.
In each of these, and several other areas, I think Sowell's arguments are correct, and should be take serious when proposing vigorous social policies for creating a more equal and fair distribution of the world's resources and produced wealth.
Book Review: Not as Good as I was Led to Believe
Summary: 2 Stars
While I may agree with most of the conclusions in this book, and agreement generally seduces four and five star reviews, at best this book deserves three stars for trying but two for falling short. Sowell, rightly wants to "torture" the data in order to reveal the truth, a truth that is very much at odds with common perceptions based on intentionally misleading superficial interpretations of the same data. While he does a much better job than most, he still falls well short of his objective. And worse, he knows it and intentionally disguises it. For that, I subtract one star.
For example, he (merely) asserts that changes in the marriage patterns of women largely accounts for changes in their relative pay. Perhaps, but more equal pay may very well have motivated significant changes in their behavior. Incentive based behavioral changes would surely be consistent with economic theory. He shows that while there might not be many women in careers like engineering, with other factors held equal, their equal pay demonstrate that women do earn as much as men. Perhaps, but employers desperately seeking the appearance of equality should likely have driven the salaries of scare women engineers beyond the pay of equivalent men.
In the case of hedonic quality adjustments and their critical effect on measures of inflation, he lists reasons why simple measures of price inadequately measure inflation, knowing full well that many of the factors he mentions are already incorporated into inflation measures as a result of the Boskin commission. He never mentions Boskin. Similarly, he creates a list of people that are rich but don't earn much, like the housewives of rich husbands, and then asserts that they account for "hundreds of thousands" of workers who are mistakenly classified as poor. "Hundreds of thousands" may sound like a lot but mathematically it's essentially zero. The list goes on. While Sowell searches for a more accurate interpretation of the data, at the same time he intentionally disguises flaws and weakness in his own analysis. A much fairer approach, and for me, a more persuasive one, would be to reveal and admit to the shortcomings of his own work.
Typical of his work is his chapter on income, which I found especially weak, despite agreeing with its conclusions. Given the current debate on income inequality, I would have thought this should have been the most important chapter. His analysis in this chapter can best be described as "thought salad" - a fact here and another quasi-related fact there, but never a more comprehensive picture of the "mix adjusted" data. He completely overlooks what is probably one of the most significant factors causing the appearance of flat wages, the dramatic shift in the demographics of the work force to what have traditionally been below average wage earners (first generation immigrants, minorities, women, single mothers, children of unwed mothers, etc). If you want to show that wages have increased over time when adjusted for demographic mix shifts, for example, then show the changes in wages rates for each demographic. If necessary, put the data table in an appendix. The book has no such appendices because he really hasn't analyzed the data. He merely reports factoids from other people's work. Why? Because he hopes the reader will carry a few of those factoids into the world. Ok, even if they're true factoids, that's still propaganda and not "four star" work. For me, it damages the credibility of the work.
Nevertheless, I would recommend everyone read this because there aren't many other works trying to use the data to reveal the truth, even if he is less straightforward then I would prefer. In the end, I can't help but wonder if the data the government collects isn't either unwittingly or intentionally obfuscated because it sure is misused and it sure is hard to use properly as evidenced by the fact that no one, not even Sowell, seems able to mix-adjust the data to the satisfaction of a critical layman, like myself.
Book Review: A seriously flawed book.
Summary: 1 Stars
There are a lot of serious flaws with this book. A lot of oversimplified conclusions based on incorrect assumptions.
Rather than focusing on the chapters on racial and gender issues, which press on emotional buttons too easily, I'm going to focus on the problems with the chapter "Income Facts and Fallacies" since these are flaws that can be more calmly discussed using measurable standards.
EXECUTIVE COMPENSATION: Sowell's position is that CEO pay may seem outrageous to outsiders but is simply the corporation paying the market price for talent. A corporation will act in its own self interest and pay what it deems is the best price for talent. A wonderfully simple explanation based on the flawed assumption that the people deciding CEO pay are the same people who own the company. What Sowell fails to mention is that unlike in small companies that are managed by their owners, the owners of large corporations (shareholders) do not make the decisions about management's pay. Those decisions are made by the board of directors, who are often times chaired by the very same CEO whose pay they are deciding, or filled with board members nominated by that CEO. Often times the salary of the CEO reflects the influence that CEO holds over the members of the board rather than some market determined price for talent.
REAL INCOMES: Sowell claims that when you factor in non-wage compensation like health benefits and retirement benefits today's workers are earning just as much as those of a generation ago, maybe even more. But compensation is only half of the picture when it comes to real incomes, the other half of the picture is purchasing power that those wages command. Getting a 10% raise sounds nice but if your expenses increase 20% due to inflation then your real income has actually decreased. Sowell addresses this by pointing out how inflation in consumer goods is merely the reflection of improvements in the quality of those goods over time ("if Chevrolets today contain many features once confined to Cadillacs [then that explains why Chevys cost more now than before]"). However, Sowell fails to mention that the largest expenses faced by households today (housing costs, healthcare, tuition, insurance) have all increased beyond the rate of inflation in consumer goods. Who cares if the price of a laptop computer has decreased by 10% if the cost of rent or college tuition or health insurance premiums have tripled during the same time. By focusing only on the nominal wages and benefits of workers while ignoring the purchasing power of those wages Sowell paints a misleading picture of the real incomes of workers today.
If this book was written by some undergraduate political science major then I could dismiss these issues as the sloppy mistakes of an amateur but when a man with Sowell's training makes these mistakes I take a more cynical view. I believe that Sowell is deliberately misrepresenting his facts in order to mislead the reader. He leaves out too many important details that don't fit his narrative. At the end of the day this is not a book about economic "facts and fallacies", instead it is a collection of the author's opinions that he declares to be "facts" based more on ideology than on actual data.
Book Review: Too Predictable
Summary: 4 Stars
It is easy to predict the contents of "Economic Facts and Fallacies" knowing that Sowell is a respected conservative writer. Thus, however, that does not prevent him from providing and useful information.
Early in the book Sowell takes on what he calls the "zero-sum" fallacy in economics. His point is that free-market transactions involve two "willing parties - ergo, both feel better off. True, but that does not eliminate the possibility that one of the parties has unfair advantage, perhaps due to withholding information, outright fraud, or simply much greater economic strength. Regardless, Sowell makes a viable case against rent-control and minimum wage laws.
On the other hand, what about OSHA safety regulations? Assuming a relatively inelastic labor supply vs. personal risk, employers would otherwise be free to let economic forces compel employees to accept risky jobs - for what point? As for improved job safety reducing employment, that must be balanced against also reducing the externality of disabled workers dependent upon greater society. More recently, it is also difficult to see how society has been served by the recent sub-prime mortgage mess.
Sowell, of course, supports free trade - claiming benefits to millions impoverished within third-world countries - ignoring evidence that the U.S., England, Japan and South Korea all used protectionism to establish their initial strengths, and the U.S. considers to do so today, using patents instead of tariffs (especially in pharmaceuticals). And then there's the problems of millions of down-scaled American workers caused by "free trade" - unaddressed by Sowell.
Sowell, however, is totally on target when alleging that government restrictions are a major cause of high housing costs - eg. much of the L.A. area restricts development. (This also considerably raises the potential for disastrous fires.) On the other hand, these restrictions were imposed through democratic vote. In any case, Sowell is off base contending that because Houston's commute times went down while adding 100+ freeway miles/year, and up when building slowed supports a case that "cities can pave their way out of traffic congestion."
Sowell also points out that homeowners living in areas with restrictions (eg. large minimum lot sizes) deprive others with less funds of the "right" to live in the area - forgetting that the original homeowners have a right to exclude the negative financial impact such housing would bring to their investments. (In fact, they most likely paid a premium to obtain such restrictions, contrary to Sowell.
His material on how accreditation agencies restrict competition between established colleges/universities and newer innovative approaches (eg. employing part-time practitioners, instead of full-time academics; increasing teaching loads while reducing "research") is another area on target and well worth considering.
Bottom Line: Worth reading and careful consideration, though not always the last word.
Book Review: Willful Error...Forever.
Summary: 5 Stars
Economic Fallacies is the third book by Thomas Sowell I've read this year and it continues to illustrate why he is one of the most important conservatives in America today. His writing beams with scholarship and clarity. There are no wasted words and the work is an arsenal of information. These chapters should be read and reread as they thoroughly refute the positions of those who irrationally regard America as being a racist, sexist and corrupt state.
Sowell debunks the myth of female oppression by highlighting the way that statistics are jiggled in the hopes of morphing the USA into a patriarchy. Indeed, in my opinion, our nation is closer to being a matriarchy than it is anything else. The old 74 cent to the dollar feminist canard is refuted after he teases out the example of unmarried, childless women. They oftentimes are anything but oppressed. Indeed, in many cases they make even more money than their male age-mate peers. Much of the difference between the sexes, in terms of wage, is a result of personal choice. Women work fewer hours and are more likely to choose stability over cash when deciding on a career. Women also select less dangerous jobs than do men as indicated by the statistic he cites showing that 92 percent of those who die in job-related accidents are male.
In terms of class, all of us who ever have tried to debate the left comprehend the error in their perceptions--as does Sowell who eliminates their positions with ease. Unfortunately, it's a serious challenge to ever get them to come around as they would feel contaminated should they ever try to examine world events through the eyes of a conservative. Rife among our opposition is the belief that only a finite amount of money exists in the world, and, if you have lots of it, that automatically means that thousands have none of it. While pseudo-liberals appear to have heard of "economic growth" they have yet to internalize its meaning. This is why they are so enamored with redistributing the rest of population's wealth. They dub this larceny "social justice" despite real social justice embodying the practice of letting people keep what they earn. Tragically, without a basic understanding of economics the left will continue to hike taxes until...the welfare state collapses along with the nation as a whole. Once they eradicate the rich there will be no one left to fund the dole.
With race, Sowell tears apart [yet again] the notion that blacks make less due to discrimination. He refers to an argument here I never heard elsewhere--but greatly appreciate--which is that when a particular group's mean age is lower, as is the case with blacks, they generally have lower incomes than do groups with higher mean ages. This makes perfect sense as a group of 20-year-olds never make as much as those nearing the end of that particular decade; although, his insight matters little as the mainstream media has no use for nuance. They crusade against injustice even though, most often, they are ones who perpetuate it.