Basic Economics A Common Sense Guide

Thomas Sowell lays the foundation of many significant ideas dealing with economics in Basic Economics: A Common Sense Guide to the Economy. The framework of economics begins with the actual definition of economics which states that “economics is the study of the use of scarce resources which have alternative uses” (p. 3, Sowell). With this understanding, Sowell is able to expand on the role of prices, industry and commerce, work and pay, time and risk, the national economy, the international economy, and specific issues associated with economics. One imperative factor to consider with economics as a whole is prices and the different ways prices are actually influenced. For instance, resource allocation plays a crucial role in how products

Sowell emphasizes the importance of speculation because the market value of some transactions is not clear. He states some transactions, “involve buying things that do not yet exist or whose value has yet to be determined” (pg. 303, Sowell). The uncertainty at hand then makes concepts like the return on investment and present value extremely important. Return on an investment is basically the rewards one can reap later from costs they absorbed earlier. There are many important implications involved with receiving delayed rewards. For instance, interest plays a crucial role as people are much more willing to lend money at high interest rates due to the fact that they will receive more rewards later than if they offered a low interest rate. The opposite holds true as people are more likely to borrow and less likely to save when interest rates are low. Present value is significant because it is basically what something is worth at the moment. Present value not only impacts important economic decisions but also affects areas that are not normally thought of as economics decisions. An example of the significance was given by Sowell with a ninety year old man planting fruit trees that would not be mature for at least twenty years. The land will be worth much more when the trees do mature so the old man could sell his land with the knowledge of his property increasing in value. This is just one basic example of the importance of being able to link the future value to the present. With the understanding of this, one can then moderate their risks effectively and can avoid making costly investments. One effective way to minimize risk is by diversifying investments rather than just having one, big investment. The idea behind this comes from the negative consequences present if an individual’s only investment fails. The consequences are not as severe if one has a portfolio of