Re: TownHall.com – 5/14/2008 – “Too Complex? Part II” – Thomas Sowell

Sowell describes “the most fundamental reality of economics” as “what everybody wants has always added up to more than there is”. Sowell is wrong. Lots of things are available in quantities far beyond the sum total of everyone’s needs. Take the atmosphere. Where Sowell is right is that economics tends to ignore the value of anything that is currently not scarce, one of the great failures of economics.

Sowell tries to blame high current oil prices on those who restrict drilling, but such an argument is just too simple. There are plenty of other reasons why oil is expensive now: war and terrorist disruptions of oil production throughout the world (and fear of these disruptions), financial speculation, high cost of finding and drilling for new oil, etc.  

There’s a lot more to high housing prices than government restrictions limiting supply. Rural land is expensive because rural land owners are speculating on future prices --- listings are expensive but little land gets sold at those prices. Just drive around rural areas and look at the number of persistent for-sale signs. City land is expensive because lots of people want to live close together but the laws of nature forbids two people from occupying the same space and there is a real cost to stacking people vertically, so that at some point city land becomes insufficient to meet demand even without government restrictions. But long before the land is exhausted the infrastructure necessary to support such population densities becomes prohibitively expensive and thus limits land utilization. If few houses are being built because of government land restrictions, demand for construction labor such as carpenters, electricians, and plumbers should also be low and competition for work should keep hourly rates low, but such is not the case.

One problem with a free market economics is that it tends to discount the future to virtually nothing. As economists view it, as long as there is someone who wants to pay the cost today, they should get their way. If 100 years from now, the whole world explodes, so what, the value of the world in 100 years to those alive today is near 0, because of the time-cost of money and that few who are alive today will be alive then. But societies and governments have much longer time horizons than individual people (although some societies and many governments fail to survive 100 years), and thus it is appropriate for them from time to time to overrule free market economics by giving appropriate weight to the long term and to other hard to monetized factors.

While it is true that many politicians interfere with the free market for votes rather than for valid economic reasons, not every such interference is justified only by its political ramifications --- some are for real good reasons and accomplish real positive results, both ethical and economic.