A quest for reality 1
For the last eighteen months, I’ve read several books to help remove the scales from my eyes. The journey started when the professors of my economics fellowship program challenged common stories I believed but had not really questioned or thought through thoroughly. It opened my eyes to the fact that both sides of the political aisle exhibit tendencies more like religious fundamentalism than reasoned analysis. Topics ranged from climate change to diversity, automobile accidents, crime rates, drug use, and more.
That, combined with the lectures, textbooks, projects from the other parts of my MBA program, helped me realize how little I really knew about the world. So, I sought some guidance.
Statistics
The first thing I wanted to learn was how to count better. We commonly see statistics cited in mainstream news outlets or in conversations that fail to take in base rates or comparable statistics that put those numbers in perspective.
Many examples can be found in my series “What an MBA taught me,” but here’s a simple one that struck me recently. A marketing asset I read last week contained the following short argument:
On average, teachers earn 76.5 cents for every dollar earned by professionals in other fields requiring a similar level of education and expertise. In other words, educators are generally underpaid.
It went on to argue for education reform and other solutions to this supposed problem. The source cited contained broad statistics of average education—such as a bachelor’s degree—but didn’t control for industry, location, hours worked, supply and demand, or any number of the myriad variables that influence income. In other words, “educators are generally underpaid” is a non sequitur from the aforementioned statistic.
A simple variable like age alone has a huge effect on earnings and wealth: Many sources talk about wealth differences between races. But it helps to know that the median age for American whites is 58 while the median age for American hispanics is 11, which means whites have on average five decades longer to accrue wealth and the requisite experience to earn high salaries.
The fact that something so simple and obvious is so often overlooked in conversations and media outlets strikes me as a serious problem that has important implications for what we think about our society and the policy responses to such issues. Statistics and stories like these made me second guess whether important details were left out of common discussions. It’s as if people who should know better—economists, journalists, business leaders—are lying or propagandizing their way to their Machiavellian ends. Or else that these details don’t matter. Like they say, “Don’t let the facts get in the way of a good story.”
However, I think these details are very important. They mean the difference between being right and wrong about the topic, and thus what to do about it, since they bring us closer to reality. Sound reasoning, logic, and argumentation based on reality can change the world. Facts are what got us to the moon and help us develop life-saving vaccines. We must seek the truth.
So, I sought to know more.
The first person to help me with this is Thomas Sowell. Sowell is an accomplished economist with impeccable credentials. He writes very clearly and without much emotion, which is exactly what I wanted. I read nine of his books, in no particular order:
Discrimination and Disparities
This book “challenges both the fundamental assumptions and the usual kinds of evidence presented—even by economists who should know better—on issues involving the sources of economic and social disparities.” It opens with an epigraph from Fernand Braudel that summarizes its contents: “In no society have all regions and all parts of the population developed equally.”
This fact is obvious once it’s pointed out. Sowell continues, “If there is not equality of outcomes among people born to the same parents and raised under the same roof, why should equality of outcomes be expected—our assumed—when conditions are not nearly so comparable?”
The rest of the book is devoted to making these differences exceedingly clear, and noting that they don’t have anything to do with discrimination. Differences between groups are often more driven by geographical, historical, or cultural factors than by anything else.
For example, Sowell writes that “a given man is not even equal to himself at different stages of life—sometimes not even on different days—much less equal to all others who are in varying stages of their own lives.” The differences between societies are equally vast. Sowell points out that even “different languages have stored vastly different amounts of knowledge at different times and places,” depending on whether its people have a written version or only verbal version. (Nearly 800 million adults alive today can’t read, mostly women, which drastically reduces their economic well-being.)
But these differences can be particular too: Data from 2016 showed that, “while the top ten percent of white income earners had incomes nearly eight times that of the bottom ten percent of white income earners, the top ten percent of black income earners had incomes nearly ten times the income of the bottom ten percent of black income earners.” Another study from 1966 “indicated that among the more than 4 million black American families at that time, just 5.2 thousand families produced all the black physicians, dentists, lawyers and academic doctorates in the country.”
Economic Facts and Fallacies
This book aims to expose “some of the most popular fallacies about economic issues … such as about urban problems, income differences, male-female economic differences, as well as … about academia, about race, and about Third World countries.”
These fallacies are often promulgated by, as Sowell calls them, third-party observers who pay no price for being wrong. For example, he notes that the Smoot-Hawley tariff enacted in June 1930 was meant to protect American jobs, perhaps from bureaucratic “compassion,” but these “government interventions had prolonged the Great Depression by several years.” The modern Fed has admitted that they played a huge role in inhibiting economic recovery from that time.
The rest of the book points out fallacies like these using lots of statistics and studies. One of those is the differences in the economic well-being of urban districts and the rest of the country. A common story is that “urban residents in low-income neighborhoods” often pay more for goods from drugstores and other merchants, because of “greed,” right? “One reason,” Sowell counters, “is that it is often not economically realistic to locate large supermarkets or ‘big box’ retail stores with economies of scale in such neighborhoods.” He also points to how these urban markets often have higher crime rates than suburban markets, leading to increases in the cost of doing business due to security costs and other reasons.
These facts lead Sowell to conclude that “there is no such thing as costs in general. There are particular costs that matter differently to particular individuals and enterprises, and those individuals and enterprises can weigh for themselves the various costs and benefits that affect them. The assumption that third-party observers can make better decisions than the people directly involved has produced many urban fallacies and many economic and social disasters.” The same could be said of such broad categories as profits, wages, and more.
Further, “correlation is not causation. Moreover, even where causation is involved, that does not determine the direction of causation.”
A Conflict of Visions
This book notes that “controversies in politics arise from many sources, but the conflicts that endure for generations or centuries show a remarkably consistent pattern.” Sowell’s goal is to illuminate and describe that pattern.
In brief, both sides of the political spectrum have a vision for how the world should be. Sowell summarizes these beliefs by saying that the conservative view is the “constrained vision,” represented by writers such as Adam Smith and Edmund Burke. This view holds that there is a limited nature of humanity, including moral limitations, that are inherent facts of life. “The fundamental moral and social challenge” for thinkers like Smith “was to make the best of the possibilities which existed within that constraint, rather than dissipate energies in an attempt to change human nature—an attempt that Smith treated as both vain and pointless. … One of the hallmarks of the constrained vision is that it deals in trade-offs rather than solutions.” That’s why Smith “relied on incentives rather than dispositions to get the job done.”
The progressive view, in contrast, is summarized as the “unconstrained vision,” represented by writers such as William Godwin and the Marquis de Condorcet. Godwin “regarded the intention to benefit others as being ‘of the essence of virtue,’ and virtue in turn as being the road to human happiness.” The real solution, according to this view, is “to have people do what is right because it is right,” tapping into “the moral potential of human beings.”
“In the unconstrained vision,” Sowell lays out, “there are no intractable reasons for social evils and therefore no reason why they cannot be solved, with sufficient moral commitment. But in the constrained vision, whatever artifices or strategies restrain or ameliorate inherent human evils will themselves have costs, some in the form of other social ills created by these civilizing institutions, so that all that is possible is a prudent trade-off.”
The rest of the book fleshes out the beliefs underlying these two visions.
Basic Economics
This book aims to provide “a presentation of economics in plain, straightforward language, without the jargon, graphs, or equations that dominate too much of other economic writings.” The book accomplished that goal.
In 626 pages, which took him about 10 years to write, Sowell lays out his economic vision based on decades of study, from Harvard to Columbia to the University of Chicago, where he eventually earned his PhD from none other than Milton Friedman. However, even under Friedman’s tutelage Sowell was an avowed Marxist.
The contents of the book begin with an explanation of economics, “the study of the use of scarce resources which have alternative uses.” Part 1 describes the role of prices and markets. Part 2 describes industry and commerce, including the rise and fall of businesses, the role of profits, anti-trust laws, as well as market and non-market economies. Part 3 describes work and pay, especially as it pertains to productivity, minimum wage laws, and special problems concerning labor markets. Part 4 describes time and risk, like in investments and insurance. Part 5 covers the national economy, comprising the national output, money and the banking system, and government finance and functions. Part 6 covers the international economy, including international trade, transfers of wealth and disparities between countries. The last part discusses special issues, like “myths about markets” and the history of economics.
I’m sure I’ll have more to write about this book in the future. It’s a surprisingly easy read, and I’d recommend it to anyone interested in the subject.
The Housing Boom and Bust
This book, which I listened to via Audible, discusses how “the ‘creative’ financing of home mortgages and the even more ‘creative’ marketing of financial securities based on American mortgages to countries around the world, are part of the story of how a financial house of cards was built up—and then suddenly collapsed.”
The insight from this book is a counterintuitive point, and one that I had never heard until reading it. In an effort to introduce so-called affordable housing in the late 1980s and early 1990s, politicians pressured banks and other financial institutions to relax their lending criteria and provide loans that had previously been unavailable to low-income or non-credit worthy borrowers. The politicians punished banks with fines and other sanctions if their portfolio statistics showed any unevenness in their demographic makeup, which in hindsight is rather spurious.
To do so, banks got creative. They offered products that led to what eventually became NINJA loans and the like, giving credit to people who had no intention of ever paying off the principal. The Big Short by Michael Lewis goes into this in more detail. These fancy loans and products ended up collapsing, as you can imagine they would.
The interesting thing is that the very politicians that forced banks to get “creative” were the very politicians that blamed banks for being “greedy” and “causing” the financial crisis. Still more interestingly, government-owned institutions like Fannie Mae were actually created with the purpose of offering mortgage-backed securities, the products that many believe led to the crisis. Of course, bankers share part of the blame, but the story isn’t as simple and one-sided as it’s so often described.
The Quest for Cosmic Justice
This book, which I listened to on Audible, “shows how confused conceptions of justice end up promoting injustice, how confused conceptions of equality end up promoting inequality, and how the tyranny of social visions prevents many people from confronting the actual consequences of their own beliefs and policies.”
My takeaway is that human beings often want to replace God, fashioning a universe in their image. Whether on the political left or the right, politicians and social activists want the world to be “better,” though for whom or how that might be accomplished is unclear. The “shoulds” in our lines of reasoning are often muddled, and whatever we imagine might be better could actually make the outcomes far worse than if we had left them alone.
Marxism
This book, which I listened to on Audible, “leads the listener through the Marxian scheme of ideas, shattering some existing interpretations of Marx which have developed through repetition rather than through scholarship.”
To be clear, Sowell was a Marxist for many years. It wasn’t until after his PhD under Milton Friedman, when he began working for the Department of Labor, that Sowell left Marxism behind. He found that government bureaucrats, far from being the saviors of society, face their own incentives and trade-offs. They’re neither evil nor stupid, but rational actors faced with constraints.
My takeaway from this book was that Karl Marx, despite having a brilliant mind, was a miserable person. He destroyed his finances, left his family destitute, and refused to take care of himself physically, eventually dying after decades of alcohol abuse, smoking, and a terrible diet.
In some sense, one’s beliefs and principles should actually work, if not for greater society at least for one’s own life and family. It appears that Marx’s beliefs are incompatible with reality. However, I would like to learn more about his critiques of capitalism because it seems they’re growing ever more popular today.
The irony of Marx’s life and thought is that they were funded by the wealth created by Friedrich Engels’ father, a capitalist.
Wealth, Poverty, and Politics
This book, which I listened to on Audible, “argues that political and ideological struggles have led to dangerous confusion about income inequality in America. Pundits and politically motivated economists trumpet ambiguous statistics and sensational theories while ignoring the true determinant of income inequality: the production of wealth. We cannot properly understand inequality if we focus exclusively on the distribution of wealth and ignore wealth production factors such as geography, demography, and culture.” It follows closely his other writings.
Applied Economics
This book, which I listened to on Audible, describes the “application of economics to major contemporary real world problems—housing, medical care, discrimination, the economic development of nations.” It follows closely his other writings. The main theme of this book is that to be a true economist, one must look past first-order hopes into second- and third-order effects of one’s decisions. It also helps to know that people change their behavior based on enacted policy, making second- and third-order effects almost impossible to know beforehand.
On the shelf sit two more Sowell books I’m hoping to get through: Knowledge and Decisions and Intellectuals and Society. I also read The Tyranny of Metrics by Jerry Muller and some of Weapons of Math Destruction by Cathy O’Neil. These two books showcase the inherent limitations of data and statistics. Finally, I read several other books on economics that helped me understand conversations a little better, including Capitalism and Freedom by Milton Friedman, Economics in One Lesson by Henry Hazlitt, Practicing the King’s Economy by Rhodes, Holt, and Fikkert, as well as a few other books.
These books helped me see how little I had really thought about many of these issues. But more importantly they taught me how to count, using statistics in more accurate ways. They led me to think more about how beliefs and statistics work themselves out in the real world, like in markets, which I’ll discuss next.