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The Honolulu Advertiser

Posted on: Monday, July 19, 2004

SECOND OPINION
Economics lessons are needed

By Cliff Slater

If there is one book I would have Hawai'i's legislators and journalists read, it is Thomas Sowell's newest one, "Applied Economics." While its title is somewhat daunting, it is a fascinating discussion about the real outcomes of legislators' good intentions.

Sowell, who as a graduate student was a Marxist, dedicates the book to his graduate school teacher, Arthur Smithies, who would keep asking of Sowell's proposals for legislative reform, "What then?" And with endless aggravating reiterations of "And then?", he would make Sowell think through all of the ramifications of his economic proposals until Sowell had found in the end that invariably, while his intentions were good, the outcomes would have been poor.

Sowell takes on the issue of minimum wage by showing that it can even make sense to pay for a job. In the United Kingdom, hotel doormen pay the hotels to work there because the tips are outstanding. But not in the United States; it's illegal.

It would make sense for architectural graduates to work for top architects for free, for a while, since they would undoubtedly recoup far more in later years because of that superior training.

And it makes no sense to require that highly tipped waiters in Hawai'i's better restaurants be paid minimum wages. But Hawai'i law requires it, and the cost is passed along to customers. And then Sowell gets to why the minimum wage harms the poorest of workers.

His chapter on why some nations become rich and others poor also documents that many nations now poor were once the richest. When China traded with the West in the 16th century, we had so little to offer in decent quality goods that the Chinese accepted only precious metals — mostly silver.

Argentina only a hundred years ago was one of the world's 10 richest nations and today is poor. South Korea had the same per capita GDP as Ghana in 1957, but today sends Ghana aid.

Sowell discusses how important property rights are to those who do not have any property. For example, in the United States, it is quite common, if not the norm, for people to start businesses funded with mortgages on their homes.

They hire employees for their new businesses and the "And then?" is that it puts an upward pressure on wages from which all employees benefit. In Hawai'i today, we have hardly anyone working for minimum wage, and that is because employers, in hiring, have bid up wages way beyond the minimum.

Now imagine if we had in the United States no secure property rights, as is the case in most, if not virtually all, of the poor nations. If lenders have no security, what incentive is there for them to lend? How do you fund business startups?

Were our Hawai'i legislators to understand the principles behind the many examples Sowell gives, they would not even consider bottle-cap legislation, minimum-wage laws and housing regulation, which are all well covered in his book.

And then we could tell Sowell that it was no longer applicable in Hawai'i to say, as he often does, that "The first lesson in economics is scarcity: There is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson in economics."

Cliff Slater is a regular columnist whose footnoted columns are at: www.lava.net/cslater.