Naked Economics

August 12th, 2004

Presentation of the book
"Naked Economics - Undressing The Dismal Science"
by Charles Wheelan

The Book’s Publishing

The book “Naked Economics” by Charles Wheelan with foreword by Burton G. Malkiel was first published September 2002, ISBN 0393049825 - Then September 2003, 388 pages, paper, ISBN 0393324869 - by W.W.Norton & Company, Inc., 500 Fifth Avenue, New York, NY 10110 - The book has been translated into seven languages. Further when I will refer to some page numbers, I mean the 2003’ edition with the hard cover.

Foreword by Burton G. Malkiel? Who is Burton G. Malkiel? Harvard College, BA, June 1953 - Harvard Graduate School of Business Administration, MBA, June 1955 - Princeton University, Ph.D., January 1964. He has been Assistant Professor, Associate Professor, Professor, Chairman, Dean, and Director in several universities. He has been Director and Chairman in investment and insurance companies. He has worked for the Government and received many Awards and Honors. He has written a teen of books and some dozens of articles, plus a dozen books review [1].

Who is Charles Wheelan

He received a master's degree in public affairs in 1993 from the Woodrow Wilson School of Public and International Affairs. He is or has been “Midwest correspondent for The Economist. Director of Chicago Metropolis 2020. He has written freelance articles for the Chicago Tribune, the New York Times, the Wall Street Journal and other publications. He’s also lectured on urban issues, economics and finance at North-western University’s Medill School of Journalism and he’s been a contributor for National Public Radio”.

Charles Wheelan is the Midwest correspondent for The Economist, an adjunct lecturer at Northwestern University, and an economist correspondent for WBEZ, Chicago Public Radio. He lives in Chicago with his wife and two daughters” - He also wrote “The Microeconomics: Vault.com Guide to Mastering Microeconomics” and several articles, as in [2], [3], [4] and [5].

Introduction

Talking of a so barren matter like Economics, this book not only is fun, is amazingly and surprisingly fun. The Author covers arid, some times boring economic themes like capital market, inflation, finance, government institutions, GDP and more. He talks of “micro, macro, monetary, labor and global economics”[6], and he does all this with an informal and simple style.

If a reader wants to notice the difference with a boring book, might try to read Adam Smith “An Inquiry into the Nature and Causes of the Wealth of Nations”, that you can find for free at www.adamsmith.org. That’s what I define a brick (well, actually it’s a five bricks series). Unless you are an economist.

Now, also if this could appear a contradiction, the Wheelan’ book is technical without being technical. Moreover what is really astonishing is he uses no diagram, chart, table or equation; none at all. He drills down tough concepts with a grocery jargon. A common reader like me would be grateful to this author.

About the term “dismal” science linked with Economics, it has its origins in the words of Thomas Carlyle in response to the well known Malthusian Theory. More precisely “The term originated in the writings of Thomas Carlyle. He coined the term while referring to Thomas Malthus and his belief that exponential population growth and linear food supply growth would result in worldwide famine. Malthus was wrong because he did not take into account advances in productivity. Economics has also been referred to as the dismal science in recent times because of the theory of diminishing marginal returns” [7].

Here I wish to open a parenthesis, and also ask a provocative question: if in the next, let’s say, twenty or thirty years the Malthusian Theory should be confirmed, is it the Bible promised Armageddon? Well, the answer is in the next century historical and economics books.

Now, I don’t belong to the herd of pessimistic economics prophets risen in the last years: but as a matter of fact, considering just only one point, resources like oil and natural gas are not renewable (if not in an arc of ten or twenty thousands or some thing) how will our grand-grandsons do? Isn’t better since today to strongly push the Research? The mankind must face this music: why procrastinate?

The Economics Idea of Scarcity

Since the very first chapter the Author introduces some Economics concepts. One of these is the Scarcity. There is a finite quantity of any item worth having and he makes clear that the Market offers not what we need but what we want to buy. So one of the first rule is that if an item is offered in limited quantities, the price of that item rises. This commonly happens with gold and diamonds. On the other side the producers of those items don’t wish to offer larger quantities of both gold and diamonds because that can lower the price, then their profit. And this is another key concept of economics, of which I’ll talk in a short. Let me simply state that indeed is commonly known that the De Beer’s holds 90% of the world’s diamonds in their safes and dungeons, without releasing them on the market. As well as the OPEC won’t offer more product: “the price of oil and gasoline begins too drift down as supply rises and demand falls” [pg.19].

So about scarcity the Author talks of the Super Bowl tickets. Who gets them? “The people who are willing to pay the most. Who had the best seats for the Supreme Soviet Bowl in the old USSR (assuming some such event existed )? The individuals chosen by the Communist Party. Prices had nothing to do with it” [pg.19].

Maximizing Profit

To explain this, the Author introduces an other economic concept: the price discrimination. He says the if you are going to your cousin’ wedding, you will shell out no more than 250 bucks, and probably you will book the tickets 2-3 weeks early. On the other side the business man who flies from Chicago to Denver, often pays more than 1 grand, and books the flight eleven minutes early. This allow the companies to offer the same good at different prices!

And this maximize the profit! Another way to maximize profit is to reduce the cost. That’s why, he explains, Nike opens factories in Vietnam: because workers wages are far less than in America. Or to produce the same good in USA will cost more. This is the same reason why Boeing does not open factories overseas but builds up airplanes in USA: because oversees there are not skilled workers, so airplanes, if built in USA cost more. And this introduces the next paragraph about the human capital. So he specifies this is the answer to one of the most mankind burning question: “why did the entrepreneur cross the road? Because he could make more money on the other side” [pg.11].

The Human Capital

There are many statistics around here that clearly indicates that a college associate earns about 40% more than an unskilled worker. A graduate can reach 80% more. The juice of this is that it’s a better choice, when available, to invest money in education. It’s an investment that will return increased in the years. Wheelan remarks that “Sending students to college creates jobs for professors. Using the same money to buy fancy sports cars for high school graduates would create jobs for auto workers. The crucial difference between these scenarios is that a college education makes a young person more productive for the rest of his or her life: a sport car does not”.

The author pinpoints that if Microsoft perished and his wealth were confiscated, still Bill Gates could find a new job immediately. “Other companies would snap him as a consultant, a board member, a CEO, a motivational speaker”. And he keeps on with: “How would Bubba, who dropped out of school in tenth grade and has a methamphetamine addiction, fare? Not so well. The difference is human capital”[pg.99].

Now just for the sake of shortness, before this paper becomes as long as the New Testament, let’s briefly review another economics key point.

The Value of the Choices

Let’s consider, says Wheelan, “a family that has a spare $1,000 and is deciding between buying a large screen TV and squirreling the money away in an investment fund. These two options have profoundly differently impact on the economy in the long run. Choosing the investment makes the capital available to firms that build plants, conduct research, train workers. These investments are the macro equivalents of a college education; they make us more productive in the long run and therefore richer. Buying the television, on the other hand, is current consumption. It makes us happy today but does nothing to make us richer tomorrow”.

This example elucidates how our choices affect the market.

Conclusion

The Wheelan’s book is really too long to be condensed in a few pages. There are extensive chapters:
  • on the Federal Reserve and how it works and influences the money market;
  • on the Asian sweatshops that both makes us richer and creates losers;
  • how protectionism saves jobs in the short run but slows economic growth in the long run;
and one of the most painful point is in chapter 12 where the author asks how comes that “in a time when we can split the atom, land on the moon, and decode the human genome, why do 2.8 billion people live on less than $2 a day?”. The answer of course is that “their economies have failed them”, and how that is influenced by government institutions, often corrupted.

It’s really fun the example of installing a vending machine in Moscow, Russia [pg.210]. But all that doesn’t answer to the implied moral question; closing chapter is a perspective look at the year 2050 economy and with the example of how many pepperoni slices a pizza should contain, rebates the concept of how much a government can regulate commerce.

The author pinpoints that the Nikkei Index is on the level of the 80’s. This resembles me the short warning the Feds issued in the last September 2003 about a possible fear of deflation in the US. My personal question is: communism has proved not feasible, but is the capitalism really working? Is ever possible that with so many brains out here we can’t shape a better solution?

A well-done book, fun and clear, politically correct, well-packaged, highly recommended.

2004.08.12

Vincenzo Maggio

What Others Said

  • Wheelan has done what no one else seems to have been able to do: write a non-technical economics book that avoids the fatal flaws of many others in the genre, presents all of the major areas of economics, does not insult the adult learner, and keeps the reader's attention from cover to cover” ...more at [8].
  • "Cutely sub-titled 'undressing the dismal science', this slim volume is certain to infuriate just as much as it entertains and provokes. I know that it's hard to imagine that a book on economics can be entertaining, but it is, and it's well-written too” more at [9].
  • Wheelan, [...] demystifies key concepts, lays bare the truths behind the numbers, and answers those questions you have always been too embarrassed to ask” more at [10].
  • Finally! A book about economics that won't put you to sleep. In fact, you won't be able to put this one down. Naked Economics makes up for all of those Econ 101 lectures you slept through (or avoided) in college, demystifying key concepts, laying bare the truths behind the numbers, and answering those questions you have always been too embarrassed to ask” more at [11].

What the Author Said

  • Free international trade can improve the standard of living of the trading countries
  • Concern for the environment is a luxury good
  • The "Superstar" Phenomenon: small differences in talent tend to become magnified into huge differences in pay as a market becomes very large (e.g. pop music, pro sports)
  • The market is amoral, in that it doesn't make things that we may need, but things that we want to buy
  • A capitalist market uses prices to allocate scarce resources; a communist market uses waiting in a line
  • Incentives matter; When we work on commission, we work harder
  • "Law of unintended consequences" - a specific policy designed to solve a problem may only make it worse ("perverse incentives") (e.g. requiring child seats on planes and resulting increases in overall child deaths due to more driving)
  • Being able to buy goods cheaper is essentially the same as having more income
  • People want to work
  • "Dead weight loss" - taxes that make people worse off without making anyone better off
  • Gov't could buy out patents once new drugs are developed
  • We've built a society that values civil liberties over social order
  • The most insightful way to think of poverty is as a dearth of human capital, or less useful human capital due to other factors (e.g. substance abuse)
  • There IS NOT a fixed amount of work to be done in the economy; jobs are created every time someone provides a new good or service or finds a better/cheaper way to provide an old one
  • Technology may displace workers in the short-run but provide for better products in the long-run; governments need not block the technology but rather provide job retraining and other transition services for displaced workers.
  • Okun's law: GDP growth of 3% per year will leave unemployment unchanged
  • Our standard of living is high because we are able to focus on the tasks we do best and trade for everything else
  • IDEA: Airlift 10,000 university grads to a small African nation to fix the country
  • EXPORT OUR HUMAN CAPITAL FOR THE BETTERMENT OF THE WORLD
  • ...a lot more at [12]

If You Read This Book You Probably Want to Read:

  • Wheelan, Charles J. - The Microeconomics: Vault.com Guide to Mastering Microeconomics
  • Friedman, David - Hidden Order
  • Tapscott, Don, Ticoll, David. - The Naked Corporation: How the Age of Transparency Will Revolutionize Business
  • Nelson, Robert H. - Economics as Religion: From Samuelson to Chicago and Beyond
  • Chapman, Merrill R. R., Richard, Marc F. (Illustrator), Foreword by Spolsky, Joel. In Search of Stupidity: Over 20 Years of High-Tech Marketing Disasters
  • Malkiel, Burton G. The Random Walk Guide to Investing: Ten Rules for Financial Success
  • Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors
  • Sowell, Thomas. Applied Economics: Thinking Beyond Stage One

References

  1. www.princeton.edu
  2. www.iowacityareadevelopment.com
  3. www.aaatextbooksearch.com
  4. www.princeton.edu
  5. the book’s cover
  6. FetchBook.Info, www.fetchbook.info
  7. Investopedia, www.investopedia.com
  8. Pan, Black Star Review, www.blackstarreview.com
  9. Frontlist Books, www.frontlist.com
  10. the publisher
  11. www.livejournal.com