Charles Wheelan

Naked Economics

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Naked Economics Summary

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In Naked Economics: Understanding the Dismal Science, Charles Wheelan gives readers without a background in economics entry into the financial world and an introduction to its changes and issues in accessible and practical terms. Wheelan, as his title suggests, strips down the often mundane and potentially inaccessible concepts of economic theory and makes them practical and clear by presenting them in the context of human nature rather than through Wall Street jargon.

At the outset of the book, Wheelan presents economics as the study of how people make the most out of life. A free-market economy is one in which people act for their own self-interest, which in turn raises the standard of living for the majority of the members of that society. Basic concepts explored by the author include the assertion that lowering costs will increase demand, and that profits are an incentive that inspire great work, thus leading to innovations that improve the quality of life for society. This does not imply that markets provide what is needed, but rather what is wanted.

Incentives are an essential component in economics. When people benefit from their work, they will work harder. Conversely, when workers are not driven by personal incentives, productivity suffers. Government-backed businesses and public education in America, for example, are systems in which performance is not directly linked to personal benefit. The standardized pay systems under which public school teachers work lead the most skilled among them to leave teaching and to move to, and find success in, fields in which pay is tied to productivity.  Learning to use incentives correctly is among the goals of the study of economics. There are situations where acting in self-interest can leave people worse off than they had been before.

Wheelan examines the private versus the public costs of individuals’ behavior, described by the term “externalities.” When there is a big gap, it provides an incentive for people to take actions to better themselves at the expense of others. Governments can control activities that cause externalities by taxing the behavior instead of banning it. At some level, all market activities have some type of externality. Practice shows that all involved in an externality are likely to prefer to come to a private rather than to a governmental agreement.

With respect to goods and services, it is preferable that the government not be the exclusive provider except in the case where there are strong indications that the private sector would be unable to successfully provide the goods and services required. Government-run industries lack the advantages provided by free competition, to the detriment of the citizenry. Another significant way in which the government can suppress economic growth is via taxation, which can discourage investments because it makes them a cost, and decreases productivity because of relative tax rates which encourage some people to not work.

Beyond economic capital, human capital is a significant component in understanding economics.  Human capital is the total of an individual’s skills, including personality traits, creative skills, education, experience, and other individual skills—sports, for example. Within the labor market, some skills and talents are in greater demand than others. The less common the skills possessed by an individual, the more that person will be compensated for them. Human capital is, not surprisingly, connected directly to productivity. Increased productivity translates to increased riches. America is rich, according to Wheelan, because Americans are productive. It follows that new and more advanced skills related to innovations will benefit those who embrace them.  Indeed, technology has been found to make smart workers more productive and to put low-skilled workers on the brink of obsolescence.

Naked Economics offers many common-sense points that are clear and concise, but that may have been elusive to those uninitiated in the theories of economics. For example, the gross domestic product (GDP) of a country refers to the total value of goods and services in a given time period. The GDP is adjusted for inflation; thus, if the GDP grows by a certain percentage but inflation does the same, productivity in essence has not increased. The cost of living, meanwhile, is the amount of money needed to maintain a certain level of living. This is not only measured in monetary units but should also include time—that is, the hours people must work in order to live. A recession is the result of some shock to the economy that leads individuals to spend less, thus widening the scope of the downturn. Paradoxically, a recession is beneficial to the economy in that it eliminates many unproductive enterprises.

The book concludes with points about trade and globalization. Trade is essential to modern economies. Things people in a market cannot produce, or that are not worth the time it would take them to make, they let others produce. This allows individuals to concentrate their efforts on the things they do best, thus contributing to a higher standard of living. Countries that are poor are in that state due to not being productive enough. A summation of Wheelan’s ideas is that human capital leads to individual productivity, which in turn dictates standard of living.