Naked Economics

Author Wheelan writes, "Life is about trade-offs, and so is economics." Indeed, so is Naked Economics. This book promises to be a good introduction to economics for the layman. Throughout the book, the author uses easy-to-understand language and vivid examples to illustrate his points in strategic places maintaining a sense of lightness with the readers in reading the material. Here is a summary of each of the 12 Chapters of the book Naked Economics: Undressing the Dismal Science by Charles Wheelan.

CHAPTER 1 - The Power of Markets: Who feeds Paris?

The first chapter begins with an interesting story about how an advertising strategy by Coca Cola Europe proves to be a losing proposition at the start of 1989 but ends in impressive results by the end of 1995. There are myriad of different ways everyday that make modern economy work. Wheelan begins with the question, "Who feeds Paris?" as a starting point to explain how markets are powerful influences in an individual's every day life. Wheelan explains how markets use prices to allocate scarce resources and how markets are self-correcting. Wheelan expounds on how the market gears up and aligns incentives such that individuals work for their own self-interest for an improved standard of living. In no uncertain terms, the author explains how the Soviet socialist economy failed because the bureaucracy of the government controlled the economy. This chapter makes a strong stand that it is not fair to impose preferences on others. He alleges that it is "bad economics to impose preferences on individuals whose lives are much different from all the rest." (p 7).

CHAPTER 2 - Incentives Matter: Why you might be able to save and face by calling off your nose (if you are a black rhinoceros)

The entire chapter elucidates on the central idea that "thinking in terms of incentives and disincentives is the best way to formulate policy." (p. 25). He goes further by saying that one the most important roles of government is regulating these incentives to make sure that they serve its purpose. The chapter begins with an engaging story of the rhinoceros as an endangered species and the reason why as the black rhino becomes endangered, the black market price rises correspondingly making it a vicious cycle. Other examples are used in the book to illustrate the reality that when a material thing brings in profit, that is all right but when they no longer serve their purpose, then they are dispensable. This, the author explains has nothing to do with altruism or compassion but "everything to do with maximizing the value of a scarce resource." (p.25). He maintains that many things in life all boil down to economics. The importance of incentives is given emphasis. It becomes a good motivating force on other related topics such as on the domestic front, education, environment, air pollution and even business organizations.

CHAPTER 3 - Government and the Economy: Government is your friend (and a

round of applause for all these lawyers)

The government provides a crucial role in market economy by dealing with externalities. This means that externalities are the roots of all kinds of policy issues. Wheelan makes use of examples we would rarely look into such as the formulation of a policy in providing baby seats in the airplane as ultimately unwise in the long run. He uses other examples such as the use of mobile phones and the issue on global warming. As he goes along, he poses questions tackling each issue. For example, he ponders, "Where is the invisible hand when it is needed to administer a good smack?" He continues to probe on several externalities that are both positive and negative, illustrating this with the practice of smoking cigarettes. He delivers the punchline here after enumerating the externalities. This is delivered in his strong statement that "Smokers generate extra health care costs that must be borne by state governments." (p.47). His refreshing wit drives home the point, so characteristic of his writing throughout the book, as he claims, "In other words, my taxes go to remove part of some smoker's lung." His main idea in this chapter is that "Taxing behavior that generates a negative externality creates a lot of good incentives." (p 49).

CHAPTER 4 - Government and the Economy II - The army was lucky to get that screwdriver for $500.

In this chapter, Wheelan shares two lessons about the role of government in the economy. These are: First, he states that "the government must not be the sole provider of a good or service unless there is a compelling reason to believe that the private sector will fail in that role." He expounds further that the government will be freer to take care of things that need to be really handled by the government. There are things that the government should not be doing because when it dips its hands on that, it will presumably be inefficient. He cites the example of postal mail. He posits that the technology today has radically changed and things need to be implemented differently. The second point is that even if the government has an important role to play in the economy, it need not be the actual one to do the work (p 66).

CHAPTER 5 - Economics of Information: McDonald's didn't create a better hamburger

This chapter deals with the essence of information, how one acquires it, what one does with it, and how one makes decisions based on the information at hand. This fact is so basic and important, yet one can take this for granted. Wrong judgments and decisions occur when one needs to make a decision based on incomplete data. The author cites several examples in this chapter as he narrates how errors are made in selecting the best job applicant from among many applicants. There could be a wrong logic when faced with incomplete data and management shoulders the cost of finding, hiring and training another person. When this is approached as an information problem, there are several essential issues that need to be borne in mind. First, the company is not the only one at fault here. When pregnant women, as the author illustrates decides to have a child and take paid maternity leave but eventually quit their companies, they are "imposing a cost on other women." What the author means is that the company who has suffered this would now discriminate upon hiring of women, especially those who are already pregnant. But the author thinks there is a solution here, one that calls for a generous but refundable maternity package. They