Naked Economics – Undressing the Dismal Science 2e

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All financial instruments are built on 4 basic needs – to raise capital, protect/ grow wealth, insure against risk, and speculate. Incentives matter. People work harder when they’re motivated by things like commission-based pay. In systems that don’t rely on market economy, personal incentive is not linked to productivity. This means that people have no reason to do more or better work, which can lead to inefficiencies.

A market is a collection of billions of separate transactions that form a complex economy in which people can earn and spend money to fund their lives. A capitalist market allocates resources by matching supply with demand, thereby directing resources to where they will be most productive. In doing so, a market improves society by increasing opportunities for people to make income and increasing the variety of goods available to consumers. Prices Reflect Supply and Demand When a sale is made, firms and individuals connect and maximize their utility against each other. “Utility” can be thought of as happiness, and maximizing it means making yourself as well-off as possible. In a sale, firms look to make as much money as possible, while individuals look to satisfy a need or desire by purchasing something. Sure, I might quibble with the book here and there. Some of Wheelan’s policy prescriptions are dubiously supported, and some of his facts are wrong. He confuses the existence of the administrative state with the rule of law. It is not true that the now-canceled Superconducting Super Collider particle accelerator was located in Texas because George H.W. Bush was President—that decision was made in the 1980s, and if a politician mattered, it was the corrupt Democratic Speaker of the House, Jim Wright. Nor did Arthur Laffer originate the idea that tax cuts might increase revenue—that idea was well known to Calvin Coolidge, who carefully tested it in practice. It is also not true that “trading [securities] on any information not available to the public is against the law.” But none of these minor problems erode Wheelan’s basic analysis In this radically updated and greatly expanded new edition, Keen builds on his scathing critique of conventional economic theory whilst explaining what mainstream economists cannot: why the crisis occurred, why it is proving to be intractable, and what needs to be done to end it. Wheelan also explains how we make decisions with imperfect information, weigh trade-offs, and define “cost” (which is more than just cash). Generally, when costs decrease, we consume more of something and vice versa. 2. Firms Act to Maximize ProfitsFrom the producer point of view, branding also solves the problem of sale prices being pushed toward production cost because of competition. Producers can charge more for products made under a respectable brand.

Similarly, and of more political impact today, what of international free trade and comparative advantage? The orthodox view of the role and effect of comparative advantage in international trade is straightforward, and Wheelan offers it. “[International] trade is good for consumers. We pay less for shoes, cars, electronics, food, and everything else that can be made better or more cheaply somewhere else in the world (or is made more cheaply in this country because of foreign competition). Our lives are made better in thousands of little ways that have a significant cumulative effect.” Moreover, such trade is also good for poor countries—the implicit argument being that it’s our moral duty, even at our own cost, to make that possible. And being richer also means the environment is treated better, another implicit moral duty. Yes, “trade creates losers,” often permanent losers, but on average, we are all better off, both now and even more so in the long run, and that’s the way it needs to be. Good government is essential to a strong, productive market while poor government can lead to the demise of an entire economy. The Government can be your Friend Production is important in a business. An agent should be able to provide quality products for the principal, which can be difficult if an agent doesn’t know who the CEO is. Protectionism may save jobs in the short term, but it ultimately slows down economic growth. This is because protectionism does not favor specialization. As a result, globalization favors specialization. Now that we’ve discussed currencies, we’ll look at international trade in general, and how it can be used to improve living standards around the world. We’ll also look at what countries generally need to thrive economically.Increasing productivity through specialization: Trade frees people up to focus their efforts where they can be most effective. For example, if you buy a car that someone else built rather than building a car for yourself, you will not only get a better car, but you will have time to do other things that you’re better skilled at. In this chapter we’ll examine currencies, and how the international market uses them to function, covering: Prices are used to allocate scarce resources, based on who is willing the pay the most (in terms of money, time etc.). Discussion of externalities and how governments can compensate for them. Also the role of government in ensuring fair markets, enforcing property rights, enforcing contracts, regulation, etc. Governments provide "public goods".

In March of 2009, Wheelan ran unsuccessfully for Congress as the representative from the Illinois 5th District in the special election to replace Rahm Emanuel. In its editorial assessing the race, the Chicago Sun-Times wrote, “Voters will find a ballot filled with impressive and thoughtful candidates . . . especially Charlie Wheelan, a University of Chicago lecturer who combines a razor-sharp mind with a boatload of charm and an impressive expertise in economics and foreign policy. We expect great things from Wheelan in the future.”Every market transaction makes all parties better off. However, since we define utility differently, we may not always understand the choices made in other parts of the market. Incentives & Disincentives The goal of global economic policy should be to make it easier for nations to cooperate with one another. The better we do it, the richer and more secure we will all be.