Monday, May 14, 2007

5 Reasons to Read: Naked Economics

I remember a lot of the classes I took in high school, but Economics isn't one of them.

I mean, I probably took a class on the subject. I just don't remember doing it. Nor do I remember taking an Econ course in college, although I'm pretty sure I did. My freshman year was a darn long time ago, and the only purely-school-related memory I have of it was listening to my politics professor heap praise on Billy Joel for his hit "We Didn't Start the Fire." Our topic for that day's lecture, as I recall, was "How exactly did Mr. Joel manage to cram all that stuff in one song?"

In any case, what I needed to know about macroeconomics, I could've simply learned from Charles Wheelan's Naked Economics. Moreover, I might actually — gasp! — have enjoyed it.

5 Reasons to Read: Naked Economics

  1. It makes economics pretty cool. I can't believe I'm saying this, but it's true: Economics can be fascinating when it's taught the right way. As Wheelan writes:

    The remarkable thing about economics is that once you've been exposed to the big ideas, they begin to show up everywhere. The sad irony of Econ 101 is that students too often suffer through dull, esoteric lectures while economics is going on all around them. Economics offers insight into wealth, poverty, gender relations, the environment, discrimination, politics — just to name a few of the things we've touched upon. How could that possibly not be interesting?

    No kidding. Once I started, I couldn't put Naked Economics down.

  2. You'll learn without knowing you're learning. This, in my opinion, is the hallmark of a really good nonfiction book: It's entertaining, it's informative, and it reads like good fiction. I've read lots and lots of books, and there just aren't that many that accomplish this ... if they even intended to do so from the outset. (They should.) Not that Wheelan's book is a textbook — far from it — but a moderately-curious Joe Sixpack could learn a lot from it without even knowing he's learning.

  3. Liked Freakonomics? You'll dig Naked Economics. And vice versa. It's that whole "economics in the real world" thing. No esoteric theories and pie-in-the-sky projections; just a real-world dose of "This is how things work," and some common-sense examples. If you're interested in how humans go about getting what they want and need (often without realizing how exactly they're doing it, or without realizing why they can't get what they want), then you're interested in economics. And this is a book for you.

  4. So that's why laws and policies backfire! One of the (only halfway) tongue-in-cheek ideas that books like Naked Economics and Freakonomics posit is that politicians could screw up a lot less stuff if they'd just talk to a few savvy economists before they go enacting laws. Successful laws have a lot to do with incentives (financial and otherwise):

    American policymakers routinely ignore the importance of incentives. The cause of California's chronic electricity shortage is simple enough: The demand for electricity is greater than the supply. Yet politicians initially refused to do the one thing that had to be a part of any solution: allow the price of electricity to rise. Consumers were told to conserve electricity without having any financial incentive to do so. The sad reality is that the pocketbook is mightier than the conscience. It is one thing to feel a vague sense of guilt when you turn up the thermostat; it is another thing to know that doing so will cost you an extra $200 a month.

    So, when the incentives are missing — or, heaven forbid, in direct opposition to what the law intends to accomplish — then you have wrong-way policies hitting the books. Then, by extension, people, animals, environments, or entire planets suffer.

  5. Because economics is all about human nature. And human nature, as we know, has its grubby little fingers in everything. Take, for instance, Wheelan's comments on why he wrote the book:

    Markets are consistent with human nature and therefore wildly successful at motivating us to reach our potential. I am writing this book because I love to write. I am writing this book because I believe that economics will be interesting to lay readers. And I am writing this book because I really want a summer home in Wisconsin. We work harder when we benefit directly from our work, and that hard work often yields significant social gains.

    And this nifty bit that most any home-seller can appreciate:

    The better the price you get for your house, the more money your agent will make. That is a good thing. But the incentives are still not perfectly aligned. Suppose you are selling a house in the $300,000 range. Your agent can list the house for $280,000 and sell it in about twenty minutes. Or she could list it for $320,000 and wait for a buyer who really loves the place. The benefit to you of pricing the house high is huge: $40,000. Your real estate agent may see things differently. Listing high would mean many weeks of showing the house, holding open houses, and baking cookies to make the place smell good. Lots of work, in other words. Assuming a 3 percent commission, your agent can make $8,400 for doing virtually nothing or $9,600 for doing many weeks of work. Which would you choose? On the buy side or the sell side, your agent's most powerful incentive is to get a deal done, whether it is at a price favorable to you or not.

All in all, Naked Economics was a great read. If you've ever had questions about just exactly how all that inflation- and deflation-stuff works, or wondered what the heck was the big deal with "supply and demand," then I'd highly recommend picking up Charles Wheelan's book. Oh, and one more lengthy quote I'd like to grace this blog with, as it seems so sharply appropriate:

Capital is scarce. This is the only reason that any kind of investing yields returns. If you have spare capital, then someone will pay you to use it. But you've got to have spare capital first, and the only way to generate spare capital is to spend less than you earn — i.e., save. The more you save, and the sooner you begin saving it, the more rent you can command from the financial markets. ...

The flip side, of course, is that if you are spending more cash than you earn, you will have to "rent" the difference somewhere. And you will have to pay for that privilege. Paying the rent on capital is no different from paying the rent on anything else: It is an expense that crowds out other things you may want to consume later. The cost of living better in the present is living less well in the future. Conversely, the payoff for living frugally in the present is living better in the future. So for now, set aside questions about whether your 401k should be in stocks or bonds. The first step is far more simple: Save early, save often, and pay off the credit cards.

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— Posted by Michael @ 4:36 PM

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