Naked Economics discusses the principles and problems of economics, market economy through analysis of problems, specific facts in a way that is simple to understand by those who do not have a basic understanding of economics. With an easy-to-read style, good examples, and lively, the book provides a rich amount of knowledge on economic issues but does not overwhelm the reader.
This book is for
Everyone who wants a simple, witty explanation of economics.
About the author
Author – Dr. Charlies J. Wheelan is an American economist. He is the founder and speaker of The Centrist Party. In addition to this book, he is also the author of "Naked Statistics: Stripping the Dread from the Data".
The power of the market
"Who feeds Paris?" Economists often use this symbolic rhetorical question when referring to the activities that make the modern economy work at any time of day. The restaurant at Rue De Rivoli is always stocked with fresh tuna from a fishing boat in the South Pacific, a restaurant that has all the drinks for guests' needs, regardless of whether they are imported from 10 to 15 different countries. In a complex economy, billions of transactions take place every day. The Market, not the Government, has run these transactions and our lives have been made better by the workings of the Market.
An important assumption in economics: Individuals always want to make their lives better. And so they always seek to maximize their benefits, and are faced with decision-making, choosing to trade-off: choosing between costs and benefits, between current and future benefits.
Features of a market economy
- The market economy makes our lives better because businesses always maximize profits by targeting consumers.
- The market is beyond the scope of normal morality. For example, diamonds are valued many times more than water, while water plays a more important role than diamonds in human life.
- The market only sells what we want, not what we need.
- The capitalist market uses prices to distribute goods and scarce resources (the Soviet Union, on the other hand, divided goods by ranking order). Also thanks to the use of prices, the market has the ability to self-regulate.
- If the price is fixed, businesses will find other ways, such as improving quality, making a difference, to compete.
- Market transactions, especially globalization, benefit all market participants.
- The disintegration of the Eastern bloc showed that brutal government intervention in the market would have major consequences.
The "benefit" of people's self-interested motives
The self-interested motives of each person guide human actions. When we get paid bonus, high commission, we will work harder. If the price of petrol increases, we will limit traveling by private car. If the author's three-year-old daughter knew that the author would give her a cake if she stopped crying, when the author was on the phone, she would cry loudly for the cake. Author Adam Smith writes in "The Wealth of Nations": "It is not from the benevolence of the butcher, the brewer, and the baker, but from the concern for their own self-interests. that we have dinner."
Understanding human self-interest, we can plan accordingly to partially solve most of the problems that are difficult to solve as follows: protecting black rhinoceros, gorillas, precious mammals from extinction, reducing electricity demand in places where electricity supply and demand imbalances like California, resolving conflicts of interest between agents (managers, CEOs) and bosses, designing tax policies government to collect taxes from the rich to transfer to the poor...
Government and the market economy
When switching from a Honda Civic to a Ford Explorer with better family amenities, the author and his new car create external problems: putting the lives of drivers at greater risk. The Honda Civic or small car, affects children with asthma who are vulnerable due to toxic gases and Ford Explorer emissions, raising sea levels – by emissions of CO 2 and other emissions that affect the whole world, especially those who live in affected areas like New Orleans. However, like everyone else, the author is not concerned with these external issues, but only with the cost of buying and operating the car.
Extrinsic factors emerge and increase when the cost of society is higher than the cost of the individual. With a highly self-interested motive, individuals will enjoy maximum freedom of society's costs if the market is absent from the government's role. The primary role of government in a market economy is to deal with externalities in cases in which the behavior of an individual or a company has major consequences for society.
The role of government in a market economy
- Provide infrastructure for the whole economy.
- Create and maintain a legal framework that enables markets to function, such as establishing and protecting physical and intellectual property rights for individuals and companies, enacting antitrust laws, banning The company must not link in ways that eliminate the benefits from competition, prohibit commercial fraud.
- Provide "public goods" that make citizens' lives better, such as missile defense systems, or lighthouses at sea. There are public goods that, if delivered into the hands of private companies, will cause many consequences; government should be the one to provide and manage, for example: basic research, law enforcement, parks and open spaces.
- Solving the weak problems of capitalism by adjusting to external factors, especially the problem of environmental pollution.
- Participating in the redistribution of wealth: collecting taxes from some citizens and giving them to others. The debate between two options: a pie with fairly even portions or a larger pie with unequal shares is a never-ending debate among economists and politicians. .
The government to the market can be likened to a surgeon's scalpel to the patient. If the doctor is good, the surgery is careful and correct, everything will be better. If a doctor is incompetent, or acts recklessly, even with the best of intentions, it will have extremely disastrous consequences.
According to economic theory of the ocean (Econ 101), all market participants have “perfect information”. Both the consumer and the producer know what they want to know. But the reality of what happens in the market is far more interesting and confusing than this general economic theory.
Former President Clinton's Hope Scholarships program failed because the students had enough information about their future plans while the fund managers did not. Therefore, only low-income students can apply for this scholarship. As a result, repayments do not cover capital and fund management costs. When we go to the doctor, we are always at an informational disadvantage compared to the doctors. If the doctor is not good or ethical, it is always the patient who suffers.
To deal with the situation of asymmetric information to protect their interests, insurance companies either sell insurance in groups (within a certain group, everyone has to buy it), or they will appraise it a lot. Be careful if you sell personal insurance.
Information plays an important role in a market economy. Economists study what we do with information, and what we do without information.
Labor productivity and human capital
Human capital is the totality of an individual's knowledge and skills: knowledge, intelligence, influence, reputation, honesty, creativity, work experience, skills of all kinds. Human capital is all that remains of a person if someone takes away all possessions – work, money, house, other properties – and leaves him alone. me, her on the street corner with only clothes on.
Human capital is important because it is closely related to one of the most important economic concepts: labor productivity - in the simplest definition the minimum number of hours a worker needs to produce. some commodity.
The total human capital of a country will determine the level of prosperity of that society, not natural resources or other things. Marvin Zonis, a professor at the University of Chicago, stated the following: The need for human resources is getting higher and higher. The country, the company that can raise and use human capital and the school that can generate this capital is the winner. And countries that do not do that will forever be backward, miserable and a nuisance to other countries.
Financial markets provide the following functions to us:
- Raising capital: Individuals, companies, and governments need capital to be able to do things they cannot currently afford to do, and the financial markets fund them to a certain extent. certain price.
- Protect and use capital to make a profit.
- Insurance for human life and property against countless risks.
- Short-term speculation: people always have a need to make money in a short period of time.
It is very difficult to find a bargain – high return, low risk – in investing, because financial markets are, if not entirely, very efficient. That is, the price always represents the value and risk of the financial product. Also because the market is efficient, stock-picking funds don't beat index funds, which invest in the whole market. Portfolio diversification is a wise way to hedge against risk. And long-term investing will pay off if the portfolio choice is right.
The power of interest groups
The knowledge of economics and public policy of economists and politicians is increasing, but why do governments make decisions that go against economic knowledge, public policies? "perfect"? The answer lies in the "group interests" of politicians. Listen to the two politicians exchange: “If you support the felt farmers in my locality, I will support the construction of a building honoring Mr. Bingo in your locality.”
Contrary to popular belief, democracy is not meant to serve the interests of the majority. The groups that may be only 2% but really care about something, well organized will win over the 98% group with opposite interests but don't care deeply, are not organized and there is no incentive to “struggle” for benefits.
GDP represents the value of all goods and services an economy produces. GDP is often used to measure the size and growth of a country. Nominal GDP is GDP excluding inflation. Adjusted GDP is GDP adjusted for inflation. In short, a country can consume more than GDP i.e. consume more than it produces. But in the long run, a country's total consumption will be equal to or close to its total production.
GDP per capita – GDP divided by the population of the country – measures the wealth of countries. GDP is an imperfect metric, because more wealth does not mean happier, better lives. The study found that GDP per capita in the US doubled between 1970 and 1999, but during this period the number of people who described themselves as "extremely happy" dropped from 36% to 29%.
Unemployment rate: percentage of people who want to work but cannot find a job. Okun's law: if GDP increases by 3% - unemployment rate does not change, GDP increases by 4% - unemployment rate decreases by 0.5%, GDP increases 2% - unemployment rate increases by 0.5%. That is, a 1% change in GDP will result in a 0.5% change in unemployment.
Poverty. No matter how prosperous the economy is, there is always a proportion of poverty in society. Currently, the US has 13% of the poor group according to the measure given by the US Government: the poverty level for singles is $8,350/year or less, and for a family with two children is $22,050/year or less.
Income inequality. Economists use the Gini index to measure income equality. Gini index equal to 0%: is absolute equality: all working people have the same income, while when the index is 100% - absolute inequality - only one person accounts for all income of society. In 2007 this index of the US – 45%, France – 28%, Sweden – 27%, Brazil – 57%.
Government size. Saying the size of the government is large or small must be based on some measure. A fairly simple measure is the ratio of all government spending – local, state, federal – to GDP. Government size US: 30%, UK: 40%, Japan – over 45%, France and Sweden – more than 50%. Compared to these countries, the size of the US government is smaller, and so the American people receive less. The US government is the only developed country that does not provide public health services. (Writer: as of the time the book was published).
Budget deficit and surplus. A budget deficit occurs when the government spends more than it collects, while a budget surplus does the opposite. Budget balancing should be done over the long term, whereby the Government should maintain a moderate surplus during good times of the economy, and a moderate deficit during bad times.
Balance of trade. When a country's income from other countries (mainly exported goods and services) is higher than other countries' income from that country, the country is running a trade surplus. The opposite is called a trade deficit. If the country buys a lot of goods for future investment and development, this deficit is good. And if the country buys a lot of goods for consumption, this deficit is not good. Bankrupt countries have large trade deficits.
National savings. Individuals, after spending on personal needs and plans, need to save because saving is an essential requirement for the accumulation of capital for investment, and investment helps the productivity of the whole labor. society increased. Countries with low savings must borrow abroad and pay the return on investment for both principal and interest.
Demographic. The social security fund for the elderly is operated as a pyramid model, that is, young people, still working - at the bottom of the pyramid - contribute social security money for the elderly, retired - in tower top. The system will work well when the number of young people at the bottom of the tower is more than the number of old people at the top of the tower. As society ages, the number of young people is less, they have to work more, contribute more to maintain the social security fund.
Federal Reserve, monetary policy and inflation
The Federal Reserve is comprised of 12 banks and a 7-member Board of Governors. The head of this Board is also the Chairman of the Federal Reserve. The Department is in charge of supervising and regulating the activities of commercial banks, linking the activities of the financial system; and one of the most important tasks is the management of monetary policy. The Federal Reserve needs to decide on the “just right” amount of credit to keep the economy growing.
If the amount of money provided by the Fed (Federal Reserve) to the economy - through large commercial banks - is large, interest rates will decrease, companies will invest in producing more goods, the economy will grow. . But when interest rates are low, consumers will invest, consume more, supply is higher than demand, leading to an increase in prices of products and inflation. Inflation will lead to the following consequences: reduced purchasing power of money; banks do not dare to lend money to people for a long time, greatly affecting retired individuals or people living on other fixed incomes, the economy is skewed… Because of the great effects In this situation, inflation, especially hyperinflation, is something that all governments dread.
Deflation – the opposite of inflation – has equally bad effects. Deflation causes consumers to stop spending and the economy to stop growing. Companies responded by continuing to lower prices. Just like that, deflation creates a spiral that pulls the economy down.
Monetary policy is like a double-edged sword. Used correctly, the economy will grow smoothly and not suffer from inflationary shocks, or deflation. If misused, the economy will be severely damaged.
Trade and globalization
Commerce is a magical invention. Trade – barter – has turned corn into a CD player, Windows software into bottles of fine wine, turned Boeing into tons of fresh fruit and vegetables… Countries that have access to trade with many other countries will grow faster than those that are not able to trade.
Globalization - trade on a global scale - allows each country to focus on producing what they are most productive and most advantageous, and then trade and exchange goods with other countries. is different. Globalization is highly competitive and thus produces losers – countries that are not as productive as competing with other countries producing the same good. For this and a few other reasons – including political reasons – some countries have not really engaged in globalization. And this is their mistake because considering all the factors involved, participating in globalization still brings more benefits than shutting down.
Solutions for the economy of developing countries
According to the Food and Agriculture Organization of the United Nations (FAO), there are still 1 billion people who do not have enough food to eat. And while the world has achieved great achievements such as going to the moon, decoding the human genome, there are still 2 billion people who earn less than 2 US dollars a day. The majority of this group of “poor” people belong to developing economies. Let's consider the following solutions for these economies:
Need effective government institutions. To grow and prosper, a country needs the rule of law, the ability to enforce law when someone breaks the law, strong courts, good basic infrastructure, a government that can collect taxes, is not corrupt, and is popular with the people. to respect.
Define the ownership rights of people and businesses in a formal and clear manner. Ownership – legal status over property – enables people to legally rent, subdivide, transfer, or use property as collateral to borrow capital.
Eliminate unreasonable rules. Unreasonable laws cause instability and trouble for people and businesses. They also facilitate corruption.
Focus on improving human capital. Developed economies need to always focus on training and coaching human capital. And more than that, these countries must create a good working environment so that highly skilled people can work together and develop their skills. Otherwise they will find suitable environment in developed countries.
Overcome obstacles caused by geography. According to the World Bank, of the 30 countries classified as rich, only two – Hong Kong and Singapore – are located in the tropics. The tropical climate – high temperatures and lots of rain – is not good for food production and human health. Developing countries located in the tropics need to create mechanisms to encourage pharmaceutical companies to produce more drugs to treat diseases in the tropics. The important solution is to open up the economy to escape the trap of an economy based mainly on agriculture.
Open the economy. Above we discussed the importance of opening the economy, trade, import and export to other countries. For developing economies, opening up the economy is not only important but also crucial.
Implement responsible fiscal and monetary policy. Governments need to conduct fiscal policy in a rational and responsible manner. If the government overspends the budget will cause the following problems: higher taxes (to pay off debts), inflation (decreases the value of debts), and higher defaults. Monetary policy also needs to be properly implemented to create stable economic development without strong inflationary or deflationary shocks.
Do not rely too much on natural resources. Israel has no oil but is richer than any of its oil neighbors in the Middle East; Japan and Switzerland have very few natural resources but are many times richer than Russia - a country with rich resources; Agola earned $3.5 billion from its huge oil reserves, but it was a poor country. Natural resources – taken as a whole – create more disadvantages than advantages. Countries with natural resources need to use it wisely and not rely too much on it for economic development.