Friday, November 14, 2008

Reading Journal: "Naked Economics"

Charles Wheelan, Naked Economics: Undressing the Dismal Science. New York: Norton, 2002. Available by special order from River City Books.

Econ 101 met at 8:00 a.m., which in 1983 was much earlier than I was capable of getting out of bed. As a consequence, economics remained one of the more significant gaps in my education. Had I dragged myself out of bed in 1983, I might have learned how Fed chairman Paul Volcker used monetary policy to curb the high inflation of the late 1970s and slow the U.S. economy. The short term result was higher interest rates, peaking at 16% in 1981, and double-digit unemployment. The longer term result was a return to 3% inflation from 13% in 1980. But, because Econ 101 met so early in the morning, I learned none of this. Then again, I may not have learned any of this even had I managed to drag myself out of bed. As Charles Wheelan complains in Naked Economics, economics, as taught in college, is too often "dry and mathematical."

"The sad irony of Econ 101," Wheelan writes, "is that students too often suffer through dull, esoteric lectures while economics is going on all around them."

Fortunately, Wheelan has written a lively and engaging introduction to economics that will open readers' eyes to the economics going on around them without making them wish they had stayed in bed.

Adam Smith begins his Wealth of Nations with the division of labor. "The greatest improvement in the productive powers of labor...seem to have been the effects of the division of labor." As Wheelan explains in his book, the division of labor allows each worker to specialize in the skill that he or she does best, thereby maximizing his or her productivity. The market frees the aerospace engineer from having to make his own shoes and allows him to focus on designing aircraft. The market allows him to trade the wages of his labor for goods, such as shoes, made by other workers. The basic functioning of the market is hard to dispute. We participate in the market every day, trading money earned from teaching Greek or selling books or repairing automobiles for other goods and services.

Wheelan's book was published in 2002, after the attacks of September 11 sent the U.S. economy into a tailspin, Wheelan has little to say specifically about the economic effects of the terrorist attacks. He has much more to say about the WTO protests in Seattle in 1999, which he found profoundly foolish. Globalization expands the market and facilitates the division of labor. Vietnamese sweatshop workers assemble t-shirts so Americans can focus on designing airplanes or teaching Greek. Eventually, Wheelan explains, the expansion of the market will raise the standard of living even of the sweatshop worker.

Wheelan is also careful to explain that government has a crucial role to play in the economy, most importantly in the creation and maintenance of an infrastructure, which includes appropriate taxation and regulation. Is the U.S. government too large? Wheelan points out that government spending in the U.S., as a percentage of GDP, is about 30%. In most of Western Europe, it's significantly higher—as much as 50% in Scandinavia. But, unlike Western Europeans, we are left without universal health care. Wheelan points out that politics is about setting priorities and making fiscal choices. A certain amount of government spending is good for the economy.

But I suspect that Wheelan would look askance at a proposed bailout of the auto industry, on the grounds that it interferes with another important economic principle, the principle of "creative destruction."

Beginning in the 1980s, personal computers with word processing software like Microsoft Word began to edge out typewriters. In 1983, when I was unable to get out of bed for Econ 101, there was a Smith Corona typewriter on the desk in my dorm room. Ten years later, I was using an already obsolete Mac SE. Meanwhile, back in Cortland, New York, near where I grew up, Smith Corona had nearly dried up and blown away. As the New York Times reported in 1998: "Today, a couple of hundred Smith Corona people rattle around the plant here that was once home to 5,000 workers. The basement, once noisy with the clang of typewriters being assembled, is now warehouse space for other companies. And the town long ago stopped grieving for the company that had been its largest employer and benefactor."

This is creative destruction. It's one of the engines of economic growth, but it's painful. As Wheelan points out, the market is amoral, but humans aren't. We want to ease the pain, and our political system encourages us to do so. Gov. Granholm of Michigan doesn't want to see GM turn into another Smith Corona, so she encourages her friend Barack Obama to support a bailout package for the auto industry. Unfortunately, Wheelan argues, such government intervention tends to discourage competitiveness and innovation. As Thomas Friedman complained in a recent editorial, politics has shielded the U.S. auto industry "from environmental concerns, mileage concerns and the full impact of global competition that could have forced Detroit to adapt long ago."

Wheelan's book is full of fascinating information. For example, he offers this interesting example of the failure of Soviet central planning:
The Soviet central planners did not consider birth control to be an economic priority. The Soviet government could have made contraceptives available to all; any country that can build intercontinental ballistic missiles has the know-how to make a birth-control pill, or at least a condom. But contraception simply was not where the central planners chose to channel the country's resources, leaving abortion as the only form of family planning. In the years of communism, there were roughly two abortions for every single live birth. Since the collapse of the Soviet Union, Western contraceptives have become widely available and the abortion rate has fallen by half.
On a somewhat related note, Wheelan also points out that education, especially the education of women, is a powerful force for creating economic opportunity and prosperity. "The market economy," he argues throughout the book, "is a powerful force for making our lives better."

Naked Economics, with its strong defense of globalization, provides an interesting contrast to Bill McKibben's Deep Economy, which I read over the summer, with its emphasis on local economies. For Wheelan, the global economy has the potential to bring people in the developing world out of dire poverty, and give them the opportunity to develop their local economies and protect their local environments. It's difficult to care much about pollution when you're starving, and it's difficult to start a business in a local economy where there is no available capital. He seems to suggest that environmentalism is to a large extent a luxury of the developed world, and that economic development will make it possible to address environmental issues more effectively. He points out that air quality in London, for example, has vastly improved since the sixteenth century. He concludes: "Trade makes countries richer; richer countries care more about environmental quality and have more resources at their disposal to deal with pollution." (Wheelan does favor a carbon tax, or cap and trade system, to use the market to regulate greenhouse emissions.)

Wheelan points out that he himself led an effort to keep a McDonald's out of his upscale Chicago neighborhood. He writes: "These are local decisions that ought to be made by the people affected—those who might eat in the safe, clean environment of a McDonald's restaurant as well as those who may have fast-food wrappers blown in their gutters. Free trade is consistent with one of our most fundamental liberal values: the right to make our own private decisions."

There is a wealth of information in Naked Economics, all of it presented clearly and even entertainingly, with excellent examples and analogies and apposite quotes from a wide range of people, from Nobel Prize winning economists to Ronald Reagan (including several good Reagan quips about economists). There is much that could be argued over, but Wheelan does an excellent job of laying out the issues fairly and reasonably, while being clear about his own biases. Whether you shop at Cub Foods or Just Food Co-op, it's important to understand the economy and its effect, for good or ill, on all of our lives. There is no better place to start than with Naked Economics.

1 comment:

Shan said...

I've heard great things about this book. Wish I had more time/stamina/mental concentration for reading books right now. I should make a list!

New Poem: "Phrasebook"

My poem " Phrasebook " has been published online in Ergon: Greek/American Arts and Letters .