Category: Finance

Just finished reading ‘Naked Economics: Undressing the dismal science’. It was a present from a friend, and I’ve been meaning to read it for a while. Glad I finally got around to it.

From the title, I assumed the book aimed to point out the failures of economics as a science. Not so at all – it was written by an economist and provides a high level overview of capitalism in layman’s terms.

Here’s some interesting questions and explanations from the book:

• Why do we have money? So that we can indirectly swap our labour or goods for the things we want, even if the person with the things we want is not interested in our labour or goods. Without money, we would need to barter. That’s fine if you’re swapping chickens for rice. But what happens if you do web design, and you want meat for dinner, and the butcher does not want a website?
• Money has value only because we all believe it does. We have faith that if we sell something (ie, convert it to the common value unit), we will then be able to swap that money for something we want.
• Why have markets anyway? Markets produce what people want – ie, what people are willing to pay for (or at least what we are convinced into wanting through advertising etc).
• Why not set the price of everything rather than letting it get worked out in a market? Well, it would be an enormous job, and things would not reflect the cost of production. Eg, bird flu wipes out half of the chickens in the world. There are now less chickens to go around so chicken becomes more expensive. People who really want chicken can still get it, but it costs them more. People who don’t care as much or can’t afford it eat fish or beef instead. If the cost of chicken was a constant mandated by the state, chicken distribution would need to be mandated in some other way. If there’s not enough chicken for everyone who wants it, who should get it? First come first served? Political clout? Personal connections?
• Markets destroy. A new way to mechanize weaving may make thousands unemployed and destroy towns and communities. But according to Wheelan, the country as a whole is better off as we are able to produce more for less cost, hence increasing our standard of living. Ie, as a consumer, you may now be able to buy a shirt for half the price.
• In politics, small motivated groups often drive policy. Eg, the general population does not care much one way or other on a subsidy on growing alfalfa. It might cost each person in Australia 0.01c per year. However, if the subsidy was to be removed, and the alfalfa farmers would care a lot. It may well mean their livelihoods so they would demonstrate, make campaign donations, vote as a block and generally make as much fuss as possible to make sure the subsidy was not removed.
• Why do people work in sweatshops? According to Wheelan, the pay is generally better than for other jobs available – ie, sweatshops are not the cause of the problem, rather a symptom of the general poverty and lack of opportunity in the area.
• Why is free trade good? So that everyone can do what they do best – ie, specialise to the max. The idea being that if everyone works on what they are most good at, then productivity overall is higher.
• Why are tariffs bad? Because they support local industries that are not viable – ie, a poor uses of resources.
• Why do we need governments? To provide the rails for capitalism. Eg, to enforce laws (so you can’t just kill me and take my stuff), to regulate the excesses of the free market and to provide goods and services that people need but that free markets will never provide. Also, to do things that individuals cannot do alone, but are in the interest of the population as a whole – eg, build infrastructure.
• Care for the environment is a luxury good – ie, if you and your family are starving, cutting down trees to sell for food seems like a pretty good idea.
• Companies destroy the environment because the current monetary cost of environmental destruction is usually minimal. If the full cost of environmental destruction was factored into the market (eg, companies have to pay for pollution and destruction), then environmental destruction would slow dramatically.
• Who can create new money? The reserve bank, and it does it by buying bonds from banks with money that did not previously exist.
• How can the reserve bank change interest rates? It can sell government bonds at its target rate and it can buy bonds (with brand new money) or sell bonds from/to trading banks to influence the amount of cash the banks have to lend. Eg, lots of cash at a trading bank means they’ll lower the interest rates so as to rent out the money.
• How come the economy can go into recession for no real reason? If people are worried, they don’t spend. If people don’t spend, then companies can’t afford new/current investment. People get sacked and then can spend even less. People get more worried and the cycle continues.
• Why is the level of savings in a country important? Money in the bank means it can be lent out to people who want to use it to create new businesses or expand current businesses. Access to capital allows growth.

I wouldn’t take these on face value, and I would certainly question some of the assumptions on which they are based. However, they provide some interesting areas for further thought.