Naked Economics and the Free Market
This past week I finished reading Naked Economics by Charles Wheelan and immediately made a mental note to recommend it to anyone who has an interest in economics, human nature, business, or psychology.If your understanding of economics can be boiled down to a rudimentary understanding of the laws of supply and demand, yet you have a desire to expand your understanding on the subject, this is the book for you. In Naked Economics, Wheelan breaks down some of the most daunting concepts of economics and conveys them in a simple, yet engaging manner.
Once economics is stripped of the intellectual jargon that it’s generally associated with, what remains is a simple definition which operates under a single assumption. Simply stated, economics is the study of maximizing efficiency and getting the most out of any given situation. It operates under the assumption that people generally act in a manner in which they feel their utility, or benefit, will be maximized. Before delving into the content of this book, this definition and assumption are vital to have a firm grasp on how economics impacts every aspect of life.
Wheelan illustrates the practical relevance of economics, within the context of his definition, with an amusing, yet compelling statistical anecdote. Since 1905, the average number of children born dropped approximately 45 percent. This drop in childbirth was caused by the progressive and steep ascent regarding the costs involved in raising children. These mothers weighed all the benefits and detriments of having more children and concluded that their utility would ultimately be maximized with fewer children. It is important to clarify that economics, specifically the concept of utility maximization, doesn’t necessarily motivate selfishness, but rather it enables wiser decision-making. This is evident in the fact that these benefits were not solely manifested in fewer expenses and more opportunity in the workplace, but were also found in evading a less privileged life for their children. This precisely explains the trend of the drop in fertility; women felt that, with all factors taken into account, their utility was most effectively maximized when having fewer children.
While this anecdote represents economics in relation to everyday decision-making, Wheelan stresses that economics and its relation to the market is of equal importance. In understanding how the two directly align an understanding of a free market is vital. A free market is a system in which the prices of goods and services fluctuate based on what consumers desire, thus being governed by the rules of supply and demand. He postulates that because the free market caters to what people feel will maximize their utility; the market tends to be self-correcting. This can be simply explained as follows: A free market is one that, regardless of the situation, finds channels to provide goods that are desired by the consumer. When an event occurs which affects the exchange between the market and consumer, the market will naturally adjust to assure that the buyer’s utility is satisfied. This phenomenon can only occur once the buyer and seller are left alone from government regulation, primarily in the form of determined fixed prices for goods and services. Wheelan conceptualizes this notion through a fascinating, yet realistic, chain of events. If an incident occurs causing the price of oil production to rise, a series of procedures will subsequently transpire. First people will drive less, then they will buy more fuel-efficient cars, next companies will introduce fuel-alternative solutions, and eventually as the demand for oil mitigates the price of oil follows suit. Wheelan describes this instance of market self-correction and supply and demand as an ideal model of market economics.
Wheelan introduced his book stating that with a comprehensive understanding of economics, people can live their lives with an enhanced efficiency regarding everyday decisions making. This is because it provides a tool in which one can approach an array of questions such as the desirability of an investment opportunity, the decision of whether or not to attend college or graduate school, the benefits and costs of alternative careers, or the likely impacts of geopolitical events. This book will open doors to the world of economics and will provide an understanding of the factors behind decision-making and its effects on a day-to-day basis on a micro and macro-scale.