Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

in line in the rain for six hours to get them. Taking the bus for $1.50 may not be cheaper than taking a taxi for $7 if you are running late for a meeting with a peevish client who will pull a $50,000 account if you keep her waiting. Shopping at a discount store saves money but it usually costs time. I am a writer; I get paid based on what I produce. I could drive ninety miles to shop at an outlet in Kenosha, Wisconsin, to save $50 on a new pair of dress shoes. Or I could walk into Nordstrom on Michigan Avenue and buy the shoes while I am out for lunch. I generally choose the latter; the total cost is $225, fifteen minutes of my time, and some hectoring from my mother, who will invariably ask, “Why didn’t you drive to Kenosha?”

Every aspect of human behavior reacts to cost in some way. When the cost of something falls, it becomes more attractive to us. You can learn that by deriving a demand curve, or you can learn it by shopping the day after Christmas, when people snap up things that they weren’t willing to buy for a higher price several days earlier. Conversely, when the cost of something goes up, we use less of it. This is true of everything in life, even cigarettes and crack cocaine. Economists have calculated that a 10 percent decrease in the street price of cocaine eventually causes the number of adult cocaine users to grow by about 10 percent. Similarly, researchers estimated that the first proposed settlement between the tobacco industry and the states (rejected by the U.S. Senate in 1998) would have raised the price of a pack of cigarettes by 34 percent. In turn, that increase would have reduced the number of teenage smokers by a quarter, leading to 1.3 million fewer smoking-related premature deaths among the generation of Americans seventeen or younger at the time.4 Of course, society has already raised the cost of smoking in ways that have nothing to do with the price of a pack of cigarettes. Standing outside an office building when it is seventeen degrees outside is now part of the cost of smoking at work.

This broad view of cost can explain some very important social phenomena, one of which is the plummeting birth rate in the developed world. Having a child is more expensive than it was fifty years ago. This is not because it is more expensive to feed and clothe another little urchin around the house. If anything, those kinds of costs have gone down, because we have become far more productive at making basic consumer goods like food and clothing. Rather, the primary cost of raising a child today is the cost of the earnings forgone when a parent, still usually the mother, quits or cuts back on work to look after the child at home. Because women have better professional opportunities than ever before, it has grown more costly for them to leave the workforce. My neighbor was a neurologist until her second child was born, at which point she decided to stay home. It’s expensive to quit being a neurologist.

Meanwhile, most of the economic benefits of having a large family have disappeared in the developed world. Young children no longer help out on the farm or provide extra income for the family (though they can be taught at a young age to fetch a beer from the refrigerator). We no longer need to have many children in order to ensure that some of them live through childhood or that we have enough dependents to provide for us in retirement. Even the most dour of economists would concede that we derive great pleasure from having children. The point is that it is now more expensive to have eleven of them than it used to be. The data speak to that point: The average American woman had 3.77 children in 1905; she now has 2.07—a 45 percent drop.5

There is a second powerful assumption underpinning all of economics: Firms—which can be anything from one guy selling hot dogs to a multinational corporation—attempt to maximize profits (the revenue earned by selling stuff minus the cost of producing it). In short, firms try to make as much money as possible. Hence, we have an answer to another of life’s burning questions: Why did the entrepreneur cross the road? Because he could make more money on the other side.

Firms take inputs—land, steel, knowledge, baseball stadiums, etc.—and combine them in a way that adds value. That process can be as simple as selling cheap umbrellas on a busy corner in New York City when it starts to rain (where do those guys come from?) or as complex as assembling Boeing’s 787 Dreamliner (a passenger jet that required 800,000 hours on Cray supercomputers just to design). A profitable firm is like a chef who brings home $30 worth of groceries and creates an $80 meal. She has used her talents to create something that is worth far more than the cost of the inputs. That is not always an easy thing to do. Firms must decide what to produce, how and where to produce it, how much to produce, and at what price to sell what they produce—all in the face of the same kinds of uncertainties that consumers deal with.

How? These are massively complex decisions. One powerful feature of a market economy is that it directs resources to their most productive use. Why doesn’t Brad Pitt sell automobile insurance? Because it would be an enormous waste of his unique talents. Yes, he is a charismatic guy who could probably sell more insurance policies than the average salesman. But he is also one of a handful of people in the world who can “open” a movie, meaning that millions of people around the world will go to see a film just because Brad Pitt is in it. That is money in the bank in