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

powerful force that derives its strength from rewarding the swift, the strong, and the smart. That said, it would be wise to remember that two of the most beautifully adapted species on the planet are the rat and the cockroach.

Our system uses prices to allocate scarce resources. Since there is a finite amount of everything worth having, the most basic function of any economic system is to decide who gets what. Who gets tickets to the Super Bowl? The people who are willing to pay the most. Who had the best seats for the Supreme Soviet Bowl in the old USSR (assuming some such event existed)? The individuals chosen by the Communist Party. Prices had nothing to do with it. If a Moscow butcher received a new shipment of pork, he slapped on the official state price for pork. And if that price was low enough that he had more customers than pork chops, he did not raise the price to earn some extra cash. He merely sold the chops to the first people in line. Those at the end of the line were out of luck. Capitalism and communism both ration goods. We do it with prices; the Soviets did it by waiting in line. (Of course, the communists had many black markets; it is quite likely that the butcher sold extra pork chops illegally out the back door of his shop.)

Because we use price to allocate goods, most markets are self-correcting. Periodically the oil ministers from the OPEC nations will meet in an exotic locale and agree to limit the global production of oil. Several things happen shortly thereafter: (1) Oil and gas prices start to go up; and (2) politicians begin falling all over themselves with ideas, mostly bad, for intervening in the oil market. But high prices are like a fever; they are both a symptom and a potential cure. While politicians are puffing away on the House floor, some other crucial things start to happen. We drive less. We get one heating bill and decide to insulate the attic. We go to the Ford showroom and walk past the Expeditions to the Escorts.

When gas prices approached $4 a gallon in 2008, the rapid response of American consumers surprised even economists. Americans began buying smaller cars (SUV sales plunged while subcompact sales rose). We drove fewer total miles (the first monthly drop in 30 years). We climbed on public buses and trains, often for the first time; transit ridership was higher in 2008 than at any time since the creation of the interstate highway system five decades earlier.9

Not all such behavioral changes were healthy. Many consumers switched from cars to motorcycles, which are more fuel efficient but also more dangerous. After falling steadily for years, the number of U.S. motorcycle deaths began to rise in the mid-1990s, just as gas prices began to climb. A study in the American Journal of Public Health estimated that every $1 increase in the price of gasoline is associated with an additional 1,500 motorcycle deaths annually.10

High oil prices cause things to start happening on the supply side, too. Oil producers outside of OPEC start pumping more oil to take advantage of the high price; indeed, the OPEC countries usually begin cheating on their own production quotas. Domestic oil companies begin pumping oil from wells that were not economical when the price of petroleum was low. Meanwhile, a lot of very smart people begin working more seriously on finding and commercializing alternative sources of energy. The price of oil and gasoline begins to drift down as supply rises and demand falls.

If we fix prices in a market system, private firms will find some other way to compete. Consumers often look back nostalgically at the “early days” of airplane travel, when the food was good, the seats were bigger, and people dressed up when they traveled. This is not just nostalgia speaking; the quality of coach air travel has fallen sharply. But the price of air travel has fallen even faster. Prior to 1978, airline fares were fixed by the government. Every flight from Denver to Chicago cost the same, but American and United were still competing for customers. They used quality to distinguish themselves. When the industry was deregulated, price became the primary margin for competition, presumably because that is what consumers care more about. Since then, everything related to being in or near an airplane has become less pleasant, but the average fare, adjusted for inflation, has fallen by nearly half.

In 1995, I was traveling across South Africa, and I was struck by the remarkable service at the gas stations along the way. The attendants, dressed in sharp uniforms, often with bow ties, would scurry out to fill the tank, check the oil, and wipe the windshield. The bathrooms were spotless—a far cry from some of the scary things I’ve seen driving across the USA. Was there some special service station mentality in South Africa? No. The price of gasoline was fixed by the government. So service stations, which were still private firms, resorted to bow ties and clean bathrooms to attract customers.

Every market transaction makes all parties better off. Firms are acting in their own best interests, and so are consumers. This is a simple idea that has enormous power. Consider an inflammatory example: The problem with Asian sweatshops is that there are not enough of them. Adult workers take jobs in these unpleasant, low-wage manufacturing facilities voluntarily. (I am not writing about forced labor or child labor, both of which are different cases.) So one of two things must be true. Either (1) workers take unpleasant jobs in sweatshops because it is the best employment option they have; or (2) Asian sweatshop workers are persons of weak intellect who have many more attractive job offers but choose to work in sweatshops instead.

Most arguments against globalization implicitly assume number two. The protesters smashing windows in Seattle were trying to make the case that workers in the developing world would