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

become obvious to many laypeople—which is kind of like the fire department showing up at a house with smoke wafting from the roof and declaring, “No, that’s not a fire,” only to have flames start leaping from the attic twenty minutes later. There was a bubble. And it can be explained best by incorporating psychology into economics, namely the tendency of individuals to believe that whatever is happening now is what’s most likely to happen in the future.

Economics is evolving, like every discipline. One of the most interesting and productive areas of inquiry is the field of behavioral economics, which explores how individuals make decisions—sometimes in ways that aren’t as rational as economists have traditionally theorized. We humans underestimate some risks (obesity) and overestimate others (flying); we let emotion cloud our judgment; we overreact to both good news and bad news (rising home prices and then falling home prices).

Most of this was obvious to Shakespeare, but it’s relatively new to mainstream economics. As New York Times columnist David Brooks noted, “Economic behavior can be accurately predicted through elegant models. This view explains a lot, but not the current financial crisis—how so many people could be so stupid, incompetent and self-destructive all at once. The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it to front and center.”4

Of course, most of the old ideas are still pretty darn important. Federal Reserve chairman Ben Bernanke was a scholar of the Great Depression before leaving academe, a fact that has had implications far beyond the Ivory Tower. Chapter 10 will make the case that Bernanke’s creative and aggressive interventions at the Federal Reserve, many of which were inspired by what went wrong in the 1930s, prevented a bad situation from getting much, much worse.

This book walks through some of the most powerful concepts in economics while simplifying the building blocks or skipping them entirely. Each chapter covers subjects that could be made into an entire book. Indeed, there are minor points in every chapter that have launched and sustained entire academic careers. I have glossed over or skipped much of the technical structure that forms the backbone of the discipline. And that is exactly the point: One need not know where to place a load-bearing wall in order to appreciate the genius of Frank Lloyd Wright. This book is not economics for dummies; it is economics for smart people who never studied economics (or have only a vague recollection of doing so). Most of the great ideas in economics are intuitive when the dressings of complexity are peeled away. That is naked economics.

Economics should not be accessible only to the experts. The ideas are too important and too interesting. Indeed, naked economics can even be fun.

Acknowledgments

Many waves of people have helped to bring this project to fruition, almost like a relay race with fresh legs pushing me toward the finish line at every stage. In the beginning, Tifanny Richards was a strong believer that there would be a market for an accessible book on economics. Her wonderful encouragement moved this book off the starting line. Tabitha Griffin brought the project to W. W. Norton, something for which I will always be grateful.

Then came the second leg. When Tifanny and Tabitha went on to other opportunities, I was fortunate to end up in excellent hands once again. Tina Bennett is everything that one could hope for in an agent: smart, supportive, and always interested in new ideas. Meanwhile, I was lucky to have Drake McFeely take on the task of editing the book. Who knows how the man can find time to run the company, edit books, and cavort with Nobel Prize winners, but he does and I am a beneficiary of his experience and judgment. Of course, Eve Lazovitz is the one who made Drake’s trains run on time for the first edition, albeit with a delicate touch. Jeff Shreve was a kind but stern taskmaster for the second edition. Without their support (and deadlines), this book would still be an unfinished manuscript scrawled on legal pads.

Mary Ellen Moore and Danielle Kutasov offered excellent research assistance, finding the facts, figures, and anecdotes that had eluded me. Three accomplished economists were kind enough to take time from their busy schedules to read the first edition manuscript and make helpful comments: Burton Malkiel, Robert Willis, and Kenneth Rogoff. These three men are giants of the profession, and each had many other things that they might have done with their time. Robert Johnson was kind enough to read the international economics chapter that has been added to the second edition. I appreciate his willingness to share his expertise on the topic.

I owe a debt to my former editors at The Economist. John Micklethwait was generous in allowing me to disappear for a stretch while I finished the first edition of this book and was also willing to read and make comments on the finished product. I owe Ann Wroe credit for her clever subtitle. The fact that both John and Ann find time to edit one of the world’s great publications while also raising families and writing books of their own continues to be an inspiration.

More recently, the Harris School of Public Policy at the University of Chicago and Dartmouth College have both offered me an intellectual “home” where I have the privilege of teaching great students and working on projects like this one. At the Harris School, former Dean Susan Mayer was a particularly enthusiastic supporter of my ongoing quest to make important academic ideas more accessible to the lay public. At Dartmouth, Bruce Sacerdote has been both a terrific intellectual companion and a great water-ski buddy.

I also owe a different kind of debt. The vast majority of ideas I describe in this book are not my own. Rather, I am a translator whose work derives its value