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

from the brilliance of the original, which in this case is centuries of work done by great thinkers. I hope this book reflects my enormous respect for that work.

Last, I would like to acknowledge those who inspired my interest in the subjects that make up this book. I’ve made the case that economics is often poorly taught. That is true. But it’s also true that the discipline can come alive in the hands of the right person, and I was fortunate to work and study with many of them: Gary Becker, Bob Willis, Ken Rogoff, Robert Willig, Christina Paxson, Duncan Snidal, Alan Krueger, Paul Portney, Sam Peltzman, Don Coursey, Paul Volcker. My hope is that this book will help to transmit their knowledge and enthusiasm to many new readers and students.

naked economics

CHAPTER 1

The Power of Markets:

Who feeds Paris?

In 1989, as the Berlin Wall was toppling, Douglas Ivester, head of Coca-Cola Europe (and later CEO), made a snap decision. He sent his sales force to Berlin and told them to start passing out Coke. Free. In some cases, the Coca-Cola representatives were literally passing bottles of soda through holes in the Wall. He recalls walking around Alexanderplatz in East Berlin at the time of the upheaval, trying to gauge whether there was any recognition of the Coke brand. “Everywhere we went, we asked people what they were drinking, and whether they liked Coca-Cola. But we didn’t even have to say the name! We just shaped our hands like the bottle, and people understood. We decided we would move as much Coca-Cola as we could, as fast as we could—even before we knew how we would get paid.”1

Coca-Cola quickly set up business in East Germany, giving free coolers to merchants who began to stock the “real thing.” It was a money-losing proposition in the short run; the East German currency was still worthless—scraps of paper to the rest of the world. But it was a brilliant business decision made faster than any government body could ever hope to act. By 1995, per capita consumption of Coca-Cola in the former East Germany had risen to the level in West Germany, which was already a strong market.

In a sense, it was Adam Smith’s invisible hand passing Coca-Cola through the Berlin Wall. Coke representatives weren’t undertaking any great humanitarian gesture as they passed beverages to the newly liberated East Germans. Nor were they making a bold statement about the future of communism. They were looking after business—expanding their global market, boosting profits, and making shareholders happy. And that is the punch line of capitalism: The market aligns incentives in such a way that individuals working for their own best interest—passing out Coca-Cola, spending years in graduate school, planting a field of soybeans, designing a radio that will work in the shower—leads to a thriving and ever-improving standard of living for most (though not all) members of society.

Economists sometimes ask, “Who feeds Paris?”—a rhetorical way of drawing attention to the mind-numbing array of things happening every moment of every day to make a modern economy work. Somehow the right amount of fresh tuna makes its way from a fishing fleet in the South Pacific to a restaurant on the Rue de Rivoli. A neighborhood fruit vendor has exactly what his customers want every morning—from coffee to fresh papayas—even though those products may come from ten or fifteen different countries. In short, a complex economy involves billions of transactions every day, the vast majority of which happen without any direct government involvement. And it is not just that things get done; our lives grow steadily better in the process. It is remarkable enough that we can now shop for a television twenty-four hours a day from the comfort of our own homes; it is equally amazing that in 1971 a twenty-five-inch color television set cost an average worker 174 hours of wages. Today, a twenty-five-inch color television set—one that is more dependable, gets more channels, and has better reception—costs the average worker about twenty-three hours of pay.

If you think that a better, cheaper television set is not the best measure of social progress (a reasonable point, I concede), then perhaps you will be moved by the fact that, during the twentieth century, American life expectancy climbed from forty-seven years to seventy-seven, infant mortality plunged by 93 percent, and we wiped out or gained control over diseases such as polio, tuberculosis, typhoid, and whooping cough.2

Our market economy deserves a lot of the credit for that progress. There is an old Cold War story about a Soviet official who visits an American pharmacy. The brightly lit aisles are lined with thousands of remedies for every problem from bad breath to toe fungus. “Very impressive,” he says. “But how can you make sure that every store stocks all of these items?” The anecdote is interesting because it betrays a total lack of understanding of how a market economy works. In America, there is no central authority that tells stores what items to stock, as there was in the Soviet Union. Stores sell the products that people want to buy, and, in turn, companies produce items that stores want to stock. The Soviet economy failed in large part because government bureaucrats directed everything, from the number of bars of soap produced by a factory in Irktusk to the number of university students studying electrical engineering in Moscow. In the end, the task proved overwhelming.

Of course, those of us accustomed to market economies have an equally poor understanding of communist central planning. I was once part of an Illinois delegation visiting Cuba. Because the visit was licensed by the U.S. government, each member of the delegation was allowed to bring back $100 worth of Cuban merchandise, including cigars. Having been raised in the era of discount stores, we all set out looking for the best price on Cohibas so that we could get