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

the most bang for our $100 allowance. After several fruitless hours, we discovered the whole point of communism: The price of cigars was the same everywhere. There is no competition between stores because there is no profit as we know it. Every store sells cigars—and everything else for that matter—at whatever price Fidel Castro (or his brother Raul) tells them to. And every shopkeeper selling cigars is paid the government wage for selling cigars, which is unrelated to how many cigars he or she sells.

Gary Becker, a University of Chicago economist who won the Nobel Prize in 1992, has noted (borrowing from George Bernard Shaw) that “economy is the art of making the most of life.” Economics is the study of how we do that. There is a finite supply of everything worth having: oil, coconut milk, perfect bodies, clean water, people who can fix jammed photocopy machines, etc. How do we allocate these things? Why is it that Bill Gates owns a private jet and you don’t? He is rich, you might answer. But why is he rich? Why does he have a larger claim on the world’s finite resources than everyone else? At the same time, how is it possible in a country as rich as the United States—a place where Alex Rodriguez can be paid $275 million to play baseball—that one in five children is poor or that some adults are forced to rummage through garbage cans for food? Near my home in Chicago, the Three Dog Bakery sells cakes and pastries only for dogs. Wealthy professionals pay $16 for birthday cakes for their pets. Meanwhile, the Chicago Coalition for the Homeless estimates that fifteen thousand people are homeless on any given night in that same city.

These kinds of disparities grow even more pronounced as we look beyond the borders of the United States. Three-quarters of the people in Chad have no access to clean drinking water, let alone pastries for their pets. The World Bank estimates that half of the world’s population survives on less than $2 a day. How does it all work—or, in some cases, not work?

Economics starts with one very important assumption: Individuals act to make themselves as well off as possible. To use the jargon of the profession, individuals seek to maximize their own utility, which is a similar concept to happiness, only broader. I derive utility from getting a typhoid immunization and paying taxes. Neither of these things makes me particularly happy, but they do keep me from dying of typhoid or going to jail. That, in the long run, makes me better off. Economists don’t particularly care what gives us utility; they simply accept that each of us has his or her own “preferences.” I like coffee, old houses, classic films, dogs, bicycling, and many other things. Everyone else in the world has preferences, which may or may not have anything in common with mine.

Indeed, this seemingly simple observation that different individuals have different preferences is sometimes lost on otherwise sophisticated policymakers. For example, rich people have different preferences than poor people do. Similarly, our individual preferences may change over the course of our life cycle as we (we hope) grow wealthier. The phrase “luxury good” actually has a technical meaning to economists; it is a good that we buy in increasing quantities as we grow richer—things like sports cars and French wines. Less obviously, concern for the environment is a luxury good. Wealthy Americans are willing to spend more money to protect the environment as a fraction of their incomes than are less wealthy Americans. The same relationship holds true across countries; wealthy nations devote a greater share of their resources to protecting the environment than do poor countries. The reason is simple enough: We care about the fate of the Bengal tiger because we can. We have homes and jobs and clean water and birthday cakes for our dogs.

Here is a nettlesome policy question: Is it fair for those of us who live comfortably to impose our preferences on individuals in the developing world? Economists argue that it is not, though we do it all the time. When I read a story in the Sunday New York Times about South American villagers cutting down virgin rain forest and destroying rare ecosystems, I nearly knock over my Starbucks latte in surprise and disgust. But I am not they. My children are not starving or at risk of dying from malaria. If they were, and if chopping down a valuable wildlife habitat enabled me to afford to feed my family and buy a mosquito net, then I would sharpen my ax and start chopping. I wouldn’t care how many butterflies or spotted weasels I killed. This is not to suggest that the environment in the developing world does not matter. It does. In fact, there are many examples of environmental degradation that will make poor countries even poorer in the long run. Cutting down those forests is bad for the rest of us, too, since deforestation is a major contributor to rising CO2 emissions. (Economists often argue that rich countries ought to pay poor countries to protect natural resources that have global value.)

Obviously if the developed world were more generous, then Brazilian villagers might not have to decide between destroying the rain forest and buying mosquito nets. For now, the point is more basic: It is simply bad economics to impose our preferences on individuals whose lives are much, much different. This will be an important point later in the book when we turn to globalization and world trade.

Let me make one other important point regarding our individual preferences: Maximizing utility is not synonymous with acting selfishly. In 1999, the New York Times published the obituary of Oseola McCarty, a woman who died at the age of ninety-one after spending her life working as a laundress in Hattiesburg, Mississippi. She had lived alone in a small, sparsely furnished house with a black-and-white television that received only one channel. What made