I just finished reading a really good book called
Naked Economics. It's by far the best book on economics written for the lay person that I've read. Most books of these kind are written by crazy libertarians. They usually argue about how you shouldn't vote because your one vote doesn't matter and how parks should be privately owned. Not this one. But it's also not a crazy communist book. The author argues that the benefits of capitalism far outway the negative impacts. Here are some of the more interesting things he writes about.
The author says that one of the reasons why capitalism can cause problems is that
externalities (the gap between the private cost and the social cost of some behavior) are not included in the prices people pay. When somebody chooses to buy an SUV he gets a certain value from owning it but it has effects on other people who weren't included in his decision. For example, the SUV is bigger so it causes other people to buy bigger cars to feel safer, the SUV causes more polution, the SUV is heavier so the roads don't last as long, and the SUV uses more gas which is artificially cheap. The author says that it's a government's job to reduce the negative externalities. One way to fix the SUV problem is to make sure that SUV owners are paying for the full cost of their vehicle. For instance, they should pay taxes based on the weight of the vehicle and they should pay the full price of gas. That would of course include the $200 billion for the war in Iraq and other payments for middle east stability.
He says something that I wouldn't expect out of an economist's mouth: "Anyone who tells you that markets left to their own devices will always lead to socially beneficial outcomes is talking utter nonsense."
Later on he writes about the "helping hand" versus the "grabbing hand". Governments allow business to happen by creating a stable environment and keeping people from cheating but they can also get in the way for no real reason. He says that registering and licensing a business in Canada requires two procedures compared to twenty in Bolivia. The cost of jumping through these hoops is 260% of Bolivia's per capita GDP. Obviously, people in Bolivia aren't going to bother which means they are going to work and trade outside of the safety net of the legitimate economy.
He talks about supply side economics and how at a certain level of taxation the
Laffer Curve is true. If the tax rate was 95% then no one is going to do a whole lot of work beyond what is necessary to subsist. But does this make sense in the US where we pay a maximum of about 40%? He says no. Reagan tried it and it failed. It caused a decade and a half of budget deficits.
He says this which I'll quote in full
Government has the potential to enhance the productive capacity of the economy and make us much better off as a result. Government creates and sustains the legal framework that makes markets possible; it raises our utility by providing public goods that we are unable to purchase for ourselves; it fixes the rough edges of capitalism by correcting externalities, particularly in the environmental realm. Thus, the notion that smaller government is always better government is simply wrong.
He talks about global trade, which I'd like to go into futher in another essay. He says that Saudi Arabia can produce oil cheaper than the US and the US can produce corn cheaper than Saudi Arabia so the corn-for-oil trade is an example of absolute advantage.
He makes an excellent point about global trade. America punishes rogue nations such as Iraq by imposing economic sanctions. We cut off international trade
as a punishment. So why is it that anti-globalisation people want to impose sanctions on the rest of the developing world? Are they doing it because they think that they are helping the people in those countries or because they really hate the people in those countries and want them to suffer? Think about this: The sanctions in Iraq were responsible for the deaths of half a million children. Are you sure you want to kill that many people in other countries?
He talks about how geography impacts the economy. Only two of the thirty countries classified by the World Bank as rich lie between the Tropic of Cancer and the Tropic of Capricorn. Those countries are Hong Kong and Singapore.
He ends the book pondering some questions about how life will be like in 50 years. One of the interesting questions that I ask myself all of the time is whether we Americans are going to stop working so hard. He discusses the "backward-bending labor supply curve" which is that when wages go up we work hard up until a certain point. At a certain point the extra money doesn't matter as much as your time. I've always thought that it had something to do with the length of time your country has spent at the top of the food chain. Europe is old, they've been at the top for a long time and so they no longer feel like they need to prove themselves by working so hard. The US is younger and it was understandable that we think we need to work hard to prove ourselves. The interesting thing is that it's part of our character as Americans to think of ourselves as the underdogs. It ends up causing some good and some bad. The reason why I think that China is going to take over the world as the only superpower is that they are just beginning to become powerful and they are going to continue to work very hard until they've felt like they've proven themselves, which can't be anything less than world domination. The US on the otherhand is well off, we don't need to work as hard and I think we'll eventually wake up one morning and realize that we are working way to hard.
Well, those were some of the things the author discussed. I'd like to write more about some of the topics but I need people to disagree with me. Please write comments about things you disagree with. And make sure you supply good logic. I hate bad logic.
