Economics, a science that most consider as appealing as a root canal, is far more important to our daily lives than we might think. The following was a blog post that I wrote for my AP Economics class that I think can open up the world of econ to those people less inclined to explore it.
1. Everything has a cost. Wheelan addresses the topic of implicit and explicit cost in Chapter 3, “Government and the Economy.” He uses an example from his personal life, a situation in which he sold his Honda Civic to buy a safer, albeit less fuel-efficient, Ford Explorer. In this example, Wheelan considers the explicit costs of driving a larger car – the cost of the new car, the cost of increased gas consumption – as well as the implicit costs of his new Explorer – the environmental impacts of increased carbon dioxide emissions, the danger a multi-ton car poses to smaller cars. He also classifies these two costs as “private” – having an impact on just himself – and “public” – impacting more individuals than just himself.
2. Incentives matter. This next principle of economic thinking is the title to Chapter 2 of Naked Economics. According to Wheelan, incentives are what drive any kind of economy. He uses the black rhinos as his primary example: black rhinos are endangered because there are more incentives in hunting them than in preserving them. Thus, black rhinos face extinction. The same concept applies to Communism – why work when the incentive to work is exactly the same as the incentive not to work?
3. People gain from voluntary trade. In Chapter 11, “Trade and Globalization,” Wheelan discusses the mutual benefits of trade and how people benefit from globalization. The benefits of trade are most prevalent in the long run and, although the short term benefits of trade may not always be obvious, the long term benefits are numerous. Sweatshops in Vietnam may seem inhumane by our standards, but they benefit both the workers (Vietnamese) and the consumers (us). Instead of farming or working as a prostitute, sweatshops give Vietnamese women the opportunity to work in a relatively clean and safe environment while earning more money than they would otherwise. On the other side of the coin, we as consumers have access to cheaper goods. Increased consumption begets increased demand, which creates more jobs. In short, “a rising tide lifts all boats.”
4. The price of a good or service is affected by people’s choices. This principle of economic thinking is addressed at the very beginning of the book, in Chapter 1, “The Power of Markets.” Of this, Wheelan says, “since there is a finite amount of everything worth having, the most basic function of an economic system is to decide who gets what” (Wheelan 19). The price of a good is affected by how people choose to prioritize it. How important are Super Bowl tickets? If few people choose to buy them, their price will drop. Conversely, if everybody chooses to purchase them, their price will rise and only those who can afford them will get them.
5. The test of a theory is its ability to predict. While Wheelan does not discuss this point in great depth in Naked Economics, he does use John Maynard Keynes’s economic theories as an example of a theory that has been applicable and has succeeded in the real world. He hesitates, however, to extol the virtues of economic theory, especially in fiscal policy, because of the wringer it must go through in Congress.
6. People choose for good reasons. For this point we return to Wheelan’s example of the choice between a Honda Civic and a Ford Explorer. He, just like any other person, had a perfectly legitimate reason to choose the Explorer over the Civic. Although he did not state this point explicitly, Wheelan implies that people do not choose arbitrarily. Every significant decision has some reason, which is valid to the chooser, to back it up.
7. Economic actions carry secondary effects. Again we return to the Civic v. Explorer example. While the primary effect of purchasing a new Ford Explorer may be an increase in gas consumption or an increase in safety, a secondary effect would be a child who suffers an asthma attack as a result of increased carbon dioxide in the atmosphere or an ice cap that melts as a result of global warming. Similarly, if I purchase a pizza every day for lunch, the primary effect would be that I am giving business to this company, which may need my money. A secondary effect would be that I am adding unnecessary grease to my body every day, resulting in intense obesity and, as a result, a profit for the insurance company.
8. Economic thinking is marginal thinking. Economic thinking involves being able to consider the marginal costs and marginal benefits of a certain action. If I decide to wait in line for a pizza, the marginal costs to me are the time it takes to wait in line (time I could be using to be productive) and the price of the pizza. The marginal benefit, however, is that I am no longer hungry. To determine, economically, if this choice is “worth it,” I must consider whether the cost of time wasted and $10 spent justify the pleasure of fullness that the pizza will bring me.
9. People create economic systems to influence choices and incentives. Economic systems, like a market economy or a command economy, influence choices and incentives by changing who makes the decisions for allocations of resources and who pays the paycheck. In a market economy, the people allocate resources based on their own beliefs and workers are paid based on the success of others. The incentive for success is high. In a command economy, the government calls the shots and the government pays the paychecks, regardless of the success of the workers. Thus, the incentive to work is low.
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