Naked Economics Chapter 1: The power of markets

John Botterbusch

Anderson

AP Macroeconomics

8 February 2014

Wheelan, C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

            Market economies truly deserve a lot of credit for the progress of human development in the world. In chapter 1 of Naked Economics, Charles Wheelan discusses how market economies are so powerful in the world we live in, because of the power of choice and productivity. Markets allow for people to choose what they wish to produce with a finite amount of resources. Ultimately, markets are maximizing utility since societies-in a more basic sense-are growing around consumerist cultures, ran by firms trying to produce what people want to buy, not necessarily what they need. On the contrary, communist central planning as seen in Soviet Russia and Cuba does not allow for the most productive societies nor the most efficient. Why? Because in communist countries, the means of production is own by a group of bureaucrats, who try to allocate resources to what they think the country needs and fix prices to what they think is “market fair”. However, the fixing of prices on everything completely obliterates the ability for competition to occur and if the prices are not at equilibrium to supply and demand, the government either has made an inefficiency in either shortage or surplus of a good/product since price floors/ceilings are not market efficient. Take for an example, in which Cuba fixes the prices of Cohiba cigars at about $100 US and because of the high prices, there is a surplus of cigars that no one wants to buy for. What ultimately led to the demise of the Soviet Union and other communist nations was the fact that they were trying to change human nature: humans are meant to find their own means of production with the resources they find or have, rather than a government bureaucrat owning the means of production and dictating what can be done with it. Wheelan later on in the chapter begins to outline important points about why the market economy is so powerful and important to our lives. He begins by discussing how markets make our lives better by how profits inspires some of the greatest innovations in the world, which comes back to incentives. When people are able to get what they want and work for it, they tend to be more productive rather where in a communist country, there is no way to move up since everyone is “equal”. Wheelan discusses later on how at the same time, markets are amoral. Not that a market is immoral, but that it has no moral distinctions since morality is subjective to interpretation, like how economics is just a study of choices and how we choose to interpret them. The important point made was that markets do not create what we need, but rather what we want. That is why the poor cannot get health insurance, because they cannot pay for it. Even though the latter example seems wrong, it is the reality that if you don’t have the means to get what you want, you cannot get it. The market economy uses prices to allocate scarce resources and because markets use prices to allocate goods, most markets are self-correcting. Take for example the case of rising oil prices in the late 2000s as a result of shortening supplies of oil. Americans responded by buying smaller cars and on the supply side, oil producers started to pump more oil to take advantage of the high price. There is never a case where buyer and seller does not win, because ultimately supply and demand works for both of them. The seller is getting the best possible profit out of a price that the buyer is willing to pay for. Every market transaction, as Wheelan puts it, makes all parties better, since firms are acting in their own best interests and so are consumers. This brings back the argument against globalization, where the argument is that Asian sweatshop workers are persons of weak intellect who have many more attractive jobs offers but choose to work in sweatshops. Even though the wage earned by a typical sweatshop worker is pathetic and sweatshops are nasty places by Western standards, they often earn more than average worker’s income in the rest of the country they live in. According to behavioral economics, people act consistently in ways that make themselves better off. Even if it does not seem like much, a wage that is double what the rest of the country makes is worth it. In cases where governments choose to fix prices in a market economy--such as prior to 1978, airline fares were fixed by the government-- firms continue to find other ways to compete by either providing better quality or a distinction to their name. Some would argue that capitalism isn’t fair, but what must be acknowledged is that although market economies are flawed to an extent, they are better among all the worse of alternatives, especially socialism. When people have the means to produce and choose what they want to produce or sell, people are happier and more productive. The future of our world strives to innovate and to improve and in order for humanity to continue, people must have the freedom to choose in life, rather than be dictated.