Popular economics book are very common and hot lately. Did you ever wonder why ? I think this is because lately we're all richer, on average, than we've ever been, so we're looking for good ways to invest our money, and popular economics books look suitable because they may provide clues on how to invest better. Well, if investing is your thing, Burton Malkiel's masterpiece is probably the last book you'll ever have to read on the subject. But if you want to know why we're all richer lately, "Naked economics" is the book for you. Let me deviate from my usual book review structure and begin by saying that I really loved this book. Yes, it's probably one of the best books on economics I've ever read. So if you're interested in economics and want to know how the modern financial machine ticks, you should definitely read this book ASAP. There's too much curious stuff in this book to even briefly mention in a review, so I'll post a list of things I found most interesting:
  • We should all think twice before we impose our preferences and criticize people in the developing world. As the author nicely put it:
    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.
  • Important to keep in mind: for every buyer of a stock, there must be a seller. When you buy shares on the stock market, you have no choice but to pay the "market price" - which is the price at which the number of sellers exactly equals the amount of buyers.
  • The best taxes are broad (harder to evade), simple (easily understood and collected) and fair (two similar individuals will pay similar taxes). This naturally leads to the most efficient tax of them all: a lump-sum tax, which is the same for everyone. Unfortunately, this doesn't work in practice as Margaret Thatcher's trial in the 1980s showed.
    Obviously good economics is not always good politics
  • One of the best parts in the book discusses externalities - the gap between the private cost and the social cost of some behavior.
    The polluting company can produce its product more cheaply by dumping the by-products on nearby vacant land than by paying to dispose of them properly. Customers, most of whom live far away and are unaware of (or indifferent to) the pollution, will actually reward the company by buying more of its product, which will be cheaper than what can be produced by competitors that pay to dispose of their waste in a more responsible way
    This is just one of many examples. It is one of the major functions of governments to manage externalities and try to contain them, by imposing real costs on companies that cause high social consequences.
  • Is this funny or sad: in 2001 Philip Morris (the big cigarette company) released a report for the Czech Republic showing that premature deaths from smoking save the Czech government $28 million a year in pension and old-age housing benefits. This report came in response to the Czech's petition to raise the taxes on cigarettes.
  • Because of all the externalities, markets left entirely to themselves will not always be good. They must be regulated to some extent by a central authority like the government.
  • An interesting explanation of why the birthrate in rich countries is much lower than in poor countries: as incomes rise, each child becomes much more expensive. This is because (1) the parents' time is more expensive and (2) much more has to be invested in the child to help him become a productive adult who can succeed in the modern world. On the other hand, the benefits of having many children have practically disappeared: you no longer need to make children that will help you work the family farm. Also, child and infant mortalities are so low that if you want 3 kids, you just have to make 3, and not 10, knowing that 3 will live past childhood.
  • An analogy for picking stocks and why it's hard: how about picking a checkout line at the supermarket ? Who can brag he always picks the shortest line ? Why is this so difficult ? If you give it some thought, you'll realize that all the same factors as in picking stocks are involved here.
  • The dark ages: the growth rate of GDP per capita in Europe between years 500 and 1500 was essentially zero.
  • Chapter 10 of the book that talks about the function of the Federal Reserve is just brilliant. Especially the description of how the Fed actually controls the interest rates, and how it all connects to inflation and the amount of new money entering the markets. It's a fascinating topic that got very little coverage in other books, for some reason. Wheelan handles it wonderfully. This chapter alone is well worth reading the book for.
  • Did you ever think about how geography affects affluence of nations ? Did you know that only 2 of the 30 richest countries in the world are from tropical regions ? There's a nice treatment of this subject in chapter 12.
  • One of the most difficult topics when considering the morality of capitalism is drug research. How could it be that some people are denied life-saving treatment because they can't pay for it ? The author discusses this fascinating topic in several places and even provides a seemingly viable solution:
    [...] a government [...] to identify a disease in need of a cure and then offer a bounty to the firm that develops an acceptable treatment. Governments would then inherit the patent and distribute the drug cheaply to those who need it. The pharmaceutical company would get what it needs to justify the research: a return on investment.