Naked Economics: Undressing the Dismal Science

This term is used often today and means that a company’s products or services have garnered a level of trust that makes consumers choose them. One example is when someone choses McDonald’s over a local restaurant because it is a known quantity with no guesswork about what it offers. In other instances, a certain brand might be known for its high quality, so consumers would choose it even when they have no direct knowledge or experience with one of its products they are buying.

This is the well-known cycle of boom and bust, in which an economic downturn creates a recession or depression, then recovery takes place, a boom occurs, followed again by recession, and so on.

This term was coined by economist Joseph Schumpeter to describe what happens to losers in a market. Economic growth always involves firms or professions that lose out because they rely on old technology or are not efficient enough and thus can’t keep up with competitors. Rather than try to save them, this idea has it, they should be allowed to go out of business or otherwise wither away. This is a prime example of markets allocating scarce resources efficiently, without regard to value judgments, nostalgia, etc.

This refers to a loss resulting from something that is unproductive. Wheelan discusses it in terms of taxation, but it can apply to other phenomena as well. When a tax disincentivizes positive behavior and doesn’t raise revenue, it’s a deadweight loss. If taxes on a second income are high enough to deter a family member from working, then productive behavior is deterred, and taxes are not collected.

This simple theory states that “prices reflect all information” (169). Wheelan includes this in the context of financial markets, noting it as the reason it’s rare to be able to make a killing in the stock market. Everyone has the same information so will make similar decisions to yours, and stocks will be priced accordingly. The same goes in any market. Only when there is an information differential can one side take advantage of the situation.

As the author explains in Chapter 3, an externality is “the gap between the private cost and the social cost of some behavior” (58). In other words, when a behavior creates a social cost that is not paid for by the person or entity acting, an externality exists. An example is someone driving a car that emits pollutants that contribute to climate change. The driver pays the private costs of gasoline, insurance, and maintenance for the car but not the social cost of environmental degradation.

This is the measurement of income equality in a country based on a calculation that results in a single comparable number. A lower number (down to zero) means greater equality and a higher number (up to 100) indicates inequality.

This is the sum of an economy’s total goods and services for a given year. It can be expressed as an aggregate figure or divided by the total population to give a per capita amount (the average amount per person). The latter is better for comparison purposes. Economists also talk about “nominal GDP” (a straight figure not adjusted for inflation) and “real GDP” (which does account for inflation).

The word “capital” usually implies money available to invest in something. Here, it refers to an investment in people. Wheelan calls human capital the “sum total of skills” (132) a person has. Essentially, it is everything an individual brings to the job market, a conglomeration of skills, education, experiences, and personal qualities that one has to offer. Investing in human capital is one of the best ways a country can create economic growth.

This is the belief that the economy has a limited amount of work and a fixed number of jobs to do it, making work a zero-sum game. That is, any jobs gained somewhere must mean that an equal number were lost elsewhere. Wheelan points out that this is wrong, and jobs and work can expand without fixed limits due to factors like technology and productivity. This false belief is common when discussing international trade (American jobs “lost” to China, for example), but Wheelan points out that lost jobs in the US have been overwhelmingly due to automation.

These are incentives that arise unintentionally when an action is meant to prompt another behavior. This is what happened when Mexico City tried to reduce air pollution by limiting the days each car could be driven, and people responded by buying new cars (see summary for Chapter 2).

This term describes when a company sells the same good or service at different prices to different groups of people to maximize profit. This is common with airplane tickets, for example.

When someone (the “agent”) working for a company (the “principal”) has an incentive to do something that does not benefit the company, there is a principal-agent problem. The author describes instances of this at both low and high levels (a Burger King cashier stealing from the register and a CEO taking actions that benefit him or her but are detrimental to the company).

This is a classic hypothetical scenario that illustrates how people often make decisions that are not in their best interests. It presents the case of two people arrested on suspicion of murder. During the interrogation, through seemingly rational thinking based on self-interest, they each make decisions that could lead to their imprisonment rather than their freedom.

The definition given for productivity in Chapter 6 is “the efficiency with which we convert inputs into outputs” (140). In other words, how fast can a worker sew a dress, or an automobile factory assemble a car? If assembling a car goes from three days to half a day, productivity has increased; we can now make more cars than before in the same amount of time. This is important because it leads to economic growth. Throughout the 20th century, the productivity of American workers steadily rose, which accounted for Americans’ higher living standards from the start of the century to its end.

This is a measurement of prices in different countries by comparing how much the same item costs in each country—that is, how much purchasing power a currency has. This is useful for comparing the standard of living or income across countries.

The term economists use for “interest rate.”

Also called “rational discrimination,” it is described in Chapter 5 using the example of a specific type of discrimination against women. Statistics indicate that women still provide the main childcare functions in the US and are thus more likely than men to leave a job to raise a family. Because firms do not know in each case whether this will happen (and are prohibited by law from asking), they often hire men instead based on statistical likelihood. The larger pattern is thus applied to each individual case, even though many women candidates may have no intention of quitting their jobs to raise children.