Why did the entrepreneur cross the road? Because he believed he could make money on the other side.The book Naked Economics, by Charles Wheelan, is a worthwhile read that I highly recommend to anyone. Wheelan puts in layman's terms many of the complex ideas and issues that have littered the minds of intellectuals and economists for decades. Of the book, 1992 Nobel Prize winner (for economics) Gary Becker wrote, "I recommend this book to anyone who wants to gain an understanding of basic economics with little pain and much pleasure."
One reason for reading books like this one, and getting familiar with how economics works, is because in our postmodern era it would appear that Capitalism has won the war against Marxist Socialism and it is important to understand the reasons Capitalism (with a capital C) became the force that it has in today's global society.
Another reason for reading books on economics is that with hailstorm of financial upheavals bringing major banks and investment houses to their knees, it can be helpful having at least a rudimentary understanding of why all this turbulence is putting so many retirement portfolios at risk today.
The reality is, capitalism is not a perfect system. Wheelan, in fact, argues that a market driven economy is to economics as democracy is to government: "a decent, if flawed, choice among many bad alternatives.”
Early on he states, “Economics starts off with one very important assumption: Individuals act to make themselves as well off as possible.” Is this not why many people from all over the world have striven to make there way to America? I've heard stories of people who came to the U.S. and we startled to find that the streets were not paved with gold.
In an early part of the book Wheelan notes that markets are not always fair, and that we especially see this in pay scales. “Small differences in talent tend to become magnified into huge differentials in pay... One need only to be slightly better than the competition in order to gain a large (and profitable) share of that market.” Horses that win by a nose, superstar baseball players... the difference in financial outcomes between best and runner up can be significant. If I have a job opening, and one person gets it, that person ends up with a living wage while the contender remains unemployed. Markets are amoral and not concerned with the apparent unfairness of this situation. In addition, they reward scarcity, which has no relationship to value.
Even if we do understand how free markets work, and why government controlled economies are problematic, I doubt we'll ever fully understand what's going on with the trillion dollar fiascoes like Freddie Mac and Fannie Mae. I've heard it said that when you have autopsies without blame, only then can you know why the patient died. In point of fact, power is a more important than truth, and you can be sure Republicans and Democrats alike will do all they can to make sure that blame gets placed at the other's doorstep.
In this instance, the Bush administration is being tarred for not having provided more oversight to these major mortgage institutions. But in point of fact, in 2003 when the Bush admin pressed for greater oversight, it was the Democrats who objected. (Read the N.Y.Times story here.)I sat on a plane last spring next to a fellow who works for one the nation's largest housing lenders. He said that five years ago the government put pressure on them to loosen lending standards in order to get more people into houses. Easy loans are not always an easy burden to bear. The mess we're in was created by people inside the beltway trying to manipulate the rules in a manner that violated the way markets work. To paraphrase a popular saying, the road to economic hell is paved with good intentions.
