Naked Economics Chapter 1 Summary

Chapter 1: The power of Markets

An assumption that economists make is that individuals try to benefit their lives as much as possible. Basically they invest in things that don’t necessarily make them happy, but will benefit them in the long run, or just things that give utility. Another assumption is that firms always try to make the most money they can. The joke about why the entrepreneur crossing the road is perfect. The example he gives to prove that maximizing utility doesn’t go hand in hand with selfishness is about a women who died in her nineties who lived her life as a laundress lived in a small apartment with little in her apartment such as a black and white television. She wasn’t poor and even gave away $150,000. Her utility she gained was from saving her money than spending it on lavish things. This goes to show that everyone gets utility from their lives in different ways. Maximizing utility is just a way to live life comfortably. Many things hold utility, even those that are

foolish such as the example described about hitting your boss on the head with the paddle. You could possibly feel utility then for a moment but, as stated, will lose its utility, most likely, when entering prison. Prices in the market show the demand for an item. If the item is expensive, more likely the item is in high demand. Price also shows quality. Such as in the example with LeBron James, he gets paid bundles of money because he possesses unique skills and quality talent. To gain profit, one just has to be a bit better than the rest competing. The advantages of the market economy is that many things are getting cheaper and made better. The disadvantage is many people do whatever for money, such as the example of prostitution and drug trafficking. It is amoral because many people focus on the monetary outcome rather than their morality.
Chapter 2: Incentive matters
Adverse selection is best described by the example given in a book. A teacher is not paid based on performance and instead paid based on experience. Perverse incentives is acquiring unintended consequences. Like the plane example, pursuing that children should use car seats on planes will in turn cause more children related accidents from a series of events. It is basically a good intention gone badly. The principle agent problem is a problem where the employee has an incentive that would not be of the firm’s best interest. To prevent the employee, the firm comes up with a way to for the consumers to ensure it for them, such as a free meal if you are not given a receipt. The prisoner’s dilemma is sort of confusing but I get it in a way. A consumer will think, for example the fisherman, that if he listens to the limit, the other fisherman will get more fish, so both ignore the limit. The author states that government benefits creates a lack of incentive to search for a job to stabilize themselves since the government is doing that for them already.
Chapter 3: Government and the Economy
Externality is term used to describe the consequences caused socially when a person buys something exclusively and personally, not worrying about the social consequences. I never thought of the consequences that I could have caused just by buying a car, for example, that isn’t efficient in fuel consumption. The government’s role is to deal and manage externalities. There are rules that are enacted to cancel all the externalities such as small children must sit near the back of the plane to avoid the chance of disturbing other passengers or the rule about no mobile use while driving due to the high cost of accidents. The government regulates the activity. A favored method is to tax the behavior than banning it. It limits the behavior and the revenue goes to a good cause such as costs of global warming. For example, the taxing on vehicles that consume a lot of fuel will lead into the invention of a more fuel efficient one. It is hard to believe that we benefit from smokers dying young.
Chapter 4: Government and the Economy II
Government is acting as a monopoly in some aspects such as the dmv and post office. People can only receive their license from a dmv and can only send mail through the government. The government has a job of letting other people carry out their ideas. They do not do the job directly themselves. Regulations can disrupt the development of capital and labor, increase the cost of good and services, hinder innovation and restrain the economy. This can happen even from regulations formed from good intentions. At its worst, regulations can become a controlling implement for selfishness as people try to work the government in their favor.
Chapter 5: Economics of Information
The use of the example of the HOPE Scholarship shows to the readers that asymmetry of information was that the students could work the system better because they knew more or less how much they would make in the future, more than loan administrators. People who would make more than average would avoid the scholarship because it would be more expensive than a conventional loan while people who make less than average such as teachers, would benefit from the scholarship. Branding gives the public a sense of trust in their products and faith. The branded companies basically create a monopoly by persuading that their product is better over the rest. I find it interesting as I read this because many people don’t say “let’s get a soda,” they say “let’s get a coke.” Imperfect information is what we assume by the nice dressings and advertisements by branded products. Perfect information is information that is free of deceptions. Racial profiling is an informative error because obviously no real information is gained other than stereotypical assumption, though some may be correct in the author’s case.
Chapter 6: Productivity and Human Capital
Human capital is the sum of skill that a person possesses. The skills that are trained to an extent will have a great outcome in the future. Like medical school, you will emerge a successful doctor. Even college in general. People get paid more for their skills and what they have to offer, not their monetary possessions. Some people believe their right to immigrate in based on human capital. Once they learned their skill in college, they will be more secure to leave their place of comfort. I believe Bill Gates has the right to be rich with the money he earned with his hard work and skill but I do feel he should aid the poor more than renovate his house more lavishly. Income inequality is the term used to describe the situation between the rich and the poor. It is used to describe why some people are more likely to get paid than others. The answer is skills. One reason why economists argue that we shouldn’t care about income inequality is because they state that the difference in wages made by a high school graduate and a college graduate will motivate students to get higher education. Another reason is because they feel as long as everyone has the minimum they need, they should worry about those who get more. The example they used was that as long as people are getting pie, it shouldn’t be compared relative to how much pie bill gates is getting.
Chapter 7: Financial Markets
Modern economy cannot survive without credit. A rule is the firms and individuals need capital to do things that they cannot afford and markets provide it to them at a price. Financial markets take capital from the rich and lend it to the poor. IT is a way for people to not spend their income the moment they receive it. Get rich quick schemes violate the principals of economic because the principle is that you want to maximize your utility. If for example, the one with the house, a house is selling for an extremely low price that is supposedly worth more, it would be not in a buyer’s best interest to buy the lower priced house that is sitting there without many buyers. People want to maximize their utility, so if a 500,000 dollar house is going for 250,000 dollars, more people would be after it. This makes a lot of sense. I do agree with his advice because investing is a risk, people always want to maximize their utility. They will benefit themselves first so it is hard to trust an investment adviser.
Chapter 8: The Power of Organized Interests
The subsidies began to ensure a supply of yarn for the military to use on their uniforms. The subsidies still go to them because they are a smaller interest group. Small groups are most successful in the political procedure because the price of help they get from the government is spread over a big unorganized portion of the population. The large group subsidizes the smaller one. I think it means the smaller aspect of the population can make the “dog” bid to its needs.
Chapter 9: Keeping Score
GDP is a good measure of well-being and progress because of the fact that what we consume is limited by what we produce. If we have a GDA of 1000 dollars, we cannot consume 2000 dollars worth of goods because we would not have the other thousand for the goods that we would consume. The goods we consume should be nearly identical to the GDA. We are richer than we were in 1940. The reason is the people’s productivity. We can get many things done faster than what we could’ve in 1940. We have new technology and new means of completing tasks. The GDP is a bad measure of economic well-being because it is an imperfect measure. People have their own abstract view on how well off they actually are and how happy they are. No one can quite measure it.
Chapter 10: The Federal Reserve
The primary role of the Federal Reserve is to control money and credit for the economy. They are able to use government policies to counter economic drops. We can produce more by working longer hours, add new workers, add machines, and produce more than what they already had through innovations. The significance of the Fed is once it gives just the right amount of credit to the economy, the economy will grow more consistently. Deflation is when prices are falling consistently. Deflation is worse than inflation because falling prices cause a delay in purchases. People also feel as if they are growing poorer. The banks also get weaker as loans are tarnished as the prices of real estate continues to drop.
Chapter 11: International Economics
International transactions must continue make every party better off. A government that intentionally keeps its currency undervalued is taxing consumers’ imports and funding producers’ exports. A currency that is overvalued does the contrary and makes imports cheaper and exports less competitive. European currency promotes price transparency and makes transactions cheaper. Society participates in the action of dissaving. The objective of global economic policy must make it easier and advantages for countries to collaborate with each other. The more we do it and do it better, the more secure we would be and maximize our utility.
Chapter 12: Trade and Globalization
A contemporary economy is built on trade.

People pay others to do what they are unable to do or make things more convenient for themselves, and mainly because time is more precious to them than the price we pay for the action. They rather use that time constructively for what they enjoy. A living is considered high when a person is able to use their time doing something they enjoy and are good at and trade or buy whatever else. Different countries benefit the most by specializing in different produce and trading with each other. The likely hood that a country is poor is from the outcome that the countries is not specialized in producing anything in demand. Being productive is what makes a person rich. Having a specialization in a certain produce encourages production. Trade enables us to specialize in a produce. By inhibiting trade, a country will lack the ability to be productive and in turn be poor. The main rule of economy is that we as individuals desire to maximize our

utility.
Chapter 13: Development Economics
The absence of a struggle in life will influence people to have less incentive. Specialized skills known and human capital is what enables people to be productive. Productivity is the basis to living a desirable life and is the fuel to wealthy nations. There is a direct correlation in the wealth of a nation and the increase in education and further degrees in labor education. It is even proven that women with a higher education increases the mortality of their children. Skills are what drive the economy because of the correlation between skill and productivity. Skilled workers rely on other skilled workers and higher income is where there is a high density of skilled workers in an area. An open economy is more advantageous to have than a closed economy because the open economy is more likely to flourish.
Epilogue
How much will the price of basic necessities decrease? How will technology effect our incentive in the future? Will there be a new way of representing the well-being of people to replace a GDP?