Book Reviews, Business & Money, Charles, Economics, Great Divergence, Great Fragmentation, Political Economy
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Naked Economics (Charles Wheelan)

Sometimes I think it is a fool’s errand to study economics and hope for enlightenment.  Much economics knowledge is too simple for that goal—for example, the relationship of supply and demand to prices.  Such facts are easy to grasp through direct personal experience.  But beyond that, actual enlightenment never comes, because, as everybody knows, economics is not a science.  Economists can’t even analyze the past with any precision or unanimity, much less the future.  Because I thought highly of the explanations of monetary policy in Charles Wheelan’s Naked Money, I hoped that by reading this book I would at least move further down the curve toward enlightenment.  But even the best writers cannot spin straw into gold.

It’s not that Naked Economics is a bad book.  It is very well and engagingly written, and funny to boot.  The problem, for me, is that all the knowledge here is the first type—easy knowledge, mostly suitable for those totally unfamiliar with the basic building blocks of economics, such as (smart) elementary or high school students.  For them, this book would be valuable.  For someone who already knows the basics, and is hoping for deeper insight, you will be disappointed.  You’ll at least get a refresher, though, and you’ll be treated to direct talk, such as that about Asian sweatshops:  “One of two things must be true.  Either (1) workers take unpleasant jobs in sweatshops because it is the best employment option they have; or (2) Asian sweatshop workers are persons of weak intellect who have many more attractive job offers but choose to work in sweatshops instead.”

Sure, I might quibble with the book here and there.  Some of Wheelan’s policy prescriptions are dubiously supported, and some of his facts are wrong.  He confuses the existence of the administrative state with the rule of law.  It is not true that the now-canceled Superconducting Super Collider particle accelerator was located in Texas because George H.W. Bush was President—that decision was made in the 1980s, and if a politician mattered, it was the corrupt Democratic Speaker of the House, Jim Wright.  Nor did Arthur Laffer originate the idea that tax cuts might increase revenue—that idea was well known to Calvin Coolidge, who carefully tested it in practice.  It is also not true that “trading [securities] on any information not available to the public is against the law.”  But none of these minor problems erode Wheelan’s basic analysis

The book does not answer any of my deeper questions, though, which tend to revolve around whether the received wisdom is true at all.  For example, I have never been able to understand why a sharp distinction is drawn between “consumption” and “investing,” when often they seem to ultimately amount to much the same thing.  Wheelan says, “consider a family that has a spare $1,000 and is deciding between buying a big-screen television and squirreling the money away in an investment fund. . . . Choosing the investment makes capital available to firms that build plants, conduct research, train workers.  These investments are the macro equivalents of a college education; they make us more productive in the long run and therefore richer.  Buying the television, on the other hand, is current consumption.  It makes us happy today but does nothing to make us richer tomorrow.”  Leaving aside that many college educations do not make us more productive (e.g., getting a major in Latino Studies), why is this true?  Isn’t it true that buying the TV provides $1,000 to those involved in manufacturing and selling it, thereby enabling them to “build plants, conduct research, train workers,” and if nobody bought TVs, none of those things would happen, at least in the TV industry?  Putting the money in your mattress, or burning it, makes it unavailable for productive use, but buying things makes it available, just like putting it an “investment fund.”  Wheelan seems to try to address this by claiming that “Yes, money spent on the a television keeps the workers employed at the television factory.  But if the same money were invested, it would create jobs somewhere else, say for scientists in a laboratory or workers on a construction site, while also making us richer in the long run.”  Why is that?  Don’t the manufacturers and sellers of TVs also, if they “build plants, conduct research, train workers,” also hire scientists and construction workers?  It seems to me that there is not nearly as clear a dividing line as is commonly represented between spending that “makes us richer in the long run” and spending that doesn’t.

Similarly, and of more political impact today, what of international free trade and comparative advantage?  The orthodox view of the role and effect of comparative advantage in international trade is straightforward, and Wheelan offers it. “[International] trade is good for consumers.  We pay less for shoes, cars, electronics, food, and everything else that can be made better or more cheaply somewhere else in the world (or is made more cheaply in this country because of foreign competition).  Our lives are made better in thousands of little ways that have a significant cumulative effect.”  Moreover, such trade is also good for poor countries—the implicit argument being that it’s our moral duty, even at our own cost, to make that possible.  And being richer also means the environment is treated better, another implicit moral duty.  Yes, “trade creates losers,” often permanent losers, but on average, we are all better off, both now and even more so in the long run, and that’s the way it needs to be.

This view is subject to a variety of technical criticisms, many centering around the simplifications and assumptions that underlie it, as well as such things as the effect of technology and of diminishing vs. increasing returns to scale.  And it does not answer why some other rich countries, to a greater or lesser degree, engage in activities that cut against a free market.  Yes, it is true that the poorest countries are harmed by their own protectionism, because it prevents them from offering what little they have to offer, and thereby becoming richer.  But how about Japan, China, and many other countries, which use a range of anti-competitive devices to benefit their own people, ranging from overt ones such as currency manipulation (the yuan) and subsidies (Airbus), to less overt devices, such as China making Boeing build a factory in China to access the Chinese market, transferring critical intellectual property?  We don’t seem to do anything like that.  We just try to make sure cheap goods flow to the masses, and, not coincidentally, the powerful are able to acquire abroad cheaper goods to sell at a profit to those masses.

These are important questions, and little public attention seems to be paid to them in most quarters, other than Trumpian mumblings (now quashed by Jared and Ivanka) and places like The American Conservative and the new American Affairs.  Presumably that is because neoliberal Democrats and Chamber of Commerce Republicans like it that way.  But I have a more overarching inquiry, though few answers.  It revolves around an unaddressed question:  what does “better off” mean, given we are told making us collectively “better off” is the role and goal of exalting international free trade above any other interest?

Implicit in the orthodox argument Wheelan offers is that any aggregate increase in wealth, measured by GDP, is adequate justification for taking the action that leads to the increase.  This is subject to two obvious skirmishing attacks.  First, as Wheelan acknowledges, the result is that some people are not better off.  Arguably, any action should be required to be Pareto optimal—making no one person worse off.  Of course, that argument is easily countered—if the increase in aggregate wealth creates enough wealth to also compensate the person worse off, by so doing aggregate wealth can be increased while keeping conditions of Pareto optimality (ignoring transactions costs, in a Coasian manner).  Second, and more subtly, even if Pareto optimality is achieved, inequality may be increased.  Where, as in modern America, social mobility is sclerotic and freezing fast, with the ruling classes becoming ever more wealthy and insular, increasing inequality is a social harm.  That does not imply any specific remedy, certainly not an increase in forced redistribution, but it is something that should concern us.

After the skirmishing, though, there is a more existential battle to be fought.  The orthodox argument implies that the goal of our society, and thus the goal of our public policy, is an economy, a social structure, that allows the most disposable income for each person.  That can’t be right.  Yes, we all want more money, but the only people who always benefit from constantly rising incomes are the government (because it gets more money in real terms) and the ruling classes in general—especially the tech elites, Apple, Amazon, and so forth, who manage, through a variety of devices, to accrue ever-greater wealth to themselves.  (Not to mention that, as is well known, most Americans haven’t had any real increase in income in decades, although that fact does not directly relate to the inherent worth of the goal.)  The rest of us, it seems to me, may or may not be actually benefit from more money.  At the extreme, for example, if I buy fentanyl with my extra money and inject it, we are all worse off.

Perhaps this is an example of bounded rationality, most on display at this Christmas season.  If you go to any store, there is an infinite range of goods on offer.  Yet does the ability to buy 5% more of these goods, or of the vast majority of those goods, really improve the lives of the purchasers?  Probably not.  And to the extent the purchase price goes overseas, as it often does, no American benefits at all—the Chinese-American current account balance just gets a little more out of whack, and American sovereignty erodes a little bit more too.  On the other hand, being able to buy 5% more healthcare, or a 5% better car, is a real improvement in most people’s lives.  Being able to buy 5% more education is also, as long as that education is actually a form of human capital improvement.  More money is sometimes better.  But is it always better?  The answer has to be “no.”  Thus, there must be some limiting principle by which we admit that some increases in per capita wealth do not benefit society.  This suggests that if international free trade has costs, sometimes those costs are not outweighed by the benefits, contrary to Wheelan’s claim of universality.  What, precisely, that implies for public policy, I am not sure.  Yet.

A related question is what are the real, as opposed to apparent, benefits of constant aggregate growth?  If it’s just enabling people to get fatter and buy more cheap, disposable goods, and for old people (who have the lowest poverty rate and second-highest per capita income of any age group) to leech transfer payments from the young so they can take constant (foreign) luxury cruises, these are dubious benefits.  On the other hand, wealth allows us to fix problems, at least in theory.  More wealth means more cures for disease, or for environmental problems, and as Wheelan points out, richer people are more willing to care about collective action problems such as environmental damage.  But it seems to me that which of these buckets collect the increased wealth is the critical question, and it is not at all clear that the first bucket, worthless consumption, isn’t by far the bigger collector.  (And that relates to my first question above—is “consumption” really sharply distinct from “investment”?)

Really, these questions boil down to philosophical questions.  What makes a better society—one with more stuff, and more ability to buy more stuff?  Or something else?  Along the same lines, what makes a strong society, and a strong country?  Lots of tchotchkes being bought and stuck in the closet after Christmas?  Certainly, it’s not one where we invest in creating intellectual property, and due to the recent innovation of cheap communications, that IP is used to enrich other countries at our expense, as Richard Baldwin notes in The Great Convergence.  Is some degree of autarky beneficial, even at the cost of a somewhat reduced disposable per capita income?  And there are many more questions along the same lines.

My own impulse, certainly, is to throw up my hands in despair at the complexity of answering these questions (and all this is just scratching the surface—there are many, many, other relevant principles, from the velocity of money to exchange rates).  It is possible that I am just being obtuse, and that all my questions have easy answers that the right person could, if he would sit down with me, deliver quickly and effectively.  I doubt it, though.  I think that economists don’t want to address these questions, because they lead us into a morass of uncertainty.  And not just any uncertainty, but an uncertainty that threatens to undermine the chokehold of the cross-party ruling class on the fruits of our society.

I suspect that, as with all Gordian Knot questions, approaching these questions on a policy basis from a relatively general level, and implementing policies at that level, without trying to tease out every thread, makes the most sense.  So, for example, Congress could simply mandate that within five years, 50% of microprocessors in any consumer electronic device sold in the United States, and 100% of those in defense devices, be produced exclusively within the United States by American-owned companies.  Such devices would become considerably more expensive—but my bet is that we’d be a stronger country as a result.  Tim Cook won’t like that.  But as they say, that’s a feature, not a bug.  (Actually, on a micro level, we have already done this in the firearms industry, by making it nearly impossible to import small arms for the civilian market, ensuring a strong and growing domestic industry.  Yay!)  That doesn’t mean we need to create a new mercantilism (not to be confused with Keynesian “neo-mercantilism”).  It does mean that we need to look to our own interests, because foreigners, and Tim Cook, certainly won’t.


  1. I haven’t read Naked Money yet, I am planning to. One item that is left out, is the way interest expense is deducted. Let’s look at a Mortgage. If you put down 30%, and borrow the rest 70%, the interest cost on the 70% is fully deductible. The same is also true if you borrow 100%. The problem with the 100% borrower, is that they are taking no risk, and stressing the banking system.

    If you put a limited amount down the interest deduction should be scaled accordingly. Someone who borrows 100%, should get no interest deduction, or a very limited deduction vs. a 30% down.

  2. max says

    “Buy American!”
    Gary North – April 26, 2018
    Printer-Friendly Format

    “Americans have to pull together,” we are told. “They ought to help each other. If they don’t stop buying those foreign imports, they’re going to kill the U.S. economy.” In other words, “What’s good for General Motors is good for America.”

    But Americans have this distressing tendency—one shared by buyers in every nation in the world—to buy what they regard as bargains, irrespective of “Made in U.S.A.” stickers. When Americans “buy American,” they have in mind something very specific: “Buying what this American chooses to buy.” They are only slightly concerned with buying what another American chooses to manufacture.

    Does this indicate a lack of patriotism? Did all those people who bought Volkswagens in the 1950’s deal the national interest a body blow? After all, they could have bought De Sotos, or Studebakers, or Packards. Why, they could even have bought Hudsons. But they didn’t.

    Are we willing to modify ex-GM President Charles Wilson’s famous phrase? Are we willing to declare, retroactively, that “What’s good for Hudson is good for America”? Would anyone buy that bumper sticker?

  3. It seems like you have a point with the ambiguity you see between whether money invested is, in some sense, different qualitatively than money you spend on a television.

    However, when taken to the extreme, you can easily see that a society’s capital stock is precisely that which has not been consumed. Therefore it seems to me that money put toward investment is creating a capital stock for yourself, and therefore adding to the aggregate capital stock of the nation as a whole.

    This would, I think, be undoubtedly true in a simplified model of an economy.

    I do think though that it gets a lot stickier when you try to work out what that means in more concrete terms, partially because the instruments by which we invest, and our financial markets are so distorted that we cannot day at all that investment accounts are adding anything to capital stock. If I invest in a bank, who lends to a consumer via a credit card, to buy other consumer goods, what capital good have I created? Nothing, all that is left is the debt, which is an asset in my books, a liability on his, and a wash overall.

    On the other hand, if I give that money to a friend to build an apartment complex, and give me some return on that investment, the prices of housing go ever so slightly down and the world is clearly a richer place overall.

    This is a long way of saying I think your point is well taken that the relationship between investment and forming capital is more complex than it originally seems. It is possible that this is so precisely because we decided as a society that usury was not the malevolent force it is described by god to be. (Though an inflationary currency muddles even that argument.)

    • Charles says

      All true. I have begun exploring value again, in a recent review, part of more to come. Maybe it will become a bit clearer, though I think it’s always going to be largely muddled, which suggests that broad, general principles (like it is valuable to increase productive, long-lasting capital stock) are most of what can be relied on.

  4. Benoit says


    Have you read Small is Beautiful by Schumacher? It addresses that very question of what wealth is and economics centered on human flourishing. While his thoughts and conclusions may not be the same as yours, he does dive deep into the essential questions of economics that are so often ignored today. What is the proper use of land? Is a marker such as GDP really that useful? If you have read it, I’d love to hear your thoughts on the book.

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