Naked Economics: Undressing the Dismal Science

Wheelan is unabashedly in favor of free and open international trade, a case he makes throughout Chapter 12. He begins with the hypothetical premise of a world in which corn can miraculously be turned into an iPhone. The punchline is it can—through trade. Anyone doubtful about the benefits of trade should imagine a life without it, which would be poor and drab. If everything were sourced locally or from one’s immediate vicinity, very little variety of goods could be had as everyone eked out a living from the land. Trade makes a wide range of goods and services available and raises everyone’s standard of living. The recent increase in globalization and interdependence has shown this.

It’s true that trade creates losses for some, as any market does. However, Wheelan argues it’s wrong to think that globalization has taken away many of America’s jobs and moved them to countries like China and Mexico. In the decade after 2000, 5.6 million manufacturing jobs were indeed lost in the US. The truth is, though, that just 15% of them went abroad while 85% were replaced by automation. Technology, then, is a much larger threat to jobs than trade, especially low-skilled jobs. It’s worth noting that by the end of that same decade manufacturing output was more than two times larger, even as fewer workers were used.

Much of the chapter goes point by point through the benefits of trade, starting with the fact that it makes us richer. We can each spend time doing what we’re good at—specializing—and that makes us productive. As Wheelan put it, “Trade makes the most efficient use of the world’s scarce resources” (283). Countries with few resources and little human capital can still benefit in such a system by way of comparative advantage. Wheelan uses the example of Bangladesh and the United States. The former has the advantage of offering cheaper low-skilled labor, allowing workers in the US to do what they do best. Thus, Bangladesh can manufacture clothing to offer the US in trade. Bangladeshi workers benefit because this work is better than many alternatives.

As for those who lose out in trade, like American workers whose job manufacturing clothes moved to Bangladesh, Wheelan makes two points. First, it’s absolutely true that individual cases of trade can negatively affect people and their communities. That’s why he argues for a strong government response for those people by taxing the winners and providing the losers with both financial assistance and job training. Second, in the long term, trade will increase economic growth, making everyone better off. Protectionism might seem like an answer, but while it may save some jobs in the short run, it hinders economic growth in the long run because people are not able to do what they do best.

Another benefit of trade is lower cost goods for consumers. Put another way, this is the same as consumers getting an increase in income (as their expenses are less). If this is true for Americans, for example, some might think it must then be bad for people in poorer countries. Not so, writes Wheelan; trade is not zero-sum game but creates benefits for everyone, “pav[ing] the way for poor countries to get richer” (290). This happened to all the so-called “Asian tigers”—countries like Japan, South Korea, and Singapore—which today are rich, developed nations.

The same process has been happening in China since the 1980s. For a time, its GDP doubled every ten years, pulling millions out of poverty and into the middle class. Even sweatshops have their benefits, Wheelan writes, because they offer job training and higher wages than the alternative (which is often subsistence farming). Over time, the workers become richer and better educated, and some found businesses of their own. As more people in a country get richer through trade, their priorities change in areas such as the environment. As China grew through manufacturing, the environmental damage was great. Now that more people comprise a middle class, they’re demanding changes for a cleaner environment in part because they can—the country is now rich enough to pay for cleanups. Without this economic development, environmental degradation would remain widespread. With climate change, of course, greater development increases energy use, but Wheelan argues the answer is to work for cleaner energy and manufacturing, not curtail these activities altogether.

The final chapter covers how economics plays out in the developing world. The economies of many nations are unsuccessful, leaving over 800 million people in the world without even enough to eat. There have been success stories in the past several decades that have pulled millions out of poverty, most notably in China and India, but much work remains. The path that worked for them and other Asian nations doesn’t necessarily work for every country. We do, however, know what makes many developed economies successful, and Wheelan reviews them in this chapter.

Perhaps the most important factor is an effective government. Everything else stems from laws, institutions, the collection and proper use of taxes, and systems set up like public health, education, and property rights. Property builds wealth. Many people in developing countries live on land that they don’t own or that they only own nominally but not legally. One study estimated that the total value of this land worldwide is $9 trillion. Yet it’s “dead capital”—it can’t be used as collateral for loans, which is how many people get ahead. Another aspect related to government is the proper level of regulation. As Wheelan puts it, “Government has plenty to do—and even more that it should not do” (308). Too much regulation distorts the market and stifles growth. It also invites corruption, which siphons off money that doesn’t get put to productive use.

Another factor of successful economies is human capital. All countries with sustained growth have a well-educated and well-trained citizenry. Education goes far beyond mere job skills and influences areas as significant as public health and family size (better educated women general have fewer children). Human capital requires a kind of “critical mass,” however. Skilled workers need other skilled workers around them to make a difference. A world-class heart surgeon, for example, dropped in the middle of a small rural village with no trained support staff cannot do very much.

Geography seems to play a role as well: aside from Hong Kong and Singapore, none of the richest countries lie in the tropics around the equator. Mostly likely, this is because tropical weather is not conducive to growing food but is very conducive to spreading disease. Likewise, natural resources can affect economic success—though perhaps in a surprising way. Economists now think that having an abundance of natural resources actually hinders development. It prevents diversification by limiting input into other endeavors like manufacturing, which may be better for growth in the long run. Also, when countries are dependent on commodities, they are vulnerable to times when prices decrease. Even when prices are high, it’s not all positive since this drives up the value of the currency, which (as noted in Chapter 11) makes a country’s exports more expensive.

As the previous chapter made clear, being open to free trade is another aspect of a successful economy. Nations with high trade barriers often remain underdeveloped. In addition, having sensible fiscal and monetary policies are important for staying out of debt and keeping inflation at bay. Democracy is also a factor, as research has shown that it is associated with higher levels of growth. One key exception as of late is China; it has gotten less democratic over the past decades even as it grew faster (Wheelan returns to this in the Epilogue).

The final two factors are war (very bad) and women (very good). Regarding the latter, underdeveloped countries often prevent their women from realizing their potential. Studies have shown, however, that women are actually better stewards of money than men, and developing economies grow more when women work and gain wealth.

The Epilogue consists of eight questions Wheelan poses about the year 2050—“because the decisions that we make now will affect how we live then” (325). The first involves productivity and whether it will continue to increase, which would increase our options regarding work. Americans work long hours, and Wheelan wonders whether we will decide to cut back at some point and find more utility in nonmaterial things. Secondly, what will we decide to do about inequality? Compared to Europe, the capitalism in the US economy is harsher, with more people left outside the system and unaided by a social safety net. He wonders whether we will continue our current path or decide to sacrifice some growth to help the disadvantaged more.

Next, the author wonders how creative we will be in trying to solve social issues. It boils down one of the fundamental ideas discussed in Chapter 2: incentives. If we get those right, we can solve many problems; markets themselves ignore social problems, so we have to actively design effective incentives. The next question is about how we will choose to set up our economy. As Wheelan stresses, this is not preordained. It’s true that the market will tend toward the most efficient direction, but we don’t have to accept that if we decide another way gives us more meaning. As usual, he warns about interfering with markets, but as long we are clear-eyed about what the costs are and make sure they are borne by those who most benefit, we could choose from among many directions.

Wheelan also wonders whether we have more to learn about monetary policy and if we can do more to prevent the cycle of boom-and-bust that has been such a steady pattern. Next, he ponders whether poor countries will still be poor 30 years from now. Perhaps governments will step up to create the kinds of conditions that we know lead to successful economies, or maybe rich countries will do more to help them along.

The final two questions involve the two largest economies: the United States and China. First, Wheelan wonders whether the US will ever break its habit of deficit spending and improve its debt picture. It can’t go on forever, but we’ve developed a national aversion to taxes. At the same time, we don’t seem willing to drastically cut back the size of government. Strong leadership will be needed to find a way out of this scenario. Lastly, can China and other authoritarian states become wealthy and maintain that status? The end of the Cold War brought heady pronouncements about the victory of a liberal political order. Today, 20 years into the new century, China is less democratic than it was. Economists disagree about whether China will be able to navigate continued growth while staying politically authoritarian or whether it will need to become more democratic.