Naked Economics: Undressing the Dismal Science pdfdrive com

York Times published the obituary of Oseola McCarty, a woman who died at the
age of ninety-one after spending her life working as a laundress in Hattiesburg,
Mississippi. She had lived alone in a small, sparsely furnished house with a
black-and-white television that received only one channel. What made Ms.

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McCarty exceptional is that she was by no means poor. In fact, four years before
her death she gave away $150,000 to the University of Southern Mississippi—a
school that she had never attended—to endow a scholarship for poor students.
Does Oseola McCarty’s behavior turn the field of economics on its head? Are
Nobel Prizes being recalled to Stockholm? No. She simply derived more utility
from saving her money and eventually giving it away than she would have from
spending it on a big-screen TV or a fancy apartment.
Okay, but that was just money. How about Wesley Autrey, a fifty-year-old
construction worker in New York City. He was waiting for the subway in Upper
Manhattan with his two young daughters in January 2007 when a stranger
nearby began having convulsions and then fell on the train tracks. If this wasn’t
bad enough, the Number 1 train was already visible as it approached the station.
Mr. Autrey jumped on the tracks and shielded the man as five train cars rolled
over both of them, close enough that the train left a smudge of grease on Mr.
Autrey’s hat. When the train came to a stop, he yelled from underneath, “We’re
O.K. down here, but I’ve got two daughters up there. Let them know their
father’s O.K.”
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This was all to help a complete stranger.
We all routinely make altruistic decisions, albeit usually on a smaller scale.
We may pay a few cents extra for dolphin-safe tuna, or send money to a favorite
charity, or volunteer to serve in the armed forces. All of these things can give us
utility; none would be considered selfish. Americans give more than $200 billion
to assorted charities every year. We hold doors open for strangers. We practice
remarkable acts of bravery and generosity. None of this is incompatible with the
basic assumption that individuals seek to make themselves as well off as
possible, however they happen to define that. Nor does this assumption imply
that we always make perfect—or even good—decisions. We don’t. But each of
us does try to make the best possible decision given whatever information is
available at the time.
So, after only a few pages, we have an answer to a profound, age-old
philosophical question: Why did the chicken cross the road? Because it
maximized his utility.
Bear in mind that maximizing utility is no simple proposition. Life is complex
and uncertain. There are an infinite number of things that we could be doing at
any time. Indeed, every decision that we make involves some kind of tradeoff.
We may trade off utility now against utility in the future. For example, you may
derive some satisfaction from whacking your boss on the head with a canoe
paddle at the annual company picnic. But that momentary burst of utility would
presumably be more than offset by the disutility of spending many years in a
federal prison. (But those are just my preferences.) More seriously, many of our

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important decisions involve balancing the value of consumption now against
consumption in the future. We may spend years in graduate school eating ramen
noodles because it dramatically boosts our standard of living later in life. Or,
conversely, we may use a credit card to purchase a big-screen television today
even though the interest on that credit card debt will lessen the amount that we
can consume in the future.
Similarly, we balance work and leisure. Grinding away ninety hours a week as
an investment banker will generate a lot of income, but it will also leave less
time to enjoy the goods that can be purchased with that income. My younger
brother began his career as a management consultant with a salary that had at
least one more digit than mine has now. On the other hand, he worked long and
sometimes inflexible hours. One fall we both excitedly signed up for an evening
film class taught by Roger Ebert. My brother proceeded to miss every single
class for thirteen weeks.
However large our paychecks, we can spend them on a staggering array of
goods and services. When you bought this book, you implicitly decided not to
spend that money somewhere else. (Even if you shoplifted the book, you could
have stuffed a Stephen King novel in your jacket instead, which is flattering in
its own kind of way.) Meanwhile, time is one of our most scarce resources. At
the moment, you are reading instead of working, playing with the dog, applying
to law school, shopping for groceries, or having sex. Life is about tradeoffs, and
so is economics.
In short, getting out of bed in the morning and making breakfast involves
more complex decisions than the average game of chess. (Will that fried egg kill
me in twenty-eight years?) How do we manage? The answer is that each of us
implicitly weighs the costs and benefits of everything he or she does. An
economist would say that we attempt to maximize utility given the resources at
our disposal; my dad would say that we try to get the most bang for our buck.
Bear in mind that the things that give us utility do not have to be material goods.
If you are comparing two jobs—teaching junior high school math or marketing
Camel cigarettes—the latter job would almost certainly pay more while the
former job would offer greater “psychic benefits,” which is a fancy way of
saying that at the end of the day you would feel better about what you do. That is
a perfectly legitimate benefit to be compared against the cost of a smaller
paycheck. In the end, some people choose to teach math and some people choose
to market cigarettes.
Similarly, the concept of cost is far richer (pardon the pun) than the dollars
and cents you hand over at the cash register. The real cost of something is what
you must give up in order to get it, which is almost always more than just cash.

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There is nothing “free” about concert tickets if you have to stand in line in the
rain for six hours to get them. Taking the bus for $1.50 may not be cheaper than
taking a taxi for $7 if you are running late for a meeting with a peevish client
who will pull a $50,000 account if you keep her waiting. Shopping at a discount
store saves money but it usually costs time. I am a writer; I get paid based on
what I produce. I could drive ninety miles to shop at an outlet in Kenosha,
Wisconsin, to save $50 on a new pair of dress shoes. Or I could walk into
Nordstrom on Michigan Avenue and buy the shoes while I am out for lunch. I
generally choose the latter; the total cost is $225, fifteen minutes of my time, and
some hectoring from my mother, who will invariably ask, “Why didn’t you drive
to Kenosha?”
Every aspect of human behavior reacts to cost in some way. When the cost of
something falls, it becomes more attractive to us. You can learn that by deriving
a demand curve, or you can learn it by shopping the day after Christmas, when
people snap up things that they weren’t willing to buy for a higher price several
days earlier. Conversely, when the cost of something goes up, we use less of it.
This is true of everything in life, even cigarettes and crack cocaine. Economists
have calculated that a 10 percent decrease in the street price of cocaine
eventually causes the number of adult cocaine users to grow by about 10 percent.
Similarly, researchers estimated that the first proposed settlement between the
tobacco industry and the states (rejected by the U.S. Senate in 1998) would have
raised the price of a pack of cigarettes by 34 percent. In turn, that increase would
have reduced the number of teenage smokers by a quarter, leading to 1.3 million
fewer smoking-related premature deaths among the generation of Americans
seventeen or younger at the time.
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Of course, society has already raised the cost
of smoking in ways that have nothing to do with the price of a pack of cigarettes.
Standing outside an office building when it is seventeen degrees outside is now