Naked Economics: Undressing the Dismal Science pdfdrive com

naked economics

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CHAPTER
1

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The Power of Markets:
Who feeds Paris?
I
n 1989, as the Berlin Wall was toppling, Douglas Ivester, head of Coca-Cola
Europe (and later CEO), made a snap decision. He sent his sales force to Berlin
and told them to start passing out Coke. Free. In some cases, the Coca-Cola
representatives were literally passing bottles of soda through holes in the Wall.
He recalls walking around Alexanderplatz in East Berlin at the time of the
upheaval, trying to gauge whether there was any recognition of the Coke brand.
“Everywhere we went, we asked people what they were drinking, and whether
they liked Coca-Cola. But we didn’t even have to say the name! We just shaped
our hands like the bottle, and people understood. We decided we would move as
much Coca-Cola as we could, as fast as we could—even before we knew how
we would get paid.”
1
Coca-Cola quickly set up business in East Germany, giving free coolers to
merchants who began to stock the “real thing.” It was a money-losing
proposition in the short run; the East German currency was still worthless—
scraps of paper to the rest of the world. But it was a brilliant business decision
made faster than any government body could ever hope to act. By 1995, per
capita consumption of Coca-Cola in the former East Germany had risen to the
level in West Germany, which was already a strong market.
In a sense, it was Adam Smith’s invisible hand passing Coca-Cola through the
Berlin Wall. Coke representatives weren’t undertaking any great humanitarian
gesture as they passed beverages to the newly liberated East Germans. Nor were
they making a bold statement about the future of communism. They were
looking after business—expanding their global market, boosting profits, and
making shareholders happy. And that is the punch line of capitalism: The market
aligns incentives in such a way that individuals working for their own best
interest—passing out Coca-Cola, spending years in graduate school, planting a
field of soybeans, designing a radio that will work in the shower—leads to a
thriving and ever-improving standard of living for most (though not all)
members of society.
Economists sometimes ask, “Who feeds Paris?”—a rhetorical way of drawing
attention to the mind-numbing array of things happening every moment of every
day to make a modern economy work. Somehow the right amount of fresh tuna
makes its way from a fishing fleet in the South Pacific to a restaurant on the Rue
de Rivoli. A neighborhood fruit vendor has exactly what his customers want

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every morning—from coffee to fresh papayas—even though those products may
come from ten or fifteen different countries. In short, a complex economy
involves billions of transactions every day, the vast majority of which happen
without any direct government involvement. And it is not just that things get
done; our lives grow steadily better in the process. It is remarkable enough that
we can now shop for a television twenty-four hours a day from the comfort of
our own homes; it is equally amazing that in 1971 a twenty-five-inch color
television set cost an average worker 174 hours of wages. Today, a twenty-five-
inch color television set—one that is more dependable, gets more channels, and
has better reception—costs the average worker about twenty-three hours of pay.
If you think that a better, cheaper television set is not the best measure of
social progress (a reasonable point, I concede), then perhaps you will be moved
by the fact that, during the twentieth century, American life expectancy climbed
from forty-seven years to seventy-seven, infant mortality plunged by 93 percent,
and we wiped out or gained control over diseases such as polio, tuberculosis,
typhoid, and whooping cough.
2
Our market economy deserves a lot of the credit for that progress. There is an
old Cold War story about a Soviet official who visits an American pharmacy.
The brightly lit aisles are lined with thousands of remedies for every problem
from bad breath to toe fungus. “Very impressive,” he says. “But how can you
make sure that every store stocks all of these items?” The anecdote is interesting
because it betrays a total lack of understanding of how a market economy works.
In America, there is no central authority that tells stores what items to stock, as
there was in the Soviet Union. Stores sell the products that people want to buy,
and, in turn, companies produce items that stores want to stock. The Soviet
economy failed in large part because government bureaucrats directed
everything, from the number of bars of soap produced by a factory in Irktusk to
the number of university students studying electrical engineering in Moscow. In
the end, the task proved overwhelming.
Of course, those of us accustomed to market economies have an equally poor
understanding of communist central planning. I was once part of an Illinois
delegation visiting Cuba. Because the visit was licensed by the U.S. government,
each member of the delegation was allowed to bring back $100 worth of Cuban
merchandise, including cigars. Having been raised in the era of discount stores,
we all set out looking for the best price on Cohibas so that we could get the most
bang for our $100 allowance. After several fruitless hours, we discovered the
whole point of communism: The price of cigars was the same everywhere. There
is no competition between stores because there is no profit as we know it. Every
store sells cigars—and everything else for that matter—at whatever price Fidel

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Castro (or his brother Raul) tells them to. And every shopkeeper selling cigars is
paid the government wage for selling cigars, which is unrelated to how many
cigars he or she sells.
Gary Becker, a University of Chicago economist who won the Nobel Prize in
1992, has noted (borrowing from George Bernard Shaw) that “economy is the
art of making the most of life.” Economics is the study of how we do that. There
is a finite supply of everything worth having: oil, coconut milk, perfect bodies,
clean water, people who can fix jammed photocopy machines, etc. How do we
allocate these things? Why is it that Bill Gates owns a private jet and you don’t?
He is rich, you might answer. But why is he rich? Why does he have a larger
claim on the world’s finite resources than everyone else? At the same time, how
is it possible in a country as rich as the United States—a place where Alex
Rodriguez can be paid $275 million to play baseball—that one in five children is
poor or that some adults are forced to rummage through garbage cans for food?
Near my home in Chicago, the Three Dog Bakery sells cakes and pastries only