Book Report: Naked Economics

I was an econ minor in college, where I learned about supply and demand curves, what a mutual fund is, and how to calculate a mortgage amortization with an abacus. It always disappointed me that I didn’t learn a whole lot about the actual economy. How does the Fed manipulate interest rates and why? What is the importance of the unemployment rate as it relates to the housing market? Why should I care about the GNP? Besides in the interest of being re-elected, why do politicians tweak the tax code?

These questions and more are answered by Naked Economics: Undressing the Dismal Science

Charles Wheelan, former correspondent for The Economist, does an excellent job of explaining what economics is really about (my take is that it’s about studying human behavior), what the role of the government really should be (primarily to level the playing field for everybody), and how well we really have it in United States compared to others (the process involved in starting a business in South America is staggering, as are the differences in health care between the US and India).

My favorite concept introduced by Wheelan, though, is human capital. Covered in the chapter entitled “Productivity and Human Capital: Why is Bill Gates so much richer than you?”, human capital is defined as “the sum total of the skills embodied within an individual: education, intelligence, charisma, creativity, work experience, entrepreneurial vigor, even the ability to throw a baseball fast. It is what you would be left with if someone stripped away all your assets – your job, your money, your home, your possessions – and left you on a street corner with only the clothes on your back.” Wheelan then theorizes how quickly the Microsoft founder would find employment in that situation to demonstrate the concept. As you might imagine, there are lots of correlations between having a high amount of human capital and economic security. Not just for individuals, but for countries as well:

“There is a striking correlation between a country’s level of human capital and its economic-well being. At the same time, there is a striking lack of correlation between natural resources and standard of living. Countries like Japan and Switzerland are among the richest countries in the world despite having relative poor endowments of natural resources. Countries like Nigeria are just the opposite; enormous oil wealth has done relatively little for the nation’s standard of living. In some cases, the mineral wealth of Africa has financed bloody civil wars that would have otherwise died out. In the Middle East, Saudi Arabia has most of the oil while, Israel, with no natural resources to speak of, has the highest per capita income.”

Wheelan then goes on to explain how productivity and human capital go hand in hand. He further explains how it affects the wage gap in the US, which is why it is my favorite topic and is important to this space. Ultimately, engineers with skills (both technical and soft) get ahead and, as I’ve argued here before, the soft ones tend to be the more important of the two. Overall, Naked Economics has a thing or two to teach you about the structures and processes involved in the global economy. This can help you understand the ultimate big picture, see trends that affect technology and job markets, and assist your overall career growth.