Reviewed by James F. Davis

When one reads a well written, humorous, easily understood book that explains how free market forces help improve our standard of living and quality of life, naturally one would like to recommend the reading of the book. After all, the book has more substance than P.J. O’Rourke’s Eat the Rich. And it actually could help you get through Economics 101.

Unfortunately, in the case of Naked Economics, a new book by author Charles Wheelan, I must offer potential readers several caveats. The author, a correspondent for The Economist magazine and an adjunct lecturer at Northwestern University, contradicts many of the principles he explains so well by catering to the politically correct and to discredited Keynesian economists.

Upon finishing Naked Economics, I had the impression that the author wanted students to understand the superiority of the free market system. After illustrating how free markets are virtually always superior to markets regulated by government intervention, he suggests ways that governments can improve things by intervening in those markets. However, like many in academia, Wheelan fails to notice that government intervention in the economy almost always causes economic problems.

Perhaps to gain acceptance of his book for use as a supplement in economic courses in the leftist-dominated academia, virtually all the examples Wheelan uses in the book are geared to praising Democrats (not known for pushing free market principles) and bashing Republicans in economic matters. In pushing this liberal interventionist agenda, Wheelan makes some major factual blunders-blunders that could be made only by people who live in the cocoon of academia.

For instance, he writes that the Reagan tax cuts in the early 1980’s (supply-side economics) did not provide a boost in government revenues. Anyone who bothers to check US federal tax revenues during this time period will discover that revenues almost doubled during the 1980’s despite Reagan’s reduction of the highest marginal tax rate from 70% to 29%.

Wheelan repeats the disingenuous comments of many who call themselves liberals: “The large tax cuts did not boost government revenues; they led to a decade-and-a-half of huge budget deficits.” No, Mr. Wheelan, the U.S. Congress authorized and spent much more than the huge increase in tax revenue. That is what caused the large deficits. Tax revenues soared, along with the creation of 22 million new jobs created by investment that came from the money freed by the tax cuts. And these tax cuts and increased investment in new technology and jobs fueled an economic boom through the 1990’s.

To his credit, Mr.Wheelan acknowledges that economist Arthur Laffer’s conjecture (cutting taxes to increase revenues) “appears to hold true for the wealthiest Americans, who ended up sending more money to the treasury after their tax rates were cut.” But then Wheelan says, “This may be mere coincidence.” His ability to analyze seems to stop when he finds his statements contradicted by the facts.

He goes on to try to explain his contradictions by saying, “Highly skilled workers saw their wages rise sharply over the last several decades as the economy increasingly demanded more brains than brawn. Thus, the wealthiest Americans may have paid more in taxes because their incomes went up sharply, not because they were working harder in response to lower taxes.” He appears oblivious to the fact that the lower taxes were what made more money available for the private sector investment that created those higher paying (e.g. computer industry) jobs. Yet elsewhere in the book he talks about the importance of investment to create these jobs.

In a chapter on “The Power of Markets,” Wheelan explains how the market aligns incentives in such a way that individuals are working for their own self-interest, leading to an ever-improving standard of living for most, though not all, members of society. He explains how this happens without any direct government involvement. For example, stores sell the products that people want to buy and in turn, companies produce items that stores want to stock. He goes on to explain how the Soviet socialist economy failed because government bureaucrats directed the economy and there is no way that they could know what everyone would want.

Despite his admission of capitalism’s successes and socialism’s failures, Wheelan cannot put aside the notion that government economists should intervene in the economy and turns his attention to the alleged brutality of capitalism. He describes the process by which many major technological breakthroughs-the steam engine, spinning wheel and telephone-put blacksmiths, seamstresses and telegraph operators out of work. Yet even while deriding this supposed failure of capitalism, Wheelan does acknowledge that these workers did not starve to death and unemployment did not go up to 49% as many predicted at the time. The result was that human quality of life improved greatly. And people who were temporarily dislocated due to innovation had the incentive to seek more productive work.

Even simple statements of fact by the author are at times inconsistent. “The rich have gotten richer and the poor ran in place, or even got poorer,” Wheelan claims. Several paragraphs later he mentions, “our poorest citizens have amenities unknown even to royalty a hundred years ago.”

Many of Wheelan’s politically correct comments on government intervention in environmental matters are laughable. He states, “A steel plant in Pennsylvania emits carbon dioxide that may one day flood Bangladesh.” He does not explain or provide any evidence as to how this compound necessary for the existence of vegetative life, and incidentally, our lives, could cause a flood thousands of miles away.

Oddly, Wheelan suggests that economists have little to say about the redistribution of wealth. Has he not heard about the millions of people who died in the 20th century in Russia, China and other countries that had governments that redistributed wealth in a dramatic manner under communism? There has been an enormous amount of research and commentary on this subject. Perhaps he might start with Ludwig von Mises’ work Liberalism, written in the 1920’s. Mises accurately predicted what would result in those countries where governments intervened in the economy and redistributed wealth. As a result of von Mises’ accurate economic forecasting, his books are seldom assigned on university syllabi.

Our author accurately mentions that “Government can transfer money from the wealthy to the disadvantaged-or it can transfer money from common folk to the politically well connected.” And he adds, “Government should not be the sole provider of a good or service unless there is a compelling reason to believe that the private sector will fail in that role.” Great! But then he suggests that public health is one area in which the government should be involved, despite the massive amount of evidence worldwide that national health systems have caused a decrease in the quality of health care provided and have seriously hurt the economies of those countries that have national health systems.

Naturally, his chapter on “Keeping Score” is fraught with errors and should be skipped if you do not want to get inundated with a lot of twisted logic. For example he repeats the oversimplified erroneous liberal explanations of the Great Depression in the 1930’s. He repeats the refrain that the stock market crash of 1929 caused the Depression. He gives no analysis as to why the stock market crashed. It has been fairly well established that the government’s intervention, a combination of tight money and high tariffs and the ensuing tariff wars had more to do with the Depression. Milton Friedman, Economics Nobel Prize winner, documented this in one of his books.

Wheelan seems not to have noticed that Roosevelt kept the depression going by continual intervention in the economy. For example, he protected the high wages of the unions, and thus caused higher costs to consumers. Also, FDR’s freezing of prices resulted in many companies having less money for expansion and new jobs or, in some cases, forcing them to go out of business because they could not produce a profit with the government-imposed artificially high wages of the protected unions.

It is a shame that a book with so many clear, concise explanations of economic activity is fraught with so many errors of fact. We can forgive Wheelan for his Keynesian tendencies-at least he is honest about his assumptions-but appearing not to know that we need carbon dioxide to live and implying that the Reagan tax cuts were not followed by large increases in government revenue suggests shoddy research at best. Newcomers to economic theory would do well to read this book with a strictly analytical mindset or risk being confused by the author’s historical revisionism.