Naked Economics: The Power of Organized Interests 8/13

Today the main subject of the entry is the analysis of why our societies subsidize interest groups even when it goes against the global good or interest.

“Economists have come up with the theory of political behavior that when it comes to interest group policies, it pays to be small”. Gary Becker, University of Chicago Nobel Prize winner, theorized that “small well-organized groups are most successful in the political process”. This is because the costs of paying for their pleads is spread over a large unorganized fraction of the society.
When it comes to discuss about one specific interest group benefited from public policies, e.g. carbon mines in Spain, the miners strongly defend and fight to keep their status quo because they have a lot to lose while it represents a small quantity in taxes for the rest of the country, not worthy enough for fighting against them.

Naked Economics: Financial Markets 7/13

This entry will analyze the reason for financial instruments and the basis of investment strategy.

Financial instruments are basically designed to cover “four simple needs”:

- “Raising capital”: “individuals, firms, and governments need capital to do things today that could not otherwise afford; the financial markets provide it to them at a price”.
E.g. micro-credits. A recent financial instrument designed to facilitate the access to small amounts of investment needed to launch many local businesses in developing countries.

Naked Economics: Productivity and Human Capital 6/13

It has been more than one year since my last entry about Wheelan´s book “Naked Economics”.
I am here again trying to finish the work I started. I have seized the opportunity that the extraction of the nail in my leg has given to stay at home, relaxed and with time enough to concentrate in a task that takes me more than the short periods of time I usually have on a daily basis.

Sincerely, I don´t exactly remember the line of thoughts and examples collected in the book so it will take me a bit more than before to recall the most important messages I want to summarize in my blog.
Remember, notes in quotes are transcribed directly from Wheelan´s book.

In this chapter “Economists study poverty and income inequality. They seek to understand who is poor, why they are poor and what can be done about it”.

Naked Economics: Economics of Information 5/13

In this chapter, and again with the invaluable help of Wheelan's book, I will analyze how the markets struggle to solve the problems that the lack of information or the unfair distribution of this among the parties (asymmetric or imperfect information) brings about. “Information matters and the market tends to favor the party that knows more. If the imbalance or asymmetry of information becomes too large then markets can break down entirely”

Naked Economics: Government and the Economy 3-4/13

In a market-based economy the government makes its appearance when we have to deal with externalities.

“An externality is a situation in which the private costs or benefits to the producers or purchasers of a good or service differs from the total social costs or benefits entailed in its production and consumption. An externality exists whenever one individual's actions affect the well-being of another individual - whether for the better (positive externality) or for the worse (negative externality).”

Naked Economics: Incentives 2/13

It is still very difficult for me to provide an accurate definition of financial concepts so I will make use of the ones that Linda Ghent, Alan Grant and George Lesica share in their web site The Economics of Seinfield. This will be the first, but for sure, not the last time that I will refer this interesting and recently launched web page because it illustrates economics via entertaining and wit clips of Seinfield, one of my favorite sitcom.

Today I am talking about incentives. An incentive is any factor (financial or non-financial) that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. Incentives matter, individuals and groups work in their own interest encouraged by factors that, as we have seen in previous entry, maximize utility or profits, being this self-interest what makes the world advance.

Naked Economics: The Market 1/13

The last financial crisis (which we are still suffering from) has made us all become economists or at least to make an effort to understand the bases or roots of this usually believed tough and boring science. To give you an idea of this effect, currently it is not unusual to end up talking about credit default swaps, banking bailouts and Keynesian measures to your hairdresser while she refutes or nods like a financial pundit.