Free Naked Economics by Charles Wheelan

am talking on the phone. This was one of Adam Smith’s insights in The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Bill Gates did not drop out of Harvard to join the Peace Corps; he dropped out to found Microsoft, which made him one of the richest men on the planet and launched the personal computer revolution in the process—making all of us better off, too. Self-interest makes the world go around, a point that seems so obvious as to be silly. Yet it is routinely ignored. The old slogan “From each according to his abilities, to each according to his needs” made a wonderful folk song; as an economic system, it has led to everything from inefficiency to mass starvation. In any system that does not rely on markets, personal incentives are usually divorced from productivity. Firms and workers are not rewarded for innovation and hard work, nor are they punished for sloth and inefficiency.
    How bad can it get? Economists reckon that by the time the Berlin Wall crumbled, some East German car factories were actually destroying value. Because the manufacturing process was so inefficient and the end product was so shoddy, the plants were producing cars worth less than the inputs used to make them. Basically, they took perfectly good steel and ruined it! These kinds of inefficiencies can also exist in nominally capitalist countries where large sectors of the economy are owned and operated by the state, such as India. By 1991, the Hindustan Fertilizer Corporation had been up and running for twelve years. 3 Every day, twelve hundred employees reported to work with the avowed goal of producing fertilizer. There was just one small complication: The plant had never actually produced any salable fertilizer. None. Government bureaucrats ran the plant using public funds; the machinery that was installed never worked properly. Nevertheless, twelve hundred workers came to work every day and the government continued to pay their salaries. The entire enterprise was an industrial charade. It limped along because there was no mechanism to force it to shut down. When government is bankrolling the business, there is no need to produce something and then sell it for more than it cost to make.
    These examples seem funny in their own way, but they aren’t. Right now, the North Korean economy is in such shambles that the country cannot feed itself, nor does it produce anything valuable enough to trade to the outside world in exchange for significant quantities of food. The nation is on the brink of famine, according to diplomats, United Nations officials, and other observers. This mass starvation would be a tragic repeat of the 1990s, when famine killed something on the order of a million people and left 60 percent of North Korean children malnourished. Journalists described starving people eating grass and scouring railroad tracks for bits of coal or food that may have fallen from passing trains.
    In the United States, there is a great deal of hand-wringing about two energy-related issues: our dependence on foreign oil and the environmental impact of CO 2 emissions. To economists, the fix for these interrelated issues is as close to a no-brainer as we ever get: Make carbon-based energy more expensive. If it costs more, we will use less—and therefore pollute less, too. I have powerful childhood memories of my father, who has no great affection for the environment but could squeeze a nickel out of a stone, stalking around the house closing the closet doors and telling us that he was not paying to air-condition our closets.
    Meanwhile, American public education operates a lot more like North Korea than Silicon Valley. I will not wade into the school voucher debate, but I will discuss one striking phenomenon related to incentives in education that I have written about for The Economist. 4 The pay of American teachers is not