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The Art of War Summary

2019-10-16T05:50:00+00:00

Chapter 1 — Strategic Assessments

Military action is a matter of life and death. There is the possibility that it may be taken up lightly.
Induce the people to have the same aim as the leadership, so that they will share death and share life, without fear of danger. Align incentives.
If the people are treated with benevolence, faithfulness, and justice, then they will be of one mind and gladly serve.
“Don’t go into another’s territory at an unfavorable time.”
It is important first to know the lay of the land. When you know the distance to be traveled, then you can plan whether to proceed directly or by a circuitous route. When you know the difficulty or ease of travel, then you can determine the advantages of infantry or mounted troops. When you know the dimensions of the area, then you can assess how many troops you need, many or few. When you know the relative safety of the terrain, then you can discern whether to do battle or disperse.
Reliance on intelligence alone results in rebelliousness. Exercise of humaneness alone results in weakness. Fixation on trust results in folly. Dependence on the strength of courage results in violence. Excessive sternness of command results in cruelty. When one has all five virtues together, each appropriate to its function, then one can be a military leader.
Set up rules that are not to be broken, do not fail to punish any offenders.
If soldiers do not practice day to day, on the front lines they will be fearful and hesitant. If generals do not practice day to day, on the front lines they will not know how to adapt.
Rewards should not be out of proportion, punishments should not be arbitrary.
A military operation involves deception. Even though you are competent, appear to be incompetent. Though effective, appear to be ineffective.
Without deception you cannot carry out strategy, without strategy you cannot control the opponent.
Deception is for the purpose of seeking victory over an enemy; to command a group requires truthfulness.
While strong in reality, appear to be weak; while brave in reality, appear to be cowardly
Deceptively conceal your state. You should not let the opponent see what state you are in, for if the enemy sees your condition, he will surely have a response.
When you are really competent and effective, appear to be incompetent and ineffective, so as to cause the enemy to be unprepared.
When strong, appear weak. Brave, appear fearful. Orderly, appear chaotic. Full, appear empty. Wise, appear foolish. Many, appear to be few. Advancing, appear to retreat. Moving quickly, appear to be slow. Taking, appear to leave. In one place, appear to be in another.
Show them a little prospect of gain to lure them, then attack and overcome them.
When they are fulfilled, be prepared against them; when they are strong, avoid them.
“When you see a gap, then advance; when you see fullness, then stop.”
When their storehouses are full and their soldiers are in top form, then you should withdraw in order to watch for an opening when they relax, observing any changes and responding to them.
Use anger to throw them into disarray.
Wait for them to become decadent and lazy.
Appear to be lowly and weak, so as to make them arrogant—then they will not worry about you, and you can attack them as they relax.
Use swiftness to wear them out.
Cause division among them.
Break up their accords, cause division between the leadership and their ministers, and then attack.
If they are stingy, you be generous; if they are harsh, you be lenient. That way their leadership and followers will be suspicious of each other, and you can cause division between them.
Division is a weakness
Attack when they are unprepared, make your move when they do not expect it.
Strike at their gaps, attack when they are lax, don’t let the enemy figure out how to prepare.
When your strategy is deep and far-reaching, you can win before you even fight. When your strategic thinking is shallow and nearsighted, you lose before you do battle.
Victorious warriors win first and then go to war. Defeated warriors go to war first and then seek to win.

Chapter 2 — Doing Battle

First establish your plans, then prepare your equipment.
When you do battle, even if you are winning, if you continue for a long time it will dull your forces and blunt your edge.
“War is like a fire—if you do not put it out, it will burn itself out.”
“Those who like to fight and so exhaust their military inevitably perish.”
I have heard of military operations that were clumsy but swift, but I have never seen one that was skillful and lasted a long time. It is never beneficial to have a military operation continue for a long time.
Some win through speed, even if they are clumsy.
Advantages and disadvantages are interdependent—first know the disadvantages, then you know the advantages.
Those who use the military skillfully do not raise troops twice and do not provide food three times.
Transport supplies to a distant place, and the populace will be impoverished.
Transporting supplies to distant places means that wealth is expended in travel and used up on transportation, so that the common people become poorer day by day.
A wise general strives to feed off the enemy. Each pound of food taken from the enemy is equivalent to twenty pounds you provide by yourself.
It takes twenty pounds of provisions to deliver one pound of provisions to a distant army. If the terrain is rugged, it takes even more than that. That is why an able general will always feed off the enemy.
If people know they will be richly rewarded if they overcome the opponent, then they will gladly go into battle.
If you reward everyone, there will not be enough to go around, so you offer a reward to one in order to encourage everyone.
Captured soldiers should be well treated, to get them to work for you.
If you use the enemy to defeat the enemy, you will be strong wherever you go.
What is best is a quick victory and a speedy return.
It is important to be quick. If you are quick, then you can economize on expenditures and allow the people rest.

Chapter 3 — Planning a Siege

It is best if an enemy nation comes and surrenders of its own accord. To attack and defeat it is inferior to this.
The best policy is to use strategy, influence, and the trend of events to cause the adversary to submit willingly.
Assess your opponents; cause them to lose spirit and direction.
Those who win every battle are not really skillful—those who render others’ armies helpless without fighting are the best of all.
The best victory is when the opponent surrenders of its own accord before there are any actual hostilities.
Strike while schemes are being laid. When the opponent is just beginning to plan its strategy, it is easy to strike.
“Those who are good at getting rid of trouble are those who take care of it before it arises.”
If you cannot completely thwart the schemes of the enemy, you should work on his alliances, make them fall apart.
When you attack cities and butcher towns, this is the lowest form of attack, because there are many casualties.
One who is good at martial arts overcomes others’ forces without battle, conquers others’ cities without siege, destroys others’ nations without taking a long time.
One who is good at martial arts overcomes others without battle, conquers cities without siege, destroys nations without taking a long time.
Use tactics to overcome opponents by dispiriting them rather than battling with them; take their cities by strategy. Destroy their countries artfully, do not die in protracted warfare.
The best strategists do not fight. One who is good at laying siege does not lay siege with an army. Use strategy to thwart the opponents, cause them to overcome themselves and destroy themselves, rather than taking them by a long and troublesome campaign.
A skillful martialist ruins plans, spoils relations, cuts off supplies, or blocks the way, and hence can overcome people without fighting.
If you do not fight, your soldiers will not be wounded, if you do not lay siege, your strength will not be exhausted, if you do not continue long, your resources will not be used up. This is how you establish yourself completely victorious over the world. Thereby there are none of the ills associated with garrisons and violence, and there are the benefits of a prosperous country and a strong army. This is the good general’s art of strategic siege.
The rule for use of the military is that if you outnumber the opponent ten to one, then surround them; five to one, attack; two to one, divide.
If you are equal, then fight if you are able. If you are fewer, then keep away if you are able. If you are not as good, then flee if you are able.
If you calculate your power to be less than that of the opponent, then strengthen your defense, do not go out and get your edge snapped. Wait until the mood of the enemy gets sluggish, and then go out and attack by surprise.
If the enemy’s soldiers are more than yours, then you should run away from them, thereby making them haughty and using this in your future plans. It does not mean enduring anger and humiliation.
If the smaller side is stubborn, it becomes the captive of the larger side.
The small cannot stand up to the large—this means that if a small country does not assess its power and dares to become the enemy of a large country, no matter how firm its defenses be, it will inevitably become a captive nation.
“If you cannot be strong, and yet cannot be weak, this will result in your defeat.”
It is the very stubbornness of the smaller side that makes it the captive of the larger side.
There are five ways of knowing who will win:
Those who know when to fight and when not to fight are victorious.
Those who discern when to use many or few troops are victorious.
Those whose upper and lower ranks have the same desire are victorious.
Those who face the unprepared with preparation are victorious.
Those whose generals are able and are not constrained by their governments are victorious.
Assess yourselves and your opponents.
Those who can adapt to the situation are victorious.
“Military conquest is a matter of coordination, not of masses.”
There are ways by which a few can overcome many, and there are ways in which many can overcome a few. It is a matter of assessing their use and not misapplying them.
When the generals are all of one mind, the armies coordinate their efforts, and everyone wants to fight, then no one can stand up to such a force.
Be invincible at all times, so as to be prepared for opponents.
“Be prepared, and you will not be defeated.”
When generals have intelligence and courage, they should be entrusted with the responsibility to accomplish their work, and not controlled by civilians.
As a rule, in a military operation you need to change tactics a hundred times at every pace, proceeding when you see you can, falling back when you know there is an impasse.
If you know others and know yourself, you will not be imperiled in a hundred battles; if you do not know others but know yourself, you win one and lose one; if you do not know others and do not know yourself, you will be imperiled in every single battle.
Compare your government to that of the enemy; compare your military leadership to that of the enemy; compare your logistics to that of your enemy; compare your ground to that of your enemy. Having established these comparisons, you will have a preview of superiorities and inferiorities, weaknesses and strengths; this will enable you to prevail every time in subsequent military operations.
When you know others, then you are able to attack them. When you know yourself, you are able to protect yourself.

Chapter 4 — Formation

Skillful warriors first make themselves invincible then watch for vulnerability in opponents.
Erase your tracks and hide your form, making yourself inscrutable to opponents. When you see that an opponent can be taken advantage of, then you emerge to attack.
If opponents have no formation to find out, no gap or slack to take advantage of, how can you overcome them even if you are well equipped?
When you have assessed the opponent and seen the opponent’s formation, then you can tell who will win. If the opponent is inscrutable and formless, then you cannot presume victory.
Invincibility is a matter of defense, vulnerability is a matter of attack.
When opponents attack you, then they are vulnerable.
When you know you do not yet have the means to conquer, guard your energy and wait. When you know that an opponent is vulnerable, attack the heart and take it.
Defense is for times of insufficiency, attack is for times of surplus.
We will not do battle unless we are certain of complete victory, we will not fight unless we are sure it is safe. Some people think insufficiency means weakness and surplus means strength, but this impression is wrong.
Those skilled in defense hide in the deepest depths of the earth, those skilled in attack maneuver in the highest heights of the sky. Therefore they can preserve themselves and achieve complete victory.
Attack is for when you see an advantage to aim for. On the attack you should be extremely swift, taking advantage of unexpectedness, wary of letting opponents find you out and prepare against you.
What everyone knows is what has already happened or become obvious. What the aware individual knows is what has not yet taken shape, what has not yet occurred. Everyone says victory in battle is good, but if you see the subtle and notice the hidden so as to seize victory where there is no form, this is really good.
Everyone can easily see armed conflict—this takes no skill. Knowledge that does not go beyond what the generality knows is not really good.
It does not take much strength to lift a hair, it does not take sharp eyes to see the sun and moon, it does not take sharp ears to hear a thunderclap. What everyone knows is not called wisdom, victory over others by forced battle is not considered good. A military leader of wisdom and ability lays deep plans for what other people do not figure on.
What everyone knows is not called wisdom, victory over others by forced battle is not considered good.
A military leader of wisdom and ability lays deep plans for what other people do not figure on.
Find out the subtle points over which it is easy to prevail, attack what can be overcome, do not attack what cannot be overcome.
Their victories are not flukes because they position themselves where they will surely win, prevailing over those who have already lost.
Great wisdom is not obvious, great merit is not advertised. When you see the subtle, it is easy to win.
When trouble is solved before it forms, who calls that clever? When there is victory without battle, who talks about bravery?
So it is that good warriors take their stand on ground where they cannot lose, and do not overlook conditions that make an opponent prone to defeat.
A victorious army first wins and then seeks battle; a defeated army first battles and then seeks victory.
First determine a winning strategy, and only then send forth the troops. If you do not plan first, hoping to rely on your strength, your victory is uncertain.

Chapter 5 — Force

Skillful warriors allow the force of momentum to seize victory for them without exerting their strength.
Governing a large number as though governing a small number is a matter of division into groups.
Good warriors make others come to them, and do not go to others.
When you induce opponents to come to you, then their force is always empty; as long as you do not go to them, your force is always full.
When the speed of rushing water reaches the point where it can move boulders, this is the force of momentum. When the speed of a hawk is such that it can strike and kill, this is precision. So it is with skillful warriors—their force is swift, their precision is close.
Disorder arises from order, cowardice arises from courage, weakness arises from strength.
Good warriors seek effectiveness in battle from the force of momentum, not from individual people. Therefore they are able to choose people and let the force of momentum do its work.
It is easy to get people to act by means of the force of momentum, whereas it is hard to demand power in individual people. The able have to choose the right people and also let the force of momentum do its work.
When people are skillfully led into battle, the momentum is like that of round rocks rolling down a high mountain—this is force.
Roll rocks down a ten-thousand-foot mountain, and they cannot be stopped—this is because of the mountain, not the rocks. Get people to fight with the courage to win every time, and the strong and the weak unite—this is because of the momentum, not the individuals.

Chapter 6 — Emptiness and Fullness

Good warriors cause others to come to them, and do not go to others.
Cause opponents to come to you. You should conserve your strength and wait for them, not going to opponents for fear of wearing yourself out.
What causes opponents to come of their own accord is the prospect of gain. What discourages opponents from coming is the prospect of harm.
Lure them with something to gain, and opponents will be tired while you are at ease.
Cause them trouble with some affair, cut off their supply routes to starve them, attack what they like and appear where they will go, cause opponents to have to go to the rescue.
Appear where they cannot go, head for where they least expect you.
To unfailingly take what you attack, attack where there is no defense. For unfailingly secure defense, defend where there is no attack.
It is easy to take over from those who have not thought ahead.
Attack their gaps.
Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent’s fate.
When you induce others to construct a formation while you yourself are formless, then you are concentrated while the opponent is divided.
When you are concentrated into one while the opponent is divided into ten, you are attacking at a concentration of ten to one, so you outnumber the opponent.
If you can strike few with many, you will thus minimize the number of those with whom you do battle.
While being deeply entrenched and highly barricaded, not allowing any information about yourself to become known, go out and in formlessly, attacking and taking unfathomably.
The more defenses you induce your enemy to adopt, the more impoverished your enemy will be.
Assess them to find out their plans, both the successful ones and the failures. Incite them to action in order to find out the patterns of their movement and rest.
Stir opponents up, making them respond to you; then you can observe their forms of behavior, and whether they are orderly or confused.
Victory in war is apparent to all, but the science of ensuring victory is a mysterious secret, generally unknown.

Chapter 7 — Armed Struggle

To fight directly over advantages is the hardest thing in the world.
Make long distances near.
Make problems into advantages.
Fool opponents into taking it easy, then make haste.
The first to move is the guest, the last to move is the host. The guest has it hard, the host has it easy.
Battle depends on energy. The rule for military operations is that if you can stir up the soldiers of all ranks with a common anger, then no one can stand up to them.
When opponents first come and their energy is keen, break this down by not fighting with them for the time being. Watch for when they slump into boredom, then strike, and their keen energy can be taken away.
Once your mind is settled, you should just tune and order it, making it calm and stable, undisturbed by events, not deluded by prospects of gain. Watch for disorder and clamor among the enemy ranks, then attack.
When opponents are on high ground you shouldn’t attack upward, and when they are charging downward you shouldn’t oppose them.
A surrounded army must be given a way out.
Surround them on three sides, leaving one side open, to show them a way to life.
Do not press a desperate enemy.
An exhausted animal will still fight, as a matter of natural law.

Chapter 8 — Adaptations

Adaptation means not clinging to fixed methods, but changing appropriately according to events, acting as is suitable.
The considerations of the intelligent always include both benefit and harm.
Benefit and harm are interdependent.
Don’t count on opponents not coming, rely on having ways of dealing with them.
Don’t count on opponents not attacking, rely on having what cannot be attacked.

Chapter 9 — Maneuvering Armies

“Fight going down, not climbing up.”
Take care of physical health and stay where there are plenty of resources. When there is no sickness in the army, it is said to be invincible.
Advantage in a military operation is getting help from the land.
Those whose words are humble while they increase war preparations are going to advance. Those whose words are strong and who advance aggressively are going to retreat.
When they see an advantage but do not advance on it, they are weary.
When there are murmurings, lapses in duties, and extended conversations, the loyalty of the group has been lost.
If soldiers are punished before a personal attachment to the leadership is formed, they will not submit, and if they do not submit they are hard to employ.

Chapter 10 — Terrain

The form of the land is the basis on which the military is aided and victory is established, so it must be measured.
If you employ soldiers without sorting out the skilled and unskilled, the brave and the timid, you are bringing defeat on yourself.
These six are ways to defeat. Understanding this is the ultimate responsibility of the generals; they must be examined.
First is not assessing numbers
Second is lack of a clear system of punishments and rewards
Third is failure in training
Fourth is irrational overexcitement
Fifth is ineffectiveness of law and order
Sixth is failure to choose the strong and resolute.
Once you know the opponent’s conditions and the advantages of the terrain, you can win in battle. If you know neither, you will lose in battle.
When the laws of war indicate certain victory, it appropriate to do battle, even if the government says there is to be no battle. If the laws of war do not indicate victory, it is appropriate not to do battle, even if the government orders war.
Look upon your soldiers as you do infants, and they willingly go into deep valleys with you; look upon your soldiers as beloved children, and they willingly die with you. If you treat them well, you will get their utmost power.
If you are so nice to them that you cannot employ them, so kind to them that you cannot command them, so casual with them that you cannot establish order, they are like spoiled children, useless.
Rewards should not be used alone, punishments should not be relied on in isolation. Otherwise people will become accustomed to either enjoying or resenting everything. This is harmful and renders them useless.
If you know yourself but not the other, or if you know the other but not yourself, you cannot be sure of victory. Even if you know both yourself and your opponent and know you can fight, still you cannot overlook the question of the advantages of the terrain.
Those who know martial arts do not wander when they move, and do not become exhausted when they rise up. It is said that when you know yourself and others, victory is not in danger; when you know sky and earth, victory is inexhaustible.
When you know what is to others’ advantage and what is to your advantage, you are not in danger.

Chapter 11 — Nine Grounds

When a large, well-organized opponent is about to come to you, how do you deal with it? First take away what they like, and then they will listen to you.
Occupy a position of advantage, and cut off their supply routes by special strike forces and they will do as you plan.
The essential factor is speed, taking advantage of others’ failure to catch up, going by routes they do not expect, attacking where they are not on guard.
Glean from rich fields, and the armies will have enough to eat. Take care of your health and avoid stress, consolidate your energy and build up your strength. Maneuver your troops and assess strategies so as to be unfathomable.
When people are desperate, they will fight to the death.
The business of the general is quiet and secret, fair and orderly.
If you are quiet and inconspicuous, others will not be able to figure you out. If you are accurate and orderly, others will not be able to disturb you.
So the psychology of soldiers is to resist when surrounded, fight when it cannot be avoided, and obey in extremes.
Not until soldiers are surrounded do they each have the determination to resist the enemy and sustain victory. When they are desperate, they put up a united defense.
When they are fallen into dire straits, they obey completely.
Those who do not know the plans of competitors cannot prepare alliances. Those who do not know the lay of the land cannot maneuver their forces.
If you are able to find out opponents’ plans, take advantage of the ground, and maneuver opponents so that they are helpless, then even a large country cannot assemble enough people to stop you.
Employ the entire armed forces like employing a single person. Employ them with actual tasks. Motivate them with benefits, do not tell them about harm.
Human psychology is to go for perceived benefits and try to avoid prospective harm.
Confront them with annihilation, and they will then survive; plunge them into a deadly situation, and they will then live. When people fall into danger, they are then able to strive for victory.
When opponents present openings, you should penetrate them immediately. Get to what they want first, subtly anticipate them.

Chapter 12 — Fire Attack

Fire is used to throw enemies into confusion so that you can attack them. It is not simply to destroy enemies with fire.
When you hear fire has erupted, you should then attack; once the fire has been brought under control and the people have settled down, it is no use to attack. You should respond quickly.
Do not mobilize when there is no advantage, do not act when there is nothing to gain, do not fight when there is no danger.
Armaments are instruments of ill omen, war is a dangerous affair. It is imperative to prevent disastrous defeat, so it will not do to mobilize an army for petty reasons—arms are only to be used when there is no choice but to do so.
A government should not mobilize an army out of anger, military leaders should not provoke war out of wrath.
Act when it is beneficial, desist if it is not. Anger can revert to joy, wrath can revert to delight, but a nation destroyed cannot be restored to existence, and the dead cannot be restored to life.
Do not use arms because of your own emotions. If you are inconsistent in your feelings, you will lose dignity and trust.

Chapter 13 — On the Use of Spies

When enemy agents come to spy on you, bribe them generously to make them spy for you instead.
Whenever you want to attack an army, besiege a city, or kill a person, first you must know the identities of their defending generals, their associates, their visitors, their gatekeepers, and their chamberlains, so have your spies find out.
Whenever you are going to attack and fight, first you have to know the talents of the people employed by the opponent, so you can deal with them accordingly.

Naked Economics Summary

2013-02-05T05:50:00+00:00

Naked Economics is one of those books that changes the way you see the world.

Below I summarize some notes:

Chapter 1 - The Power of Markets

The free market aligns self interest with improving the overall standard of living for most members of society.
Economy is the art of making the most out of life. Economics is the study of how we do that.
Economics operates on the assumption that people act to benefit themselves.

Maximizing utility does not necessarily mean acting selfishly.
Capitalism and communism both ration products. Capitalism uses price while in communism prices are set and products are then allocated on a first come, first serve basis.
Utility can be intangible. Intangible utility factors of job opportunities include mental well-being and culture.
Decreasing costs, increases demand.
As costs increase, demand falls. The average child-per-mother has fallen 45% since 1905. As more professional opportunities become available to women, the costs of having children rise.
Firms attempt to maximize profit by taking ‘raw’ materials (steel, knowledge) and combine them in ways that add value.
The market economy directs resources to where they can be used most productively.
Slight talent advantages can render large profits in large markets. Lebron James’s talents are uniquely suited to outperform others in professional basketball, if only marginally better, he gains an oversized share of the market.
Some markets have barriers to entry. Truffles which can only be cultivated from the wild represents a natural barrier while Viagra benefits from patent protection, a legal barrier.
Firms consider what is going to make the most money in the long run by employing profit maximization strategies. This includes finding the optimal balance between price and output, as well as charging different customer segments at different rates.
Profit inspires some of our greatest work. By innovating to improve our own well-being, we often improve the overall well-being of society.
The market it amoral, it does not provide goods that we need but goods that we want. This explains why some of the most talented doctors are performing cosmetic surgery and drug cartels are building one-hundred-foot submarines to traffic drugs.
In the market economy, most markets are self-correcting. When OPEC decides to limit the production of oil the response includes: people driving less, buying smaller cars, non-OPEC nations producing more oil and more people researching alternative energy sources.
In fixed-price market systems, firms find other ways to compete. The early airline industry which had fixed prices, competed on the basis of providing good food and comfort.
Every market transaction makes all parties better off. Firms and consumers act in their own best interest. Workers take unpleasant jobs in sweatshops because it’s the best employment option they have.
Behavioral economics studies the intersection of psychology and economics, focusing on how humans make decisions.
If a person does not understand the true risk involved in something then they may not be making a rational trade-off.
Markets are consistent with human nature and therefore are wildly successful at motivating us to reach our potential. We work much harder when we directly benefit from our work, often yielding significant social gains.

Chapter 2 - Incentives Matter

People commit crimes because they can make outsized gains relative to the risk.
If some firms invest heavily in areas that benefit an entire industry while others in that industry abstain, a free rider problem emerges. The firms who contribute put themselves at a cost disadvantage against their competitors. The tourism industry which includes some agencies who contribute to conservation and others who do not suffer from a free rider problem.
Adam Smith noted that “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.” Meaning that incentives matter. When we benefit directly from our work, we work harder.
In systems that do not rely on markets, personal incentives are usually divorced from productivity. Firms and workers are not rewarded for innovation and hard, nor punished for sloth and inefficiency.
Government bankrolled businesses and American public education suffer from personal incentives being divorced from productivity. The pay of teachers is not linked in any way to performance. Whereas in other areas, such as Silicon Valley, if firms do not contribute value to the market, they fail and shut down.
The standardized pay of teachers creates a set of incentives referred to as adverse selection. The most talented teachers are likely to be good at other professions where pay is more closely linked to productivity. Studies show that the most talented teachers are the most likely to leave the profession early because incentive structures leads them elsewhere, the least talented teachers incentives are just the opposite.
Perverse incentives are inadvertent incentives created when we set out to do something completely different. Also known as the law of unintended consequences. A law in Mexico City once required cars to stay off the road once a week on a rotating basis, using license plate numbers to decide. Policymakers did not anticipate that people would buy new cars and hold on to older cars with poor emissions to continue driving.
Good policy directs desired behavior by using incentives while bad policy ignores incentives or fail to predict how individuals might change their behavior to avoid being penalized.
A principal agent problem emerges when a principal (such as a firm) employs an agent (such as an employee) who has an incentives to do things that are not necessarily in the best interest of the principal. Executives may be incentivized to boost short term gains while she/he can exercise her stock options. The challenge is to reward good outcomes without creating incentives for employees to game the system in ways that damage the company in the long run.
Economics teaches us how to get the incentives right.
Rational individuals acting in their own best interest can make themselves worst off. Fishermen who hunt without constraint can deplete a fish population. The only incentive is to kill as many fish as they can when no one trusts anyone else to practice constraint.
A market economy rewards winners and crushes losers. The steam engine, spinning wheel, and telephone put an end to the blacksmith, seamstress and telegraph operator, respectively. In a market economy, creative destruction must happen.
Government intervention to minimize the pain inflicted by competition slows the process of creative destruction. American automakers could have been made stronger in the long run if they faced foreign competition head-on instead of seeking political protection from Japanese imports in the 70s and 80s.
Taxes provide incentive to avoid or reduce activity that is taxed.
Raising taxes to provide generous benefits to disadvantaged Americans can simultaneously discourage the kinds of productive investments that might make them better off. Scandinavia has seen high marginal tax rates contribute to growing black market economies.
Economists tend to favor taxes which are broad, simple and fair.
Deadweight loss refers to taxes which make individuals worse off without making anyone else better off.
Regressive taxes are those which fall more heavily on the poor than the rich.

Chapter 3 - Government and the Economy

Externalities refer to the the private and social costs of one’s behavior being different.
When there’s a a huge gap between the private and social costs of behavior then people have an incentive to do things to make themselves better off at the expense of others. The market “fails” to correct this.
Although all parties involved in a transaction perform exchanges to make themselves better off, all parties affected by the transaction may not be involved which generates an externality.
Companies contributing to global warming and fast food’s impact on nationwide health care costs generate externalities.
Positive externalities can have a positive impact on society without a firm or individual being fully compensated for it. Consider a businesses which initiates an economic revitalization in a neighborhood.
Governments regulate activities which cause externalities by sometimes taxing the offending behavior rather than banning it.
Private costs of driving an SUV do not reflect the social costs. A gas-guzzler tax would limit the behavior. It could be used to pay for some of the costs of global warming and encourage automakers to make more fuel-efficient cars.
Every activity generates an externality at some level.
Markets left alone fail to close the gap between the private and social costs of activities.
Research shows that parties involved in an externality have an incentive to come to private agreements of their own.
Government makes a market economy possible through measures such as defining and protecting property rights, yielding confidence in behavior such as investing in your property and expecting to make a return.
Authors and musicians produce work with confidence that it will be protected and they can benefit from it. Pharmaceutical companies invest millions in research and development with confidence that a patent will protect their discovery and enable them to profit from their efforts.
Government lowers the cost of doing business by circulating currency, providing infrastructure, providing oversight with organizations such as the SEC to enable confidence that companies and traders are not engaging in fraud.
Inefficient governments stifle efficient market operations.
Government provides public goods. Public goods are considered things that would make us better off but would not otherwise be provided by the private sector.
Any system of voluntary payments falls victim to free riders.
Government policies that ostensibly serve the poor can be ineffective and/or counterproductive if they damage the broader economy.

Chapter 4 - Government and the Economy II

Government can deal with significant externalities or regulate an economy into ruin.
Government is a monopoly wherein people only have one option when it comes to things such as the Department of Motor Vehicles.There’s little or no incentive for these organizations to operate efficiently.
Given the incentive structure, inefficient government operations are completely logical.
The 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. Suitable areas include public health, national defense.
Governments that run steel mills, coal mines, banks, and airlines lose the benefits of competition. Citizens are made worse off.
The private sector allocates resources where they will earn the highest return while governments allocate resources wherever the political process sends them.
When government funds are directed by lobbyists the economy does not develop as quickly or efficiently because credit is channeled away from worthwhile projects.
Every regulation carries a cost. Sometimes it’s worth it, sometimes not.
Regulation can disturb the movement of capital and labor, raise the cost of good and services, inhibit innovation and otherwise shackle the economy. This can all result from regulations with good intentions. At worst, regulation can become a powerful tool for self-interest as firms work the political system to their own benefit.
Studies show that compliance in nations with heavy regulation is lower, while the regulation does not reduce pollution or raise health levels.
Taxation can discourage productive behavior, in cases where the marginal tax rate on income is 50%, many individuals decide not to work. In this case, everyone is worst off.
Taxation can discourage investment. Taxes make investments less attractive because they are a cost. The higher the tax on investments, the less attractive they become.
Government has the potential to enhance the productive capacity of the economy and make us much better off as a result. The notion that smaller government is always better is simply wrong.

Chapter 5 - Economics of Information

Statistical discrimination aka “rational discrimination,” takes place when an individual makes an inference that is defensible based on broad statistical patterns but (1) is likely to be wrong in the specific case at hand; and (2) has a discriminatory effect on some group.
Statistical discrimination includes assuming that a female candidate wants a family, will take maternity leave, and may leave shortly after taking leave. Statistical discrimination also includes assuming that a black applicant has served time in prison because blacks are more likely to have been sent to prison than whites (28% vs. 4%).
Ways to solve these rational discrimination issues includes: (1) Structuring maternity leave to be paid back if an employee leaves within a certain period of time and (2) doing background checks on all applicants. This helps both parties because the information is now known and statistical discrimination is alleviated, if that was all there was at hand.
Markets tend to favor the party that knows more but if the imbalance of information becomes too large then markets can break down entirely.
More than anything else, McDonald’s sells predictability.
Branding solves a problem for consumers regarding concerns such as quality and safety.
Branding helps provide an element of trust that is necessary for a complex economy to function. Modern business requires that we conduct major transactions with people whom we’ve never met before.
Producers of branded goods create a monopoly for themselves—and price their products accordingly—by persuading consumers that their products are like no other.
Firms will do whatever they can to “signal” their own quality to the market.
Racial profiling is an information problem.
Information matters. Economists study what we do with it, and, sometimes more important, what we do without it.

Chapter 6 - Productivity and Human Capital

Human capital is the sum total of skills embodied within an individual including 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 of your assets and left you on a street corner with only the clothes on your back.
The labor market is no different from the market for anything else, some kinds of talent are in greater demand than others. The more nearly unique a set of skills, the better compensated their owner will be.
The price of a certain skill bears no inherent relation to its social value, only its scarcity.
The most insightful way to think about poverty, in this country or anywhere else in the world, is as a dearth of human capital. People are poor in America because they cannot find good jobs. But that is the symptom, not the illness. The underlying problem is a lack of skills, or human capital.
Human capital also embodies perseverance, honesty, creativity—virtues that lend themselves to finding work. Highly skilled workers are more mobile than their low-skilled peers.
The lump of labor fallacy is the mistaken belief that there is a fixed amount of work to be done in the economy and every new job must come at the expense of a job lost somewhere else.
Rising levels of human capital enabled an agrarian nation to evolve into places as rich and complex as Manhattan and Silicon Valley.
Technology displaces workers in the short run but does not lead to mass unemployment in the long run.
High levels of human capital leads to well-educated parents who invest heavily in the human capital of their children. Low levels of human capital have just the opposite effect.
Human capital is inextricably linked to one of the most important ideas in economics: productivity. Productivity is the efficiency with which we convert inputs into outputs.
The more productive we are, the richer we are. The day will always be twenty-four hours long; the more we produce in those twenty-four hours the more we consume, either directly or by trading it away for other stuff.
America is rich because Americans are productive.
We are better off today than at any other point in the history of civilization because we are better at producing goods and services than we have ever been. We work less and produce more. In 1870, the typical household required 1,800 hours of labor just to acquire its annual food supply; today, it takes about 260 hours of work.
Productivity growth is what improves our standard of living.
If 500 million people in India became more productive and moved from poverty to the middle class, we would become richer in America too. Poor villagers subsisting on $1 a day cannot afford to buy our software, our cars, our music, our books, our agricultural exports. If they were wealthier, they could.
Productivity growth depends on investment in physical capital, human capital, research and development, and things like more effective government institutions. Investments require that we give up consumption in the present in order to be able to consume more in the future.
High taxes, bad government, poorly defined property rights, or excessive regulation can diminish or eliminate the incentive to make productive investments.
The large productivity gains of the Industrial Revolution made parents’ time more expensive. As the advantages of having more children declined, people began investing their rising incomes in the quality of their children, not merely the quantity.
One of the most potent weapons for fighting population growth is creating better economic opportunities for women, which starts by educating girls.
Technology makes smart workers more productive while making low-skilled workers redundant.
The growing wage gap between high school and college graduates will motivate many students to get college degrees. The spectacular wealth earned by entrepreneurs provides an incentive to take the risks necessary for leaps in innovation, many of which have huge payoffs for society. Economics is about incentives, and the prospect of getting rich is a big incentive.
Many economists argue that we should not care about the gap between rich and poor as long as everybody is living better.
Economic development is not a zero-sum game. The world does not need poor countries in order to have rich countries, nor must some people be poor in order for others to be rich.
Economics tells us that there is no theoretical limit to how well we can live or how widely our wealth can be spread.
Human capital creates opportunities. It makes us richer and healthier. It enables us to live better while working less. Human capital separates the haves from the have-nots.
Marvin Zonis noted that “Complexity will be the hallmark of our age. The demand everywhere will be for ever higher levels of human capital.”

Chapter 7 - Financial Markets

All financial instruments are based on four simple needs which include:
- Raising Capital
- Storing, protecting, making profitable use of excess capital
- Insuring against risk
- Speculation
Index funds are far cheaper to manage than individual stocks.
Basic economics provides us with a basic set of rules to which decent investment advice must conform:
- Save. Invest. Repeat
  - Capital is scarce. This is the only reason that any kind of investing yields returns.
  - The more you save and the sooner, the more rent you can command from the financial markets.
  - Albert Einstein is said to have called compound interest the greatest invention of all time.
- Take Risk, earn reward
  - Riskier investments must offer a higher expected return in order to attract capital.
- Diversify
  - A well-diversified portfolio will significantly lower the risk of serious losses without lowering your expected return.
- Invest for the long run
  - The odds are stacked in your favor if you are patient and willing to endure the occasional setback.

Chapter 8 - The Power of Organized Interests

When it comes to interest group politics, it pays to be small.
All else equal, small, well-organized groups are most successful in the political process because the costs of favors they get from the system are spread over a large, unorganized segment of the population.
The benefits of a $7 billion tax subsidy are bestowed on a small group of farmers, making it quite lucrative for each one of them. The costs are spread over the remaining 98 percent of us.
A tax shelter is some kind of investment or behavior that would not make sense in the absence of tax considerations.
Capitalism as a process of incessantly destroying the old structure and creating a new one.
If policies aimed at protecting weak outdated technologies prevail, they slow the economy.
Two percent who care deeply about something are a more potent political force than the 98 percent who feel the opposite but aren’t motivated enough to do anything about it.

Chapter 9 - Keeping Score

GDP represents the total value of all goods and services produced in an economy.
Real GDP is adjusted to account for inflation.
If nominal GDP climbs 10 percent in 2012 but inflation is also 10 percent, nothing more has actually been produced.
GDP per capita is GDP divided by a nation’s population.
“Making money takes time, so when we shop, we’re really spending time. The real cost of living isn’t measured in dollars and cents but in the hours and minutes we must work to live.”
Recessions stem from some shock to the economy
When consumers sustain a shock to their income, they spend less, which spreads the economic damage.
My decision to curtail my advertising budget or to buy a car next year instead of this year—may cost you your job, which will in turn hurt my business! Indeed, if we all believe the economy is likely to get worse, then it will get worse. And if we all believe it will get better, then it will get better. Our decision to spend or not to spend is conditioned on our expectations which can quickly become self-fulfilling.
Recessions may be good for long-term growth because they purge the economy of less productive ventures.
The government can stimulate the economy by cutting taxes.
Vital signs of any economy:
- Unemployment
- Poverty
  - Roughly one in five American children is poor as are nearly 35 percent of black children.
- Income inequality
  - Economists have a tool that collapses income inequality into a single number, the Gini index.
- Size of the government
- Budget deficit and surplus
- Current Account surplus/deficit
- National Savings
- Demographics
  - American workers pay into Social Security, that money is used to pay current retirees. The program a pyramid scheme, it works as long as there are enough workers on the bottom to continue paying the retirees at the top.
- Total national happiness

Chapter 10 - The Federal Reserve

An “easy money” policy at the Fed can cause consumers to demand more than the economy can produce. The only way to ration that excess demand is with higher prices. The result is inflation.
There are only a handful of ways to increase the amount that we can produce more:
- Work longer hours.
- Add new workers
- Add machines and other kinds of capital that help us to produce things.
- Produce more with what we already have because of an innovation or a technological change.
The Fed must facilitate a rate of economic growth that is neither too fast nor too slow.
To economists, money is quite distinct from wealth. Wealth consists of all things that have value including houses, cars, commodities, and human capital. Money, a tiny subset of that wealth, is merely a medium of exchange, something that facilitates trade and commerce.
Money serves as a means of exchange and unit of account so that the cost of all kinds of goods and services can be measured and compared using one scale.
The value of modern currency is that it has purchasing power. Dollars have value because people peddling things will accept them. They accept them because they are confident that other people peddling other real things will accept them, too. A dollar is a piece of paper whose value derives solely from our confidence that we will be able to use it to buy something we need in the future.
Inflation means that average prices are rising.
The way to think about inflation is not that prices are going up, but that the purchasing power of the dollar is going down. A dollar buys less than it used to.
With hyperinflation, fixed-rate loans become impossible because no financial institution will agree to be repaid a fixed quantity of money when that money is at risk of becoming worthless.
Moderate inflation can eat away at our wealth if we do not manage our assets properly. Any wealth held in cash will lose value over time.
Unexpected bouts of inflation are good for debtors and bad for lenders.
Difference between real and nominal interest rates:
- A nominal rate is used to calculate what you have to pay back, the number you see posted on the bank window.
- A real interest rate takes inflation into account and reflects the true cost of renting capital.
The greater the fear of inflation, the bigger the buffer that will be place in a nominal rate.
Inflation is bad. Deflation, steadily falling prices, is much worse. Falling prices cause consumers to postpone purchases. Prices are falling because the economy is depressed, now the economy is depressed because prices are falling.

Chapter 11 - International Economics

International transactions must still make all parties better off.
A government that deliberately keeps its currency undervalued is taxing consumers of imports and subsidizing producers of exports. An overvalued currency does the opposite, making imports artificially cheap and exports less competitive with the rest of the world.
A single currency across Europe (and in the fifty states) reduces transaction costs and promotes price transparency.
As a nation, we are literally doing what economists call “dissaving.”
The goal of global economic policy should be to make it easier for nations to cooperate with one another. The better we do it, the richer and more secure we will all be.

Chapter 12 - Trade and Globalization

A modern economy is built on trade. We pay others to do or make things that we can’t or choose not to, usually because we have something better to do with our time.
Our standard of living is high because we are able to focus on the tasks that we do best and trade for everything else.
When different countries are better at producing different things, they can both consume more by specializing at what they do best and then trading.
Countries are poor because they are not productive.
Productivity is what makes us rich. Specialization is what makes us productive. Trade allows us to specialize.
Cutting off trade leaves a country poorer and less productive, which is why we tend to do it to our enemies.
Economists reckon that the tariffs on Brazilian oranges and juice limit the supply of imports and therefore add about 30 cents to the price of a gallon of orange juice.
Zero-sum thinking is usually wrong when it comes to economics.
Individuals do things that make themselves better off.
Workers willing to accept a dollar or two a day because it is better than any other option they have.
If sweatshops paid decent wages by Western standards, they would not exist.

Chapter 13 - Development Economics

With less hardship, you have less incentive to help yourself.
Human capital is what makes individuals productive, and productivity is what determines our standard of living.
All countries that have had persistent growth in income have also had large increases in the education and training of their labor forces.
Higher rates of education for women in developing countries are associated with lower rates of infant mortality.
Skills are what matter for individuals and for the economy as a whole. Skilled workers usually need other skilled workers in order to succeed.
Those who do become skilled find that their talents are more valuable in a region or country with a higher proportion of skilled workers, creating “brain drain.”
Not being open to trade is done at great cost. Open economies grow faster than closed economies.
Poor countries, like poor people, often have very bad habits.

Epilogue - Life in 2050

Productivity growth gives us choices. We can continue to work the same amount while producing more, produce the same amount by working less, or strike some balance.
The easiest and most effective way to get something done is to give the people involved a reason to want it done. Although we recognize this as obvious, many of our policies are designed in ways that do the opposite.
Our public school system that does not reward teachers and principals when their students do well or punish them when their students do poorly.
Markets don’t solve social problems on their own. If we design solutions with the proper incentives, its a lot more like rowing downstream.
Overborrowing always ends badly, whether for an individual, a company, or a country. During the first decade of the new millennium, three parties borrowed heavily: consumers, financial firms, and the U.S. government. So far, two have paid a huge price for that leverage.
Economics offers insight into areas such as wealth, poverty, gender relations, the environment, discrimination, politics and many more.

Naked Economics has given me a greater understanding economics, human nature and the world in general. This book is definitely worth your time.