Thursday, November 25, 2010

Book Recommendation

When you hear the word "economics" maybe you get a mental picture of guys in tweed suits and round glasses speaking in mathematical equations and arguing in jargon you've never heard of. Economics is one of those subjects that we're kept in the dark about. In fact, if I were a conspiracy theorist, I might conclude that this is by design. I had a pretty good education growing up - a very good public grade school and junior high followed by a private Jesuit high school - and we never talked about economics at all.

In college, I did take two classes in economics: macroeconomics and microeconomics. It was dreadfully boring, and filled with graphs and charts and mathematical formulas. I remember almost nothing about it - except the bawdy comments of the brilliant and likeable professor whose humor had really nothing to do with the topic. It seemed to have no connection to the real world.

Nothing could be further from the truth!

Right now, the entire world is suffering because of "the economy." Unemployment is up, home foreclosures are going through the roof, nobody is making anything in their savings accounts, the stock market is jittery, and gold and silver are trading at record levels. The news accounts are filled with stories of currency wars, and China is at the center of a lot of the ruckus.

But, (at least speaking for myself), we have not been taught enough in school to understand what is going on. Furthermore, our university-level economics courses are nearly all taught according to the Keynsian model - which is what got us into the current mess in the first place.

The only economists who saw the current crisis coming were from the Austrian School of economics - an approach that differs in its basic premises from that of John Maynard Keynes. Keysianism advocates a centrally-planned economy - for the nation and for the world. The word "centrally-planned" ought to ring a bell - as this was the philosophy of the now defunct Soviet Union. Its very opposite is the free market. And the free market is the mechanism championed by Ludwig von Mises and other champions of Austrian economics.

So, how can we learn about economics - and the differences between these two opposite approaches - without boring charts, graphs, and terms that are so abstract as to sound like a cross between astrophysics and an artificial world created by Tolkien?  At least, how can we learn to grasp the basic concepts?

Here is your answer: How an Economy Grows and Why it Crashes by Peter and Andrew Schiff.

Peter Schiff is the investment guru (guided by Austrian economic principles) who for many years stood as a lone voice predicting the current situation: the collapse of the housing bubble, the precarious position of the dollar, the stock market crash, the recession, the spike in the price of precious metals, the ascendancy of China, and the failure of economic "stimulus" from the Federal Reserve to do anything except make the problem worse. This is the guy who was routinely laughed at before October 2008.

 Nobody is laughing any more.

How an Economy Grows is a crash course in economics from the Austrian perspective. It can be easily read in a couple of sittings.  It is anything but boring. In fact, taking a page out of Jesus's book (figuratively, that is), the Schiff brothers teach by using a parable - in fact, a parable about men and fish. The story begins on a desert island with three men catching fish to survive. It is not abstract, there are no graphs or formulas, and before any terminology is introduced, you learn the concept based on a real world application - one that is whimsical and entertaining - even including storybook-style illustrations.

The book is fun, and yet profound. It is a primer that teaches concepts rather than lists of words to memorize.

It is only 233 pages of fairly large print. It is a book that can be enjoyed by highly-educated adults and by young people just learning about money.

It begins with a 12-page basic introduction to the whole Austrian vs. Keysian schools of thought controversy, a very brief overview of American economic history, and an introduction to some important names.

Next follow the chapters in the parable. There are call-out boxes throughout called "reality check" that tie in the concepts introduced in the story to real-world economics and terminology used by economists. They are brief and well-explained. At the end of each chapter is a section (one or two pages each) called "Takeaway" - which sum up the lessons in the chapter and apply them to the real world of history and economics.

The story begins at square one, and takes the reader step-by-step through levels of increasing complexity - and does so with clarity, humor, and in a way that makes you want to keep reading. The chapters are short and to the point. The reader learns about capital, investment, money, banking, borrowing, interest, the gold standard, fiat currency, inflation, the role of innovation and labor in economic growth, the effect of government and central banking, international trade, reserve currency, and the effect of stimulus on an economy.

The story follows the general history of the United States, and employs humorous "fishy" names that correspond, as least in a general manner, to real world players in the economic history of America - such as American presidents Barry Ocuda, George W. Bass, Lindy B., Slippery "Slippy" Dickson, and Franky Deep. Also in the mix are central bankers such as Ben Barnacle, Ally Greenfin, and a cameo appearance by one of the authors himself: Piker Skiff. Government agencies Finnie Mae, Fishy Mac, and Sushi Mae are not hard to decipher - especially within the context of the story and as they are explicitly explained in the "Takeaway" sections at the end of the chapters.

There is also an epilogue that addresses the current situation of the United States and the world.

If you're like me and your economics education was woefully inadequate, get this book. Even if you have a working knowledge of economics, this is a wonderful way to tie everything together, to present the Austrian point of view that has been, until recently, marginalized.

Kudos to Peter and Andrew Schiff - and to their father Irwin who fostered the idea decades ago and published the first version of the story under a similar title. Thanks to Peter Schiff, Irwin's fish tale designed to teach his sons about economics will resonate with millions of people in today's generation.  Hopefully, as more people wake up to what is happening in our economy, we will be able to take our lumps and come back stronger. At very least, some people will understand what is happening and will adopt a financial strategy to deal with the realities of what is happening right now to protect themselves and their families.

How an Economy Grows and Why it Crashes is a must-read for anyone who works for a living, invests, saves, or spends U.S. dollars. And that would be just about everyone in the world.  It currently sells on Amazon for $13.57. A preview is available here.


Dave Lambert said...

Thanks for posting this story! As you can see, I've linked to your post at our blog.

melxiopp said...

A Christian friend doing an Economics PhD at a Big Ten school (after a bachelor's in religion, an MDiv and a masters in economics) sent me a list of economics books as a set of primers on the various economic theories:

1. The Worldly Philosophers - R. Heilbronner. An enjoyable retelling of the contributions of great economists. This is the book that made me want to study economics. Heilbronner was a classical economist at New School and the foremost scholar on Adam Smith.

1.2 Adam's Fallacy: A Guide to Economic Theology - D. Foley. Similar to Worldly Philosophers in that it recaps the influences of great economists but its argument is different. This book argues that economics is not a math driven science but a moral philosophy. Foley is a pragmatic Marxist at New School.

2. Rational Choice - I. Gilboa. Outlines the paradigmatic underpinnings and necessary assumptions for neo-classical economics which is founded on rational choice theory. This is the most scholarly of the books but reads more like puzzle solving then textbook. Gilboa is a neo-classical economist at MIT.

3. The Armchair Economist - S. Landsburg. This applies the same principle - the people react to incentives in ways that often surprise us - that Freakonomics did but did so a decade before. It has some awesome stories in it that I often use in my classes. I enjoy it more than Freakonomics and include it because I assume some of you may have already read Dubner and Levitt's book. Landsburg is a libertarian neo-classical economist at U. Rochester.

4. The Affluent Society - J.K. Galbraith. An early (1958) warning about the quandary we are currently in. Galbraith saw income inequality and a lack of government re-investment as a sickness of Western Capitalism that needed to be fought if our civilization was to thrive. His work, immensely popular at the time, set the tone for public policy until Reagen. Galbraith was a Keynesian and Institutional economist at Harvard.

5. Kicking Away the Ladder - H-J. Chang. This book is an historical study of how Western Capitalist countries developed: Chang argues that the Western world grew by subverting copyrights, protecting infant industries, imposing tariffs, and manipulating exchange rates - all things neo-liberalism now demands that developing countries abandon. Chang is an Institutional economics at Cambridge.

6. The Great Transformation - K. Polanyi. Polanyi is the anti-Hayek. His book, written the same year as Hayek's The Road to Serfdom (1944), takes the opposite approach. Hayek, an Austrian economist, argued that liberalism, freedom, and individualism were the only things that kept socialism, and by extension totalitarianism, at bay. Polanyi's book is a historical study, as detailed at Marx's Capital, Vol. 1, of the growth of capitalism and societies perpetual refusal to allow for unfettered capitalism. Polanyi's argument is that the thorough application of capitalism to a country would destroy it. The only thing standing in the way are social movements which continually rise up legislatively or violently to hinder the progress of capitalism. Social protectionism in its opposition to capitalism market society was the only thing keeping the Western world from a totalitarian imposition of laissez-faire economics. Polanyi was a substantivist economist (a form of heterodox economics) at Columbia.

They lean more left than it sounds like you are, but it's always good to step outside the echo chamber and talk to people we don't already (assume we) agree with, no questions asked. I've been told there are non-Austrians who also saw the recent crisis before it came.