How an Economy Grows and Why It Crashes
Number of pages: 288
Publisher: Wiley
BBB Library: Economics and Investment, Technology and Globalization
ISBN: 9781118770276
Editorial Review
In 2007, when the world was staring into the teeth of the biggest economic catastrophe in three generations, very few economists had any idea there was any trouble lurking on the horizon. Three years into the mess, economists now offer remedies that strike most people as frankly ridiculous. We are told that we must go deeper into debt to fix our debt crisis! And that we must spend in order to prosper. The reason their vision was so poor then, and their solutions so counterintuitive now, is that few have any idea how their science actually works. They disconnect results from the nearly universal acceptance of the theories of John Maynard Keynes, a very smart early-twentieth-century English Academic who developed some very stupid ideas about what makes economics grow. Essentially, Keynes managed to pull off one of the neatest tricks imaginable: He made something simple seem to be hopelessly complex. At the core of his view was the idea that governments could smooth out the volatility of free markets by expanding the supply of money and running large budget deficit when times were tough. The model proposed by Keynesians, whereby governments can spend without consequence in the belief that worthless money can be an effective economic lubricant, is false and dangerous.
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Wisdom to Share
It is important to believe that tools change everything and create the possibility of an economy. And the more we can make, the more we can consume, and the more prosperous our lives become.
The simple definition of economy is the effort to maximize the availability of limited resources to meet as many human demands as possible. Tools, capital and innovations are the key to this equation.
Full mobilization of resources through effective tools increases the economy's productivity, leading a new economic terminology to occur: Wealth, ending up with an increase in the living standards.
Wealth is always a relative term; in primitive society where little is produced, even the richest can't match the material well-being available to the poor of an industrialized economy.
The best thing about private capitalism is that it forces those who may only be motivated by personal gain to raise the living standards of others.
The imposition of a government layer in between savers and borrowers separates the cause and effect of lending, and leads to an inefficient allocation of savings.
Businesses that adhere to successful models and are run by owners with strong records of achievement tend to repay loans at higher rates. As a result, these types of business plans tend to attract willing lenders.
Loans made to individuals or enterprises that do not succeed in creating a needed innovation or expanding production capacity tend to weaken the overall economy by wasting the supply of savings.
The flow of money across borders and seemingly magical qualities of the printing press have temporary blinded many leaders and policy makers to the simple truth that "we can't consume more than we produce, or borrow more than we save" at least for very long.
In addition to distorting the credit market by passing laws that favor certain types of loans and certain types of borrowers, governments also influence the flow of credit through its control of interests rates.
A country with a trade surplus, in that it sells more abroad than it buys, will create an international demand for its currency.
Modern economics mistakenly assume that spending drives growth and that when deflation is present, people tend to defer purchases, and when they do spend, the diminished price makes less of an economic impact.
Even after the collapses of the mortgage market, people still don't understand how home prices are influenced by government policies.
Inflation is simply a means to transfer wealth from anyone who has savings in particular currency to anyone who has debt in the same currency.
There is a limit to how high taxes can go. Raise them enough, and people stop working. Raise them higher, and they may even start rioting.
Inflation allows governments to avoid hard choices and dispose of their debt of the sly. By printing money, governments can nominally pay back all that they owe, but they do so by diluting their currency.
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