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Kelly Bundy would recommend: How an Economy Grows and Why it Crashes

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Bud:    In college, I’m reading the philosophy of Plato
Kelly: You mean Mickey Mouse’s dog wrote a book?

If you want to know how an economy works and you don’t want to read one of those dry textbook-style books then you might want to try How an Economy Grows and Why it Crashes by Peter D. Schiff and Andrew J. Schiff

A Fish Story

Wrapped appropriately in a fish story, this book is about the mechanics of a nation’s economy – growth and crash and some of the reasons for both.  I am not sure who the target audience for this book would be but when I picked it up from the new books table at the local public  library I thought of Kelly Bundy of Married with Children fame. (more

The Kelly Bundy character played by Christina Applegate certainly did not like reading books.  But Kelly may like this book by Schiff.

The authors say the island fishing story is an allegory of U.S. economic history.  That is true, but what has been practiced as U.S. economic and monetary policy has antecedents well back to the time of Rome.  So the book is also an allegory of decisions governments made when they got into monetary trouble throughout history – not just what happened in American history.  What was that saying about learning from the past or being condemned to repeat it?

Island Fishing & Entrepreneurship

The book starts out with three men living on an island – Able, Baker, and Charlie.  It’s a closed economy.  The three of them live at a subsistence level.  They spend all their time catching fish by hand to live.  It takes all day to catch one fish and they need to consume one fish per day to survive.  So, the book starts out with the most simply economy possible.  There is no savings, no credit, no investment, and nothing that increases a man’s productive capacity to catch more than one fish per day. 

Man has more of an aspirational vision than this.  Wake, fish, eat, and sleep.  And Able was just the guy that was going to take some risk to make things happen on the island.

Able in an entrepreneur and he comes up with the idea of a fish catcher.  A fish catcher could increase his productivity so that he does not have to spend all day catching a single fish.  If this invention works then he wouldn’t have to spend all day catching fish and he could use his time for something else.  For example, Able could use this extra time – made possible by the increase of productive capacity of the tool – to make some clothes, build a shelter, and write a screenplay for a feature film.  Able sets out to build a net.

Taking Risk, Lending, Interest Rates, Banks, Inter-island Trade, and the Crash

Of course, to make the net Able must under consume (defer consumption) of fish and take risk.  Baker and Charlie make fun of him and tell him it won’t work and are unwilling to take risk themselves for such a venture.  Able’s fish net works and it doubles his productivity so he can catch two fish per day. Now Able only needs to work to catch fish every other day.  The other day he can use to do something else.  The island now has its first piece of capital equipment that can produce a savings and grow the economy.

The economy of the island quickly increases.  Baker and Charlie want to build their own nets and ask Able to lend them fish to eat while they build their nets.  Able gets the idea of “finance”.  Able lends Baker and Charlie fish (since he can over produce) at a 100% interest rate; for every fish Able lends Baker and Charlie they have to repay two fish.

With the initial capital equipment (Able’s net) and finance (lending) Baker and Charlie build their own nets.  With their nets built and with increased productive capacity now Baker and Charlie have more time to spend time doing something else.  Charlie opens a surfboard shop and Baker works on island transportation by building canoes and carts.  Over time, people on other islands hear about the prosperity of Able, Baker, and Charlie on the island and immigrants soon arrive.  Of course, as time goes on and more people come to the island the society and economics of the island become more complex and the once healthy economy goes from boom to bust though a number of economic decisions made by politicians and bankers.

Be careful, or you could accidentally learn something valuable

There are a lot of valuable lessons of economics in this simple story about an island economy.  To make sure you stay on track as you read the whimsical story of this island and its island trading partners the authors provide “Reality Checks” and “Takeaways” at the end of each chapter.  Reality checks are general lessons of economics to be learned from the story; Takeaways are more direct linkages of the history of the US economy to the story.  Taken together, even Kelly Bundy would enjoy reading this book.

The general trend of governments to devalue the currency

It’s amazing how governments try the same thing over and over to fix an economy and yet end up with the same undesirable outcome.  Here is one example.  How do you deal with government deficit spending?  What happens when you lend out  much more than what you have?   What happens when a government becomes bloated and it no longer able to  finance its spending?  What do you do?

From the book  ( The economy is now at the point where the government has taken all fish away from its people and have issued “Fish Reserve Notes” in place of real fish.  Further, the government no longer has adequate real fish in the bank to cover all the notes.  Sound familiar?)

“Soon Franky and his agents handed out far more Fish Reserve Notes than the government’s had fish to redeem…  At that, a number of lab-coated scientists walked in with three regular looking fish.  “Look!”, said one.  “We’ve been scouring the beaches and garbage dumps collecting discarded fish skins and skeletons… especially the ones with head and tail intact.  Just watch the magic.

Then in a blur of cutting, splicing, gluing, and sewing, the technicians took the fish and began the construction of a new fish around the discarded fish parts.  They sculpted, molded, glued, and sealed.  Using this process they were able to produce four passable fish from three.  What was once garbage now looked like a genuine fish!”

Rome in 64 A.D.

Schiff’s book does not talk about Rome.  I am simply adding this to make a point that the action taken by the Islanders not only has a reference to U.S. history but back to Rome.  Do we learn from history?  And, what happened to the Roman Empire?  And what may be some of the contributing causes to the decline of Rome as an empire?

In 64 A.D. Rome was running out of money with climbing government spending.  The Emperor could no longer raise the taxes on the people.  Nero began to mess with the coinage.  He reduced the silver and gold content of coins.  Coins were collected, melted down, and reminted with less silver thus producing a momentary surplus of silver and gold. 

One pound of silver in the old coinage produced 84 denarii.  Reminted in the new coinage the same 1 pound of silver produced 96 denarii.  One pound of gold produced 40 golden aurei in the old coinage and 45 in the new.  Through this magic Nero produced a 15% and 11% profit in silver and gold respectively.  But think about this.  Does Rome really have more money or just more coins?  Nero debased the currency of the realm through a deception.  It just continued –

  • At the time of Marus Aurleius the silver content of the denarii was reduced to 75%
  • At the end of the 2’nd century the silver content was only 67%
  • Emperor Lucius Septimius Severus raised the soldiers pay and was forced to reduce the silver content in denarii to 50%
  • By the reign of Gallienus (260-268) coins contained less than 5% silver.

Over the course of 200 years the silver used to mint one original silver denarii now  minted 150.  As the silver content decreased the prices increased.  Wheat that sold for one-half a denarius in the second century increased to 100 denarii a century later.  A two hundred fold increase.

In U.S. History

In 1913 the Federal Reserve was established.  The notes issued were a promise to pay the bearer in gold on demand.  The purpose of the Fed was originally to provide an “elastic money supply”.  The Fed expands or contracts the money supply as needed to hold prices steady.

According to the authors, the dollar has lost more than 95% of its value and the real purpose of the Fed is to provide inflation necessary for the government to spend more than it collects in taxes.

During the depression, President Roosevelt decided to devalue the dollar against gold.  In order to pull this off, the government had to control the entire gold market, and for a time, the government made it illegal to own gold coins.  Later on the ability to redeem the notes for gold was restricted to just banks, then to just foreign banks, and then finally to no one.

We are left with a currency that has no real value and can be expanded at will.  This has prevented the government from ever having to make hard choices about spending and taxes, and has set us on a path that will eventually destroy the remaining value of the dollar.

The Take

This book is 227 pages in length with large print and illustrations.  You should be able to read it in about 2 hours.  Don’t let the allegory and the whimsical island fish story deceive you that this book does not contain some very useful information on the history of the U.S. economy and how we arrived in the state we are in in 2010.

In writing successful books it’s all about presenting information that makes something interesting that otherwise might be boring.  Maybe you really do want to learn something about economics but don’t want to read some dusty economics textbook.  If so, then take a look at his book at your local bookstore, at the local public library, or page through it for free at amazon.com.

I would not say that this book is up to the classic Animal Farm.  But it is of the same genre – an allegory with a serious message.  On the surface these books respectively are about animals on a farm and island fishing.  At the deeper level these books respectively are about socialism and economics.  You can enjoy them at a superficial level as a story.  But, if you are not careful, you may learn something important by linking the story as allegory to real events in history and projecting what might happen in the future if we continue on one course of action rather than another.

The authors message in telling the tale of the island fishing economy is clear:

We need leaders who have the courage to be honest with voters who have the strength to accept the work of economic renewal.

For years we have been living beyond our means, and we must summon the resolve to finally live within them.  If we can do that, and allow free market forces to operate unhindered, we can rebalance our economy and set the stage for real expansion.

However, if we choose to put our faith in debt, the printing press, and the promise of pain-free government solutions, we will all be fishing without a net.

Resources

A decent book on Money
The History of Money by Jack Weatherford

A decent book on basic economics
Basic Economics by Thomas Sowell

How an Economy Grows and Why it Crashes by Peter D. Schiff and Andrew J. Schiff

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