45 of 51 people found the following review helpful:
4.0 out of 5 stars
Very good intro to econ for the nonecon types, October 15, 2005
The three authors managed to write a very good introduction to macroeconomics 101 without a single equation or a single supply demand curve. This is an excellent book for the layperson allergic to numbers. All macroeconomics principles are developed solely through narrative logic. Thus, the book is truly readable for anyone. For the ones who have expertise in economics, it is fascinating to observe how well the authors have presented the material in the absence of any quantitative methods.
The book is divided in four parts. Part I: Ten Key Elements of Economics; Part II: Seven Sources of Economic Progress; Part III: Economic Progress and the Role of Government; Part IV: Twelve Key Elements of Personal Finance. The parts vary in quality.
Part I is the best. It is a world class introduction to macroeconomics that is very accessible. You learn most everything you need to know about economic incentives, demand and supply, economic profit, competitive advantage of trade, and other fundamental concepts. I rate this part a 5.
Part II is very good too. It builds upon the foundation of Part I, and goes on to explain the necessary social infrastructure for a working economy including the Rule of Law, functioning capital markets, monetary stability, and free trade. It explains rather brilliantly why trade deficits do not matter a whole lot. This is because they have to be matched by capital inflows. The latter results in lower interest rates, more investments, and additional employment. The authors mention that from 1980 to 2003, the U.S. experienced chronic large trade deficits but employment expanded by 35 million jobs. The authors make an identical case for outsourcing. If something can be done cheaper abroad, it channels domestic resources to higher productive activities. As a result, output and income will rise. I'd give this part a 5 rating.
Part III is the weakest. First, it does not say a whole lot that has not been already covered. Additionally, it reads like a Libertarian manifesto. As written, the authors have you believe that most forms of government expenditures are wasteful. To fix that they recommend that 3/4th of both houses of Congress should be required to: a) pass any Federal expenditure programs; and b) to borrow any funds to finance the Budget Deficit. Well if you want a functioning government that steps in where there is no profit opportunity and does not default on its sovereign debt, you'd have to ignore the authors recommendations. While the authors explained smartly that Trade Deficits do not matter a whole lot in Part II, they failed to explain that Budget Deficits per se at not the end of the World either. As long as Budget Deficits represent a percentage of the economy that is not greater than the nominal growth of this same economy the Debt level to GDP ratio remains constant.
Within this same Part III, the authors also hammer at arbitrarily at our Federal Reserve. They recommend that if the price level changes up or down by more than 4% in two consecutive years, all Governors of the Federal Reserve System should be fired. The authors are under the illusion that the Fed has a 100% control on our economy, including its inflation rate. It really does not. If we'd follow the authors' recommendation s, we would have fired Paul Volcker in 1980. Yet he did a superb job of breaking the back of double digit inflation triggered in good part by OPEC quadrupling the price of oil in 1979. I'd give a 1 rating to this section.
Part IV is pretty good. It is an excellent introduction to financial planning. The authors do a good job of tying in macroeconomic principles they explained in the earlier parts to investment principles they present here. This section reads like a summary of the excellent book written by Burton G, Malkiel "A Random Walk Down Wall Street." It all boils down to diversifying your investments, save regularly, uses your company 401K, invest in index funds for superior performance, don't chase hot mutual funds or hot investment tips. I'd give this section a 5.
If you like this book I also strongly recommend the mentioned book by Malkiel. Another good book on economics is "Hidden Order. The Economics of Everyday Life" by David Friedman (son of Milton Friedman). This latter book is far better than the much hyped but vapid "Freaconomics."
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7 of 9 people found the following review helpful:
4.0 out of 5 stars
Conservative Common Sense, but not Full Common Sense, October 10, 2009
This book is a careful, sober, and measured conservative economic manifesto, something in the spirit of Henry Hazlett's famous Economics in One Lesson (Three Rivers Press, 1979), but longer and more detailed, with an addition on personal finance. The authors are rather sober and pedantic, so the reading is not great fun, but it is clear and logical.
The section on personal finance is the best part of the book, and covers virtually all important points about wise personal finance. Only the first two of the authors' twelve points require some emendation. Their first point is "discover your comparative advantage." (p. 123) This is of course true---you should do with your life what you are good at doing, not what others want you to do or what you think is morally the best thing to do. We humans have very heterogeneous capacities and we are most contented when we get to exercise those capacities that represent our relative strengths. However, among those activities in which you have a comparative advantage, to that which will give you the most personal satisfaction---this they do not mention. In particular, if you think that you should simply pick a profession that will maximize your income, you are making a bad mistake. Wealth is nice, but not if it is purchased by activities that you do not value and daily routines that you tolerate only because of what they offer in terms of material reward.
Their second point is "Be entrepreneurial. In a market economy, people get ahead by helping others and discovering better ways of doing things." I think this point is probably just wrong. The entrepreneurial spirit is one of several personality types, and is not necessarily associated with "helping others" or "discovering better ways of doing things." The latter two activities are not correlated either. It might be better said that one should try to change the world for the better, either by entrepreneurship, helping others, or being creative.
The authors also offer "ten key elements of economics," "seven major sources of economic progress," and "ten elements of clear thinking about economic progress and the role of government." In every case, the authors offer good advice, but sometimes this advice is, to my mind, biased in an unwarranted way towards a conservative world view. Let me give some examples.
The first of the authors' "ten key elements of economics" is "Incentives matter." This, of course, is a central message of economic theory. If you want people to behave in certain ways, you must supply incentives that lead them to choose to behave as you wish. However, it is simply empirically incorrect that people are only motivated by personal gain and material reward. In a health economy, people have altruistic tendencies that lead them to help others, they have pride in doing their appointed jobs well, for their own sake, and they recognize such character virtues as honesty, trustworthiness, as sense of fairness, and a commitment to reciprocity. It is simply a mistake to think that these moral preferences are simply forms of enlightened self-interest, and that people behave prosocially only because they fear punishment for breaking moral rules. This issue is important because the view that people are selfish money maximizers leads to bad economic policy advice in such areas a criminal law and creating a culture of virtue rather than of corruption in a firm or in society at large.
Their second economic principle is that "there is no free lunch." What they mean by this is that virtually every proposal for intervention in the market economy will benefit some and hurt others. We should always be mindful of who gains, who loses, and how much. For instance, we may impose a quota on imports that saves the jobs of 1,000 workers, but the cost will be to consumers and taxpayers, and can easily amount to two or three times the yearly wages of the workers involved. However, there certainly may be government interventions that create a net surplus of gain for the winners over the cost to the "losers"---I put losers in quotes because in many cases those that pay for an intervention gain from it and do not consider themselves losers at all. For instance, an anti-poverty program that gives young people skills and values that make them into productive and fulfilled citizens may be valued positively by the taxpayers who foot the bill for the program.
The authors' seventh principle is "people earn income by helping others." What they mean is that the salaries of high-paid professionals and the profits of entrepreneurs are not forms of exploitation of the less well off, but rather reflect their contribution to society. This is a very important point---many people deserve every cent that they earn and the idea that their earnings are illegitimate is just wrong-headed. But, what about people who earn by lying and cheating, as we have seen frequently in industry and finance in recent years? They earn money by hurting. Moreover, what about those who have the privilege of inheriting wealth that they have not worked for? It may be that their wealth is justly acquired, but they are not necessarily helping anybody.
The authors' ninth point is that "the `invisible hand' of market prices directs buyers and sellers toward activities that promote the general welfare." This principle is largely correct, but we know that there are several sorts of "market failures" that lead market prices to diverge from social welfare. Conservatives do not like to talk about "externalities," "public goods," and "increasing returns industries," but they are a central part of standard economic theory. When there are market failures, it is worth investigating whether there are state interventions that might correct them. Of course, there are also "state failures," that might make the cure worse than the disease. Still, it is always worth looking for ways of improving market economies through wise state regulation.
I know that many modern social democrats will disagree with the authors' "seven major sources of economic progress," because they involve promoting competitive markets and limiting the extent of government regulation and maintaining low tax rates. However, I think these principles are quite reasonable. There are social problems that require regulation and taxation, including fighting poverty, investing in education and health care, and contributing to environmental integrity. But in many countries regulation and taxation are captured by special interest groups who use the state for personal wealth aggrandizement (so-called "rent-seeking"), and these should be opposed single-mindedly by taxpayers and voters.
As for the "ten elements of clear thinking about economic progress and the role of government," some of their principles are highly contentious. Their second is "government is not a corrective device." This is completely incorrect. There is no advanced modern economy without a strong and large government sector, and the reason for this is that government regulation is a strong and healthy corrective to unbridled market competition. Of course, government can also be captured by special interests, as we have seen above. But social security, public health insurance, food and drug regulation, environmental controls, and a dozen other areas are well served by government regulation. Their sixth principle is that "government slows economic progress when it becomes heavily involved in trying to help some people at the expense of others." (p. 78) This point is generally true, but unemployment insurance, aid to those who are temporarily impoverished, or who are or chronically impoverished through no fault of their own, is not very costly and is immensely socially beneficial. Of course, most of the time when the government helps some, the "some" are well-off middle-class or rich voters with political clout, as the authors stress.
Towards the end of the book, the authors propose draconian constitutional changes that take the power away from the legislative branch of government in the name of fiscal conservatism (p. 117). This includes a constitutional requirement of three-fourths majority in both Houses of Congress for federal expenditures, federal borrowing, and state mandates. This is just right-wing craziness. The idea that our economic ills are due to a bloated government and excessive taxation is seriously overblown, and we have the right to elect legislators that work on majority rule, not something close to unanimity.
Most of the points I have tried to make in my criticism of the authors' economic principles are pretty obvious, and they could be incorporated profitably into their argument. Of course, theirs would not then be a conservative manifesto. It would just be common sense.
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