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Showing 1-10 of 12 reviews(2 star). Show all reviews
on October 26, 2014
Not worth the buy, it does cover some basics, but overall it is full of opinionated scenarios that don't hold up in the real world. Really poor take on "how an economy" works, so many scenarios used in the book are overly simplified to promote the arthur's ideology and not to teach by example as it is implied by the book. In the real world there are more variables you must take into account and the cause and effect described in the book are not nearly as directly correlated. I read it, but would not recommend it as a good book to learn about economics.
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on November 15, 2013
This book is a re-telling of a childhood explanation of economic forces. Like most explanations to children, it is simple -- actually simplistic. Like most stories, it has an agenda. Schiff's version of economics is a specific theory (or I should say hypothesis, because it has not been lab tested enough to be a theory) and it bears little resemblance to reality. Pretty much the rich white man's view of how things work out well for rich white men who imagine they have a Puritan ethic but don't realize what a terrific hand they were dealt to begin with. It's more annoying than informative, but it is entertaining.
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on January 15, 2014
Though I agree with the philosophy of this book, I was expecting much more content. It is fine as a primer for children, but it was disappointing for anyone expecting more than that.
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on July 27, 2015
Expensive book but had to buy it as it was required reading for school.
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on January 2, 2014
Peter's very simple and informative book is ok as a primer on economics. He uses the analogy of fishing, learning to fish and making bigger nets. What economics fails to see is that the ocean the fish live in is just like a natural bank account - it can be drained. Economic theory of the past doesn't work well when there are no more fish.
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on January 24, 2014
In the book, Peter Schiff uses the example of an island where fish becomes the currency. This is not the situation found in the United States of America or in any country that has its own currency and prints its own money.

The fishers catch the fish and dry it and then use it as the islands currency. This is the same as a miner extracts the gold which are then processed into gold bars. The currency is tied, or backed, by the gold bars. Mr. Nixon stopped converting US dollars to gold in the 1970s. It was then a fiat currency. A fiat currency is any money that is not pegged or tied to gold or something of value.

The US reserve, the central bank, prints money which is then spent into the economy (through infrastructure projects, eduction, government employees, government programs, etc.). The private sector, sells goods or services to the government to earn the dollars. Therefore, the amount the government prints and spends into the economy is equal to the money available to the private sector, which is also equivalent to the national debt.

When the government engages in austerity policies. They reduce the amount of money available for the private sector to earn.

The government uses taxes to control inflation. When there is too much money in an economy, prices tend to increase. In order to curtail or reduce the available amount of money the government introduces taxes, which reduces the amount of disposable income (the amount of money left over after paying rent, bills, etc.). when there is less money in the economy, prices stabilize.

For a good account of how an economy works using the gold standard this book is a must!
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on May 29, 2010
This book is an exemplar of simple, easy to read writing. That strength is also the book's weakness: the book is so simple to read that it seems to talk down to and patronize its audience. This book is brilliant in how it makes economics accessible to all but is also unconvincing in terms of content.

Schiff never deals with his choice of fish as the basis of currency. In many ways, fish are a terrible choice of currency, not least because fish become inedible pretty quickly after being caught. Rarely in history is commodity currency based on something so perishable, simply because perishable items are a terrible store of value. The perishable nature of fish would necessitate that individuals buy things as quickly as possible before the fish become worthless and would be entirely incompatible with savings of any kind. This may sound silly, but a proper understanding of economics requires a proper understanding of what money is and how money is used. Schiff fails in delivering this understanding and fails to even point the reader in the direction of understanding.

The "And Why It Crashes" part of the book is not as neat nor as powerful as the first half. Schiff seems to pin the current economic crash on loose monetary policies coupled with an end to the gold standard in the 1970's. This explanation ignores previous financial crashes (The Savings and Loans Crisis, the post-9/11 Recession) but sort of works for the time period after World War II. Unfortunately, this explanation falls entirely short for American history before the Great Depression, when financial crashes (then called "Panics") were common. Schiff doesn't even attempt to explain this gap, which is a pity.

Given the economy which Schiff creates, I can see an alternate scenario for how his fictional economy can experience a financial crash. Imagine everything is going great in the economy: the fishermen are fishing, manufacturers are producing everything from canoes to surfboards, and life is good.
Then one day, the fishermen temporarily become more worried about their safety while fishing. Any number of reasons can explain why, from coming predicted storm to a blistering report on canoe safety by Fisherman's News. The fishermen become worried about their safety out on the water and of course fish closer to land or not at all. Suddenly, there are less fish coming into the economy. Realizing that they'll need to save up fish for a few days (since this is clearly a temporary problem and everyone has to eat), everyone starts spending less and charging more for goods and services. Suddenly, the economy has slowed. A few people lose their jobs, but the economy normally would be able to handle this.
Unfortunately, the Fishy Bank had been using complex financial instruments to push mortgages to people who normally wouldn't be able to afford them. The investors investing in Fishy Bank's mortgages never bothered to figure out how those assets truly worked. So when some people were laid off and defaulted on their mortgages, the investors freaked out and began selling off their investments in Fishy Bank's mortgages.
Since Fishy Bank had depended on the investor's money to be able to lend more, the bank duly tries to reduce its losses by reducing lending to all customers. Suddenly businesses, both large and small, can't borrow the money they need to invest in growth. Consumers can't borrow to buy canoes or homes. Suddenly the housing market and the canoe markets are crashing, resulting builders and canoe manufacturers laying off even more people.
With everyone worried about layoffs, consumers now spend even less. Times of hardship and misery continue even after the initial storm has passed and the fishermen begin fishing again. Eventually demand for canoes and homes by fishermen restarts those industries, slowly returning the economy to its pre-crash equilibrium. The initial cause of the crash seems rather minor in comparison to the reaction of the financial market.

The scenario I have fleshed out is entirely consistent with the current financial difficulties the US finds itself in like Schiff's, but doesn't need to resort to ad hominem attacks (except to call the investors lazy), works generically for quite a few recessions as well as specifically the current one, and incorporates unemployment and consumer confidence (as well as being far simpler). Schiff provides no explanation for why any other version of events than his own does or does not work. Since this book seems to rely entirely on the author's authority as an expert (rather than convincing evidence-based argumentation) in justifying its narrative, I can't recommend this book.
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on June 15, 2012
Peter Schiff is a devout follower of libertarian ideas of free market. He thinks that more, not less capitalism is needed to run a sustainable economy and to get us out of the crisis. Now, just an observation of the Austrian School position:

1) It cannot be defended without evoking a contractualist position. In this book Schiff presupposes a capitalist state of affairs even before actual state (or republic, as they would have it) occured, and the fact of the matter is, he has no other options. Now, how did capitalism actually emerge? Remember that the regulations, the state, the taxes were all a necessary prerequisite to actually enable capitalism to rise in the first place. In England, you had Poor Law and enclosures. In United States, there were Relocation Acts and other forms of violence over Indians etc. In France, there were revolutions. The state was, historically, a prerequisite for the creation of capitalism, not a "necessary evil".
2) Schiff neglects the fact that free market itself has monopolizing tendencies. These are counteracted with antimonopolistic agencies and laws. But this is seen as a necessary intrusion to the free market, and not as a sign of a fundamental flaw of laissez-faire. Yet, publically funded education and health, for example, are seen as an impediment to free market.
3) The whole ideology of free market and minimal state rests on the assumption of the dominant position of the private property, taking this idea as axiomatic.
4) Schiff also neglects the fact that no matter how you call it, classes or professions will have a tendency to reproduce itself. Now, for someone born in rural and poorer parts of the country this means no available high quality education, museums, theaters etc. In this ideology, private property is maintained as more important than equal chances.
5) The minimal state itself seems like a utopia. Observe that even in a minimal state there are at least lawmakers, police, army, firefighters, etc. Given how much of the GDP goes to the army and its businesses, it's naive to assume that by getting rid of other departments this would become a minimal state.
6) Observe that when Schiff introduces other islanders, he assumes that they will trade freely, as if that is an expected outcome. Now remember that, if history is a judge, it would be much more likely that the richer and more powerful islanders would actually violently crush the others and just take away what is available, just looking at their short-term gain.
7) Also observe that Austrians argue that the unions are just an impediment to free market. But also, they would grant them that they trimmed down the working day from 14 hours to 8, improving the productivity. Obviously, free market itself would not be able to regulate these things as fast as with the unions. From a humanistic point of view, it was a good thing - capitalists had a whole army of unemployed, so the fact that some of the workers got sick working hard did not concern them at all.
8) Finally, many argue that the crisis of 2008 was in fact a result of free market. Austrians would like you to believe that the state poured money in banks, kept interest rates low and that it effectively started the whole thing. But, even in a free market, why wouldn't banks print the money? Why wouldn't they gamble the way they gambled in 2000s? Granted, some were bailed out, but even those that were not ended with their CEOs richer for tens of millions of dollars. Who could prevent such gambling even in a free market?
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on January 25, 2011
This book does a good job of explaining what is currently plaguing our monetary system and why the Keynesian cure is only making it worse. However, a deeper analysis reveals some extremely serious problems throughout the field of economics, and Austrians are not excepted from this.

I know the authors mean well and therefore I will try to not be too abrasive here. However, given the incredible importance of the economic decisions to be made over the next few years, I am not going to be able to avoid being blunt. We are quickly running out of time and it seems that we are only going to get one more chance to get this right. It is time for economists to put aside their silly theories and start taking some serious steps towards understanding how the real world works. I will explain some things that few economists will like to hear and most will deny. But our economies and planet will not be healed until our economic leadership accepts the inevitable conclusions which I outline.

The problem with this book is that economists, whether Keynesian or Austrian or of any other persuasion, are still economists. Economics is in the Faculty of Arts. Arts are good. And mathematics is good. So is science. But when arts and math come together, that's bad. They do not belong together; that is why economics is a very dangerous field of study. Economics masquerades itself as being more legitimate than it actually is because it can hide behind official looking numbers, charts and code words, but underneath all that nonsense is nothing more than another unverified branch of the arts. And there's nothing wrong with the arts, so long as they aren't misinterpreted and accepted as science. Science is science because it follows the "scientific method" of rigorous hypothesis testing and data gathering; the arts do not. True, Peter's book doesn't use much math, but his arguments have a logical mathematical underpinning, which makes this book, unavoidably, "mathematical arts".

As with Keynesians, Austrians suffer from a fundamental misunderstanding of what forms the basis of our economies (even though it is ironically stated otherwise in the introduction.) This is confirmed early on in the fishing allegory when Able, the innovator of the group stuck on Gilligan's Island, used a net to "produce" a fish. I'll repeat. Able's net "produced" a fish.

Huh? Did I just read that correctly? This statement sticks out like a sore thumb. Let's get that straight ... Able was able to produce a fish from ... nothing more than a net?! Wow! That must be some net! I thought only mommy and daddy fishies, or God, or 4 billion years of evolution (depending on your beliefs) could make a fish. But Able could do it. All he needed was to first "produce" some palm fiber (I thought the palm tree produced that?) and then transform this fiber into a net which magically made a fish! I'll say it again because I'm truly impressed -- WOW! That's better than Star Trek because he didn't even need a replicator!

Of course, we all know that Able did not "produce" a fish; the ocean did. Able merely caught it in his net. I know that many would find my distinction between "producing" and "catching" to be semantic, and to be missing the point of this obviously simplistic story that's merely trying to get ideas across. But I would disagree; the difference is anything but semantic, and my objection is as applicable to the real world as it is to this fishing allegory. This is because economic theories, both Keynesian and Austrian, pay no attention to how that fish (or anything else of value) was brought into existence and how it found its way into the vicinity of Able's swinging net. Their fairytale theories and magical charts begin only during and after the fish has been caught. But the natural world is what creates these things; not us. Doesn't it deserve a front seat in the equation too? I could forgive this critical oversight if Peter attempts at a later point to explain where that fish came from, but he does not.

After this, I read about Baker's fantastic new automatic fish catching contraption that was able to catch many more fish with much less effort than before. As a result, not only did everyone benefit, but get this --- "Fish became so abundant that they [the islanders] were able to dedicate all their time to other projects."

Well, I did fairly well in math and I'm pretty sure that catching more fish makes them less abundant! And apparently, "Able had just increased his productivity" through the use of his net. No!! That's not what happened at all. Able has no productivity and he never will - zero, zip, zilch! The special talent of "productivity" is bestowed only to plants. All Able has is a net, and the only thing he's done is wave it through the water to catch some of the productivity that was ultimately created by plants and then transferred up the food chain to the fish.

What has actually happened is that Able has diverted some of the biological productivity of the oceans onto his own dinner plate, and off of the menu of some other bigger fish that would have otherwise eaten Able's newly captured fish! He simply transformed fish into food, and that's all he did. It's the same with anything else of value that enters our economy. All that labour does is take stuff from the natural world, and then transform this into something else we find useful. Sometimes it's a simple transformation like in this fish allegory, or it can be more complicated like turning a bunch of metals, oil and energy into a computer. But make no mistake about it; labour "produces" absolutely nothing! Does this sound crazy? Well it's true!

Peter seems to move back over towards the right track when he makes things really simple: "The simplest definition of economy is the effort to maximize the availability of limited resources (and just about every resource is limited) to meet as many human demands as possible. Tools, capital, and innovation are the keys to this equation."

Okay, now he's starting to make more sense down here on Planet Earth. But if so, then how can this recognition of limited resources be reconciled with an exponentially growing economy based on take, take and more take? I would presume that Peter has faith that advancements in technology will enable us to make more and more out of less and less, and do so indefinitely into the future to support our growing economies (that's what "innovation" alludes to in the quote above).

Ahh, yes..... and up pops what I like to call, "The Economists' Black Box". The Economic Black Box is that necessary machine which relies on the magic of science and technology to solve scarcity problems. It is pulled out of economists' hats whenever they need a convenient exit-door strategy after being argued into a corner. (Forgive me for presuming what you would say here Peter, but since you do not explain how this inevitable logical clash can be reconciled then I must infer your most likely reasoning.)

According to the Black Box line of thinking, economists don't need to understand science and technology; they can just package it up into a nice neat box which can then be inserted as an object into their theories. Then their lives become much easier since they only need to understand that the incentives created in a free market capitalist economy will spur any new technological development we need, via the Big Black Box! That way, they don't have to understand everything about how the world works in order to be good economists, and that's why anyone can understand how economies work by reading this 200 page picture book! Let the engineers do what they do, and let the economists do what they do! Isn't that fantastic how the work gets assigned according to talent?

Well, you're in for a rude awakening if you believe the above Black Box logic. Here is why: the very economic environment created by economists, which they believe will incentivize engineers to work their "magic" and innovate new technology in order to reap monetary rewards by supplying demand in the open market, is ironically in direct violation of the same basic laws of physics which those engineers are using to supposedly bring about their miracle innovations! (Do you follow that convoluted sentence? Make sure you do because it's the most important statement in this whole review.)

To put it another way, that Black Box which economists have so much faith in ..... it's what's more commonly known as a "perpetual motion machine". Of course these were disproven centuries ago, and that's one of the most fundamental principles science has ever discovered. That's why it's necessary for economists to hide their perpetual motion machines in a Big Black Box, because there is nothing inside!

More specifically regarding food, many believe that we can depend on technological innovations to enable us to farm more fish, or plants, or whatever thing it is that we are depleting. This should solve the scarcity problem, and the resulting continually increasing yields of fish will supply our growing economy. But remember from above when I said that labour produces absolutely nothing? Yes, it's true. Labour does not "produce" those farmed fish or vegetables in any way whatsoever. Rather, what labour does is clear the original ecosystem that used to exist on that piece of land or ocean and then turn it into a farm. As a result, the original real productivity of that piece of real estate has been converted over to grow plants and animals that we find useful or tasty.

Of course, I hope you can understand that there is limited area on the planet available to do this and it's getting smaller and smaller in relation to the size of the gigantic growing human mouth demanding food from it (hint - we already use over ½ of the planet). And because of the law of diminishing returns (with the laws of thermodynamics looming as an absolute upper limit), we cannot count on further advancements in farming techniques to enable us to stimulate more and more agricultural production using less and less inputs. It doesn't work that way; in fact the opposite has been the case. The historical increases in agricultural yields (the "Green Revolution") were brought about because we figured out how to engineer plants that could take advantage of us throwing more synthetic fertilizers and more irrigation on our farms. Yet both fresh water and the fossil fuels needed to make fertilizers are running out. And if you believe that we can just make more fresh water and fossil fuels from something else.... well good luck with that. And it is extremely unlikely that future plant strains are going to be able to produce more and more using less and less, given the limitations imposed by the realities of biochemistry. Any improvements, if any, will be marginal and will be grossly overwhelmed by increasing demand from the world's population. The difference will be taken up by razing all remaining productive ecosystems for farming.

The total productivity of the planet has not increased as a result of our intensive farming activities because this has caused environmental degradation elsewhere. As a real world example of this, for every pound of salmon we farm, we have to catch and use about five pounds of anchovies to feed the salmon. So salmon farmers do not in any way "produce" salmon. All they do is pay someone else to go take anchovies from the ocean somewhere else and then they set up farms which transform anchovies into salmon. All that's happened is that salmon depletion has been turned into anchovy depletion, and since we have decided that salmon are more important to us than anchovies, we accept this. As a result, the remainder of the planet has been diminished and we have infringed on the ability of someone else to catch anchovies if they find a better use for them, because despite what Peter says, fish actually become less plentiful after you catch them!

This unfortunate misunderstanding on the part of economists, as sad as it is, belies an even sadder reality - that the magical charts and theories produced and implemented by these delusional dreamers pay even less consideration to how the fish was brought into existence than the economists do themselves! Economists simply have no idea how the fish came to be, and don't seem to care. Fish swim around the oceans, they have babies, those babies grow up and then we catch them; I don't think you're going to get any deeper understanding than that from (most) economists.

Peter explains that understanding economics is in reality quite simple and that anyone can do it as long as they can understand a 200 page large-text fishing allegory with lots of pictures; it is the Keynesians with their incoherent gobbledegook that have made economics so unintelligible and distant for the masses. I would agree with his latter point but I disagree with the former - economics is not simple. The world is a very complex place, and our economies sit right at the peak of this complexity. It is irresponsible to suggest that anyone can understand economics and come up with sound policies to implement based on reading a 200 page picture book. While certain aspects of the functioning of economies are indeed simpler than Keynesians would have you believe, the underlying biophysical processes supporting our economies are not. But at the same time they are not incomprehensible or unattainable either; it just takes quite a bit more effort than reading this book, or anything equivalent, in order to understand them. I'd say it takes many years of study covering a wide range of fields, and then bringing them all together in an economic context so that they make sense as a whole.

If you want to understand economics, this effort is inevitable because the fundamental bases of our economies are not charts on pieces of paper, or glorified nets in Austrian fishing allegories; rather they are a consequence of the workings of real-world biophysical processes and the energy and matter flows therein. I know this does not sit well with today's popular attitudes towards immediate satisfaction, where people expect more and more results from less and less effort (sound familiar?) But unfortunately, when it comes to knowledge there is no alternative - you are going to have to put in the effort to learn. You will have to delve into topics like thermodynamics, ecological productivity, how our energy "production" systems work, sociology, earth sciences, biology, chemistry, physics, engineering, etc. etc. - you know, all that hard stuff economists ran away from in the first place to study economics. Without a sound understanding of the above, any economic "theory" is nothing more than hypothetical chart thumping. If economists ever want their field of study to be taken seriously outside of the Faculty of Arts then they are going to have to learn about science and engineering.

I'm going to suggest that Peter has completely misunderstood the real reason explaining why economies grow and then subsequently stagnate, fizzle, or crash. Austrians believe this to be because governments inevitably get their meddling hands into things and overspend for short term political purposes, which requires more taxation to fund, which then stifles private sector innovation, diverts capital towards unproductive activities, and the whole economy gets bogged down so that eventually we end up in the spiraling out-of-control situation we are now facing. In their view, government is inefficient and easily corruptible while the private sector is not.

While the above scenario probably has something to with our economic problems, and Peter's description of the events in the US over the last couple decades certainly explain how counterproductive this Keynesian intervention is, the reality is quite a bit more complex than this.

Peter explains, "There is a limit to how high taxes can go. Raise them enough, and people stop working." Okay, that sounds reasonable. But the US is nowhere near that threshold. During the boom decades around 1940-1970, the income tax rate for the highest bracket varied between 70% and 90%, the highest in history. Yet those were some of the most prosperous in the nation's history. How can that be? Since then the tax rate for those top income brackets has dropped to 35%, and yet the economy is collapsing. And we are supposed to believe that it is high taxation that stifles prosperity?! This is illogical and is not consistent with history.

[...]

Contrary to what many believe, the rich do not drive an economy; the middle class does. Is it any wonder then that the economy is collapsing while the gap between rich and poor is widening so rapidly? 56% of US corporate shares are held by a staggering 1% of the population.

"An imbalance between rich and poor is the oldest and most fatal ailment of all republics."
Plato

I suggest that the fundamental reason explaining why our economies stop growing is for a reason Peter has not even considered - they stop growing because of inescapable real world biophysical limits to growth. I contend that the waxy yellow government buildup that Peter abhors is actually the result of the failure of economies to continue to grow, not the cause of it!

So how do economies grow? They do so when human labour takes more natural resources from the planet and converts them over to make useful things for us that we use in our lives. I said it before and I'll say it again - labour has absolutely no productivity itself; it merely takes productivity from the natural world. Economies can grow in two ways -- by either taking more stuff, or by improving the efficiency with which we transform that stuff into other stuff which we find useful. Technological innovation enables both. But again, the law of diminishing returns sets in, as a result of the incontrovertible laws of thermodynamics. Initial technological innovations lead to great improvements in our ability to take and / or more efficiently transform what we take. Subsequent innovations generally yield less rewards. Sometimes a new innovation will make great strides and we will enjoy prosperity for a while because of this (for example, the tech innovations at the end of last century). And population growth of course makes more hands available to do more taking.

But eventually a point is reached in this environment of diminishing returns where the vast majority of the population is employed in productive jobs and uses technology to its fullest benefit to take from the natural world and then to transform it at maximum efficiency. Further advances in technology lead to minimal improvements in our ability to take and transform; or in other words, to grow economically.

Or something else could happen - it's possible that the amount of natural resources available to take gets depleted before an economy reaches its peak so-called "productivity", and therefore can't grow anymore. Or both of these things could happen simultaneously.

The above limits to growth do not necessarily imply any inherent problems for our economies, assuming that we take resources from the natural world sustainably (that's a big assumption). Economies could grow to reach their biophysical limit and the goods taken and transformed would somehow be distributed fairly amongst the population. As long as that population doesn't grow, then theoretically it could continue on like this for a long time (the sun is continually stimulating plants to produce food and we could theoretically recycle our garbage to reclaim metals). But in our current economic system this doesn't work, because it is fundamentally structured for growth. Our modern economies cannot function properly in an environment of zero growth. Because our monetary system is a ponzi scheme, new money must be continually created in order to reward investment with a return. This is the case for both a gold standard and a debt standard fiat currency. It's just that with a fiat currency the ponzi scheme can get out of hand much more easily.

What is the implication of this? If the economy can't grow anymore in real terms because of biophysical limits to growth (be it from depletion of natural resources or maximum employment output), and therefore new money cannot be created out of private borrowing to create new business ventures, then where does the new money come from? Since all money is a claim on ecological productivity (this is where the word "productivity" rightfully enters the discussion), but no more ecological productivity can be wrung from the natural world, then how can new money be created? Well, it can't, in real terms. But what can happen is that the government can borrow it into existence. That way, the monetary system continues to grow even if the economy doesn't, at least in real terms. This is an unhealthy situation because this new money creation is not based on real world things of value. It is not sustainable and we are now witnessing the progression and end result of this, which Peter explains well so I will not go into it any further.

Why is it that pretty much every western "mature" economy is in such a situation, whereas few developing countries are? Is this because every western country's government is by chance an inefficient gluttonous over-spender, while developing countries' governments by chance aren't? Or is there something else going on? Maybe emerging economies can grow because they are emerging from poverty and therefore the increases in the ability of their workforces to take and transform resources are great, whereas in mature economies the workforce simply can't increase its "productivity" anymore, especially under the burden of increasing government debt which is needed to maintain ponzi monetary growth?

And is it possible that western governments are burdened with unserviceable future entitlement programs like retirement pensions, not because westerners are greedy and lazy, but because they just want to maintain a similar standard of living into the future as they had previously enjoyed during the growth phase of their economy? Maybe a ponzi scheme monetary system cannot maintain an equitable distribution of wealth in an economic environment without growth. The problem is not with the entitlement programs; the problem is with the monetary system that is geared to allocate wealth in a more-or-less equitable way only when the economy is growing.

Is it also possible that the mature western economies are facing unprecedented demographic challenges with a large aging baby boomer age class nearing retirement, whereas most developing countries have a younger population? Surely current governments can't be held responsible for demographics that were determined sixty years ago? And any suggestion that this could be remedied by encouraging a higher population growth rate is certainly suicidal given the limits to growth I have explained above.

There is not enough energy available on the planet for our economies to grow their way out of their debt burdens. The situation has passed beyond the mathematical point of no return. It basically all comes down to energy, and you can't argue with energy.

Yet despite every single thing in our economy being driven by energy, and despite our complete reliance on energy to power growth, this book uses the word "energy" a total of three times. Three pages, including pictures, are devoted to it. And no mention of peak oil. The authors do not appreciate how dangerous America's fossil fuel dependence has become, instead dismissing attempts to get the ball rolling with alternative energy systems as some kind of inefficient government make-work project. Apparently the new llamas (electric cars) stink less, and that is pretty much the extent to which this critically important topic is addressed in this book.

How many trillions of dollars have been sent overseas to buy foreign oil? How many trillions have been spent on wars in the Middle East to secure oil supplies? How have those expenses impacted the economy? As a frugally minded Conservative, surely Peter can understand the budgetary implications of a war-for-oil national strategy. How is America going to power itself when its dollar hyperinflates and it can no longer "buy" foreign oil in quantity? What are the implications to the American economy of $20 per gallon gasoline (in today's dollar equivalent), when the average salary drops to $10,000? Because that's what Americans can expect when they can no longer secure overseas oil via wars and when their new currency, whatever that may be, has a purchasing power more representative of the true value of America's so-called "productivity".

Peter's reluctance and / or inability to address the subject of energy is symptomatic of a more general misunderstanding amongst economists of how economies really work. Energy is not some incidental input to the economy; energy is the economy! Without it there is no life, no people, no movement, no complexity, no economy. If you don't understand energy then you simply cannot understand economics! It's that simple. The topic of energy cannot be hidden in a Big Black Box and then buried in some hypothetical economic theory, because energy is larger than the theories! I suggest that this is the main reason explaining why (almost) all economists are clueless when it comes to understanding economics, and why the field of economics has basically not progressed in over a century.

Sadly, the current energy crisis could have been easily avoided because not only are the alternatives to oil cheaper, but they are also better. It is precisely for this reason that America has done nothing to reduce its dependence on oil. Here is an interesting statistic: the amount of energy via natural gas that is needed to refine tar sand (and a lesser extent, crude oil) into gasoline is approximately equal to the energy you get out of the gasoline itself. In other words, North America could take the natural gas (domestically produced) that it currently wastes on refining oil (largely foreign) into gasoline, and instead just burn that natural gas directly in its cars, and be able to drive just as far! The benefits of this of course are that consumers would save a lot of money, and we also wouldn't need to pull crude oil or tar sand out of the ground or ocean anymore! It's a huge win-win situation. A similar energy analysis applies for electric cars but I will not repeat myself (it's actually even more favourable).

Why have we not made these changes? Well, because it isn't exactly a win-win situation as I suggested. It's more like win-win-lose, and the loser is the oil industry. The oil industry is very powerful; the top five or ten profitable companies in the world are oil companies. Do you think they are going to sit back and let this transition happen? No way! And because they are so big and operate with impunity in a more or less unregulated free market (most of the regulations and subsidies in this market favour the oil industry), it is fairly easy for them to suppress these new technologies to prevent them from entering the market and competing fairly.

So how is it then, if natural gas cars are so much cheaper to drive, that consumers can't buy them (every house has a natural gas line)? Because automakers won't make them and offer them for sale, that's why. Why won't automakers sell them? Because there is no demand because no one will buy them. Why won't consumers buy them? Because there are no filling stations (natural gas must be compressed to 3000 psi first, so a widespread network of new natural gas filling stations would be needed). And why are there no such filling stations? Well, as far as the fossil fuel industry is concerned, gasoline stations work just fine! Why would they shoot themselves in the foot by investing in infrastructure that would lessen demand for their products? There is nothing in it for them. The natural gas companies could conceivably circumvent this by developing this infrastructure themselves, but this is a huge investment and it wouldn't increase their gas sales because this would be offset by decreased demand from the oil refineries! And why would they risk investing in establishing such a network of filling stations when there is no demand from consumers because they have no cars because the automakers won't make them because there is no consumer demand?

The above chicken and egg vicious circle could be broken if two of the above parties would agree to make a big investment into establishing such an infrastructure. However, none have any incentive to do so. Their incentive is to maintain the status quo and to keep consumers and the economy addicted to an increasingly scarce and expensive energy source for as long as possible. This strategy is aided by technologically clueless political commentators who frame the energy debate as some kind of socialist conspiracy designed to extract money from consumers. Well, actually, I guess it is a conspiracy isn't it.... the oil companies are extracting thousands of dollars from every motorist ever year!

There is a massive "hump" of capital investment and infrastructure that is necessary to help the alternatives become fairly competitive with the established oil industry. The established industry has enjoyed a hundred years of economies of scale to optimize its production, distribution, and factory processes. It doesn't matter that electric and natural gas powered cars are fundamentally far superior to oil in virtually every single way, not the least of which being cost; they are simply not large enough to be able to fairly compete with the established oil industry, and are therefore easily suppressed. Therefore, what should happen, doesn't happen. This continues on decade after decade at consumers' expense and is largely an outcome of an inefficient free market, one which we are led by Austrians to believe is efficient.

Austrian thought experiments say that only individual consumers and "producers" can make efficient decisions regarding their own capital allocation and what they need for their own lives, and that bungling central planners cannot hope to be able to understand every nook and cranny of the economy to be able to decree capital allocation efficiently from above. Well, although central planning can be inefficient, the underlying assumption here is that an unregulated free market is somehow more efficient. But any analysis of the real world, with consideration of my above explanation of how economies actually depend completely on energy, should quickly dispel the Austrian thought experiments as being overly idealistic. It turns out that both free markets and central planning have advantages and disadvantages, and that both are needed to most efficiently massage economic activity.

Free markets are not efficient because they externalize their true costs onto other people at other times and other places. This is essentially what defines a free market. In the increasingly crowded and depleted world in which we live, obviously this is neither fair nor efficient. The only thing free markets optimize is the five year profit horizon of those lucky enough to be on the giving end of those externalized costs. Individual consumers cannot be expected to become experts in a wide range of the complex ethical, social and environmental externalities resulting from their collective purchasing decisions. Even if they could, they would still have no incentive to incorporate those responsibilities into their own purchasing behavior because doing so only makes it easier for competitors to take advantage of the resulting price discrepancy.

In contrast, central planners can indeed attempt and even succeed in understanding these complex externalities. That's why governments employ scientific researchers in their departments to further such understanding, with the intention that government policy would incorporate those findings into a more fair management of the economy (this of course assumes that the politicians listen to what the expert scientists in their employ are telling them, which is often not the case). This central planning is not inefficient because despite what Austrians would like to tell you, free markets aren't really efficient either.

Continued inside...
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on April 12, 2011
Oh Schiff - I will post a piece written by Dave Cohen for those interested.

Corrupt Government Is The Problem

For many, many years now, there has been a propaganda campaign to convince Americans that Big Government is the cause of all our problems. This campaign has succeeded beyond the wildest dreams of those who instigated it at Fox News, the U.S. Chamber of Commerce, and elsewhere. The same techniques have been used to discredit climate science. In recent times, political propaganda has given rise to the "Tea Party" movement, which has no coherent goal other than reducing the size of government. Today I would like to correct some common misconceptions about Big Government.
Why is the Empire in decline? There are many reasons, but perhaps the most important one is the takeover of the government by special interests. Thus the problem is Corrupt Government, not Big Government. This epidemic of corruption is entirely a bipartisan affair. The heavy hitters passing out the campaign contributions and helping legislators to "craft" our new laws bribe both the Democrats and the Republicans alike. The most powerful lobbies in Washington are the Finance, Health Care, and Defense industries.
When special interests manage the law-making process, the government loses the ability to manage itself. In particular, fiscal responsibility, which is incompatible with the special needs of these interests, goes out the window. This can be seen most clearly in health care (Medicare) spending and defense spending, both of which are totally out of control.
In line with the misconception that Big Government is the problem, you've probably heard about proposals to get rid of the Department of Energy or the Department of Education. All such proposals are irrelevant nonsense. Even if we consider how incompetent and politicized these departments have become, they probably do more good than harm on balance, and represent only a discretionary drop in the Federal spending bucket. But if we're going to get rid of them, let's make sure we throw in the Department of Homeland Security--I for one would sleep better knowing they're not around to "protect" me.
Unfortunately, Homeland Security is with us forever--so much for the evils of Big Government. Who would issue those terrorism alerts the government and media use to keep us terrorized? Both political parties support Imperial agendas to fight phony wars on terrorism (or drugs or whatever). In so far as the Empire is in the business of terrorizing or killing innocent civilians in Afghanistan and elsewhere, it is imperative to maintain the myth that Americans are the Good Guys, and thus keep the nation's psychological Shadow out of sight.

The Role Of Political Parties

If we consider the two political parties, we can easily discern their roles in the ongoing fiasco. The Republicans instigated and use the Big Government propaganda lie to further their own ends, or rather, the ends of their paymasters, who simply want to redirect more of the nation's wealth their way. Any money the government is taking in and spending to support ordinary Americans is not going into their pockets, which in their view is entirely unacceptable. Their view is rationalized by a bizarre belief in Trickle-Down economics, a stance which nobody in their right mind (or without a vested interest) could possibly swallow.
Thus Republicans consistently represent the interests of America's wealthy elites. Karl Marx wasn't kidding when he spoke of predatory capitalism and the natural concentration of the wealth that occurs in all such systems. Nor was Eisenhower kidding when he warned us about the "military-industrial" complex. All of the income & wealth inequality data show just how successful the owners of this country have been over the last 30 years in directing the country's great wealth their way. In the United States, it was necessary to co-opt the government to achieve their ends. This they did, and to good effect for them.
The Democrats present a different case. They must play the special interests corruption game or risk extinction. But in doing so, they undermine their own case that Big Goverment tempers predatory capitalism. Consequently, we get expensive health care reform that doesn't reform health care or bend the cost curve. We get financial reform that doesn't reform the banking system.
Thus the Democrats are ineffectual. The Republicans, acting as a block, slap them around and they take it. Their core beliefs no longer work in a dying Empire because the good government they believe in has been co-opted, and they are in on the deal. You can think of the Democrats as victims of Gresham's Law--bad money drives out good money--because bad government policy & spending drives out good government policy & spending.
Moreover, the Democrats don't own a propaganda machine that issues talking points about the virtues of government. It's too late to adopt such a strategy anyway. The Democrats take bribes just like the Republicans do. The Democrats don't speak with one voice. They are lost and confused in 2011. The Democrats are whipped.

The Traditional Role Of Government

So Big Government is not the problem, or at least it wasn't until special interests took it over. Decades ago, when Social Security and Medicare were enacted, the government made sure "capitalism works for everybody" as Howard Dean says in the video below. In short, the government redistributed the wealth.
In the post-World War II decades, the government would tax corporate profits and the wealthiest Americans, and then turn around and give that money to the elderly or the indigent. Or the government would build roads with it, as Eisenhower did in 1950s when we created the interstate highway system. By and large, the economy worked, although many people were still disenfranchised (e.g. the Blacks before the civil rights movement). It worked because the majority of Americans shared in the nation's wealth.
But the better days of old are long gone, the ranks of the poor are swelling, and the Middle Class is disappearing. This didn't happen overnight--it took nearly 30 years for the inequality to develop to its current point. In 2011, the Empire is far too corrupt for there to be new, equitable social arrangements that serve the larger public interest. Our political discourse has become so debased that it is almost impossible for ordinary Americans to understand what the actual problems are.
No one talks about vested interests, the political corruption that caters to those interests, lack of term limits, campaign contributions and lobbyists. All these factors undermine the traditional role of government. No one mentions the extraordinary Supreme Court decision under which corporations, having been accorded the rights of individuals, can contribute unlimited amounts of money to increasingly expensive political campaigns. It is damn near impossible to win elected office in this country without raising huge amounts of money. The money must come from somewhere, and just a moment's reflection suffices to tell us how elections must be won, and are won.

These money issues have been swept under the rug, which is what we would expect in a society where information coming from the "official" media is censored, though not often explicitly. Almost everybody in the mainstream media knows (at least unconsciously) what it is permissible to discuss, and what can not be talked about. If mainstream media figures want to keep their jobs, they must internalize and accept the rules. Consequently, most Americans live in a state of terminal confusion about the real causes of America's decline, which is another way of saying that propaganda and censorship work.
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