Since World War II, most economists
have been apologists for government
growth.[1] Now the "experts"
who never
see a crisis coming tell us that we must once again abandon
free-market principles to save the free-market system.
But there's always the possibility that
people not seated at the government's table will finally wise up. Who or what
could help them understand what's going on? People need someone to draw a
clear picture of what makes an economy thrive — briefly, without
jargon, and, most importantly for today's readers, in an entertaining
fashion.
Going Hungry for a Day
to Eat Better Later
A strong candidate for this task is
Peter Schiff and his illustrated book, How an Economy Grows and Why It Crashes, which he coauthored with
his brother, Andrew Schiff. Other elementary texts will continue to be
effective in conveying economic basics, but the Schiffs have a story to tell,
an extension of a tale first developed by their father, Irwin Schiff. There's
nothing quite like a story to get people turning the pages. And in this case,
the story is made more enjoyable by the creative work of illustrator Brendan Leach.
The authors waste no time getting to
the root of economic growth. In the opening chapter, we find three men on an
island — Able, Baker, and Charlie — fishing by hand, catching one
fish per day each, enough to sustain them until the following day when they
head into the surf again. Able gets an idea for an invention that might
enable him to catch more than one fish, but when will he have time to build
it? He spends all his waking hours working. Nor has he any assurance his
invention will work.
One day Able decides to take a chance.
He tells the others he will forego fishing for a day to fashion a device he
calls a net. They tell him he's crazy, but he goes hungry and succeeds. Using
his net, he's able to catch two fish a day, saving one and eating the other.
This allows him to spend half as much time fishing and more time working on
other ways to improve his life. (In this story, fish don't spoil.)
Schiff augments this narrative with the
first of many sidebars he calls a Reality Check. In this one, he points out
that Able, in progressing beyond hand-to-mouth existence, was underconsuming
and taking a risk.
At the end of this and every other
chapter he has a section called Takeaway. What lesson should the reader take
from the opening chapter? "By using our natural faculties we can create
tools to improve our lives … and to create an economy." No tools,
no economy.
Not surprisingly, the other two men
want nets but are unwilling to go hungry while they build them. They ask to
borrow Able's net on days when he isn't using it. He turns them down. They
ask him to loan them fish while they build their nets. He tells them he has
no assurance they will succeed. Finally, they propose to borrow fish and pay
him back at interest — for every fish he lends them they will pay him
back two. If they succeed, everyone will profit. Able accepts their proposal.
The men build their nets, and their
economy grows from three fish a day to six, a 100 percent increase.
In another Reality Check, Schiff points
out that "the economy didn't grow because they consumed more. They
consumed more because the economy grew."
From Barter to Money
As their savings grow, they have more
time to undertake other projects. They pool their savings and build a trap
that catches 30 fish a week. They never have to fish again. Able starts a
clothing company. Baker builds a canoe and a cart, while Charlie constructs a
surfboard.
Savings, ingenuity, hard work, risk
taking, and prudent lending move the economy upward. The island's prosperity
attracts and is able to support immigrants seeking a better life. Some of
them borrow fish to clear land for farming. People start offering services,
such as cooking and fish-trap maintenance. The economy becomes more
diversified.
And as it does, they discover they need
a better way to trade their goods or services. A spear maker may want the
services of a chef, but the chef may not want any spears. What they need is
something that can be traded for anything and that is acceptable to everyone.
They need money.
They settle on fish. Not only do fish
serve to facilitate trade, they can also be saved for old age and emergencies.
Money also allows people to specialize in what they do best. Duffy, for
example, can build a canoe with eight fish in savings rather than the ten
fish that others require. By charging nine fish per canoe, he makes a profit
and his customers save money. Over time, Duffy buys specialty tools with his
savings that allow him to build a canoe with only four fish. Duffy doubles
his production, and by charging six fish, doubles his profit margin and sells
canoes at a more affordable price (six fish instead of nine). A luxury
becomes an everyday commodity.
As productivity increased, prices fell,
benefiting the producer as well as his customers. Falling prices induce
people to save, which swells the amount of capital available for loans. The
Keynesian fear of falling prices was yet unknown.
A Middleman between
Saver and Borrower
Not everyone on the island is willing
to work for a better life. Some of them turn to stealing fish. Seeing an
opportunity, an entrepreneur named Max Goodbank decides to open a bank and
charge a storage fee for safeguarding people's savings.
With profits scarce from such a
service, Max decides to loan out the savings. To entice people to deposit
their fish he pays them interest. He charges borrowers a higher rate of
interest so he can pay his expenses and earn a profit. Max calls his
enterprise the Goodbank Savings and Loan.
"We
can either return to gold or we can pursue the fiat path and return to
barter."
Murray Rothbard
Max knows that a prosperous economy
would increase fish deposits. Interest on loans would then drop, but so would
interest paid to depositors. As savings diminished, Max would charge
borrowers a higher interest rate. He would also pay depositors a higher rate
to encourage more savings, and eventually the loan rate would come down.
The safety and convenience of the bank
attracts depositors, and Max is able to finance a huge waterworks project to
bring water inland. New pipelines mean previously infertile land can be made
into productive farmland. The steady flow of water can be used to harness
machines, giving birth to new industries.
The Birth of
Government
To settle disagreements and protect
themselves from violence, the islanders decide to form a limited government.
They elect 12 senators and a senator-in-chief with executive authority. The
senate would create a court system to settle disputes and a police squad to
enforce the decrees of judges. It would also create and regulate a navy of
spear-packing war canoes.
The islanders agree to pay a yearly
fish tax to finance the government. To keep the government confined to its
assigned responsibilities, they draft a constitution to spell out what it can
and cannot do. The constitution protects people from the government and protects
minorities from the tyrannies of majorities.
It is widely understood that government
could only function because it taxed producers. Government spending therefore
was really taxpayer spending, and only taxpayers could vote. The new country
is called Usonia.
As generations pass, the island's
economy continues to flourish. Then one day some creative senators decide the
original constitution was undemocratic in allowing only taxpayer suffrage.
The restriction is removed, and on election day the polls are crowded with
people who don't care much for government austerity.
The Birth of the Free
Lunch
It isn't long before an ambitious
senator named Franky Deep comes along with a radical idea. Franky loves
power, and the way to get it in politics is to promise voters free stuff. But
how could he carry it off? Government can only give by first taking.
After breezing into office as
senator-in-chief, he comes up with an idea for giving away more than
government has. To pay for his spending plans, Franky decides to issue
government paper money — Fish Reserve Notes — that can be
redeemed for actual fish stored at the Goodbank. Citizens could now use
either the fish or the notes in trade.
The island's chief judge points out
that the Constitution didn't authorize Franky to issue paper notes for fish.
Franky solves the problem by firing the judge. In his place he puts one of
his political buddies, who views the Constitution as "a living document"
subject to reinterpretation at the discretion of the chief judge.
Though uncomfortable with paper money
at first, the citizens begin to like it because it is more convenient to
carry. Those who redeem their notes for fish suspect they are not as big as
the original fish deposited, but comparing them is outlawed, so no one knows
for sure.
With a more progressive judge in
office, Franky's people find more spending projects for the government to
undertake. All they need is enough support from potential voters. The new
notes were the miracle solution.
"Once
the savers on the island realize that there is really no safety in bank
deposits, they'll stop saving! … Our whole economy could
collapse!"
Max
Goodbank VII
Taxpayers are pleased because the
spending doesn't require tax hikes, progressives love it because government
is showing it "cares," and politicians feel relieved because they
don't have to balance their budgets. The only potential problem is
economists, who might see the subtle theft taking place, but that is solved
by cutting them in on the deal with research grants and jobs.
Eventually, bank president Max Goodbank
VII starts making noise about government legerdemain. Franky replaces him
with Ally Greenfin, and Goodbank Savings and Loan becomes the Fish Reserve
Bank. The modern world is born.
The Fate of Usonia
The Schiffs are only getting started,
and to see how the former laissez-faire economy of Usonia ends up you will
find no better source than the book itself. Though the story illustrates critical
economic fundamentals, the authors carry it off with elegant infusions of
humor. Some examples: Franky Deep, Jim W. Bass, and Barry Ocuda as chief
executives, the "Carp for Carts" program, Finnie Mae and Fishy Mac,
Hank Plankton as the head fish accountant, and my favorite, Brent Barnacle,
who becomes Ally Greenfin's replacement and promises to drop notes from palm
trees if needed. Peter Schiff even pokes fun at himself, making reference to
Piker Skiff, TV's comic
relief man,
who warns of the pending hut collapse.
The Schiffs add a touch of satire when
Barnacle tells a conference that Usonia's policy of sending Fish Reserve
Notes to the island of Sinopia in exchange for fish and goods is merely the
latest development in economic specialization. With their voracious
appetites, Usonians "had a comparative advantage in consuming,"
while Sinopians were tops in the areas of savings and manufacturing things.
Many otherwise-good stories founder
with forgettable endings. But I suspect the final two lines of this story
will stay with you forever.
Given the critical role of money in an
economy, including the economy of Usonia, I would've preferred to see a more
detailed development of how the island economy moved from barter to money.
The authors tell us on page 52 that because "everyone on this island ate
fish, it was decided that fish would serve as money." Though I'm aware
of the authors' free-market convictions, the wording left me wondering if the
decision was done by a committee rather than the market.
People who find anything related to
economics tedious will find the Schiff book an exciting discovery. It should
have special appeal to Austrians at all levels of expertise, while the
Keynesian wizards who laughed at Peter Schiff when he predicted the housing
collapse will likely disdain it.
It
might be the only economics book ever written that could be read aloud to
one's family without putting them to sleep. The narrative never once lags or
becomes academic. The authors manage to convey the critical concepts without
straying from their "Connecticut straight-talk" approach.
The Schiffs' tale of Usonia would make
an excellent text for a "pre-economics" course, as a way of burning
in the basics and of showing how they apply to the US history of the past 100
years. Precalculus is a requirement for premed, as one of my daughters has
discovered. A "pre-econ" class featuring How an Economy Works
and Why It Crashes would make it clear how government interventions
operate in diametric opposition to the medical principle of primum
non nocere
("first, do no harm"), with predictable results.
The Schiffs have hit one out of the
park. I'm already introducing parts of their book to my five-year-old
grandson — who enjoys fishing.
George F. Smith
Read his book : The
Flight of the Barbarous Relic
Visit his website
Read his blog
George F. Smith is the author of The Flight of the
Barbarous Relic, a novel about a renegade Fed chairman and the editor of
Barbarous Relic.com.
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