How an Economy Grows and Why It Crashes Hardcover – May 3, 2010

Not only does this book explain the material very well, being both easy to read and easy to understand, it contains ideas that I've not previously seen expressed that help make understanding the big picture even more clear. Schiff does this by making two very cogent points:1) The distinction between microeconomics and macroeconomics is bogus. Macroeconomics is what lets economists such as Keynes pretend that wealth-destroying policies create wealth.2) Deflation is not bad, but rather a necessary adjustment to economic realities. Deflation is unpleasant, but it is a result, not a cause, of an economy in recession.Schiff does a very good job at explaining what wealth is. Wealth is not equivalent to economic activity, nor does economic activity create wealth. Rather, the creation of wealth results in economic activity.This helped me reach a better clarity of understanding, namely that the mistake of "macroeconomics" or "Keynesianism" is to confuse the metrics of economic productivity with economic productivity itself. Economic activity is a valid metric of wealth creation, but only up to a point: it isn't valid to add to that number via inducing activities that don't create wealth, and then treat the higher number as a healthier economy. It's like confusing the number on a thermometer with the actual temperature (of the outdoors, of the room, of a patient's body). Thus the policies advocated by Keynesianism are often no more than like the strategy of a child pretending to be sick: he holds the thermometer next to the lightbulb while his mom is out of the room. His temperature isn't really 106, he just wants the benefits that he imagines would result from a temperature reading of 106 (namely staying home from school for a day). Keynesian policies move money around, and the metrics (taking the temperature) measure money moving around. It is easy to (temporarily) convince everyone that the economy is strong by moving money around, but eventually the truth that no wealth has been created is communicated to everyone, causing a bust ... at which point the Keynesians insist on more policies that move money around.The housing crisis is a good case in point. The government adopted several policies for various political reasons that made it very easy to move money around, turning housing into a commodity rather than an asset. As long as housing was an asset, it was real wealth, and its value would always go up. The moment it became a commodity, the values fluctuated wildly. Now the Keynesians want to jump start the housing market by pumping money into it (moving money around), ignoring the fact that there is now a surplus of housing that will take several years to clear up. All the pump priming will never erase the facts that no wealth is being created.Why do so many people subscribe to Keynesianism, if it is so obviously problematic? The issue is that it is not "obviously wrong" at all because the assumptions of the theory "prove" themselves via confirmation bias. Economic "stimulus" moves money around, and economic growth is measured by how much money moves around, thus the metric for economic growth hides the fact that wealth isn't created. This is where my analogy of the child pretending to be sick fails: the child knows the number is a lie. Keynesians have inadvertently fooled themselves into believing that the number is true.

Understanding how can economy crashes from the Austrian point of view can be very complicated. You have to know capital theory, what interest rates are, how resources are coordinated, etc. Many people do not have the time to learn all of this.Peter Schiff’s book tries to take these complicated theories and teaches his readers through a short story about the progression of a small island economy. Peter’s book is an updated version of his father’s book How an Economy Grows and Why It Doesn’t by adding recent events and characters to the story.The book introduces us to a little bit of history of the science of economics in the last hundred years. Peter talks about the early Austrians and the rise of Keynesianism in the 1930s as a counter to the Great Depression. Keynesianism became the dominant paradigm and has plagued economics and the world since.Once Upon a TimeThe story starts with three islanders – Able, Baker, and Charlie. They were in dire poverty. The only resource they can gather is fish, and only one per day since they are using their bare hands (just enough to survive in this story). Since they consumed everything they caught, there were no savings in case something bad had happened.But they wanted more for their lives than spending the entire day catching one fish. Able came up with an idea to create a fish catcher, but in order to create this device, he must sacrifice a day and become on the verge of starvation to try and produce this net since there are no savings. When he created this net, his productivity doubled as he is now able to catch two fish per day.Throughout the book, Peter slips in economic ideas by explaining what the islanders are doing and sums up these ideas at the end of each chapter. For example, when Able created the net, he had to sacrifice eating a fish for a day, which meant he underconsumed, in order to create a net, or a capital good.As the story progresses, as there are now savings thanks to Able’s invention of the net, economic expansion accelerates. Able is able to do more than just fish because he now has a net. As they continue to save and create capital goods, their lives become better.The story continues with the explanation of other economic theories, such as the interest rate and what they do, why banks are created, how trade expands, the division of labor, and finally, how governments inflate the currency and drive interest rates lower to create an economic boom with an inevitable crash.EpilogueThe story ends and Peter shifts to the modern day, as he explains how the bursting of the dot-com bubble and George Bush and Alan Greenspan’s heavy intervention into the market has fueled the bubble for the housing bubble and created the crash. He continues to describe how the government, instead of learning from the lessons of the past, keeps trying the same thing that caused the last crisis. When Obama came to office, he did the same thing Bush did, which was to stimulate the economy in order to make it look good for re-election. So if you really want to understand the cause of recessions in an easy and fun manner, Peter Schiff’s book will tell you a good story.