My Summary of Fukuyama's Political Order and Political Decay

The first book I read that contains so long list of reference is Basic Economics of Thomas Sowell. When I read this book, I was surprised that it ended at 70% of its Kindle version. Another 30% is the long list of reference.

Clearly, the author is a well-read political scientist. He combines very relevant sources of knowledge to his topic. After reading this book, as not a student of political science, I feel my knowledge is doubled, perhaps due my scant knowledge in the subject. When I read Henry Kissinger's On China, the word Order was used widely. I could not even decipher its meaning!!! However, Francis put in plainly, and the use of its opposite political decay helps me to understand deeper.

This book targets those who are interested in developing a country. To build a country, one good leader is far from sufficient. A learned reader would not deny that one needs a good system or institution to run a company, an NGO, an institution or any organization that involves human society. Specifically, how to develop a sustainable institution or institutions i.e. political order and what kinds of elements may those institutions collapse i.e. political decay? There are three core elements for a political order: State, the Rule of Law and Accountability. The consistent balance between the three pillars make a sustainable political order.

State

There are many possible reasons as to why and how a State was formed. For instance, the need for a strong army, with an efficient ability to collect tax, to defend one's own country from foreign invasion is one of the main reasons, and it happened to countries such as Prussia, early Qing  Dynasty etc. The State holds monopoly power and is able to enforce laws or customs in their controlled territories on all residents.

Rule of Law

All early dynasties, at their most clean form, ruled by law. All people are under the law except the monarch. This is efficient in controlling the subordinate but fail to create a political order because people, in their genes, think people are equal, at least at the back of their head.

The rule of law is also indispensable for economic development. Without clearly defined and enforced property rights, no one has incentives to make the best use of their property as well as to develop it further, as a result the economy stagnates.

The State itself has to be under the law as well. No one is above the law. In addition, the law has to be impersonal,i.e. not created in favor of this or that group even to the poor.

Is the decision making has to be rule-based or discretionary? This is an old question. The author posits that Denmark has the most efficient in terms of the rule of law and discretionary decision makings. The U.S government has many principals (to use economic concept of principal-agent problem) and contradictory rules. 

Accountability

I believe the author is a free marketeer. However, he is not a libertarian thinker. I believe he is one of the few political scientists who understands economics very well and reject some of its theories very well as well. For instance, the concept of fairness. Redistribution of wealth, he acknowledges, creates disincentives and distorts economic activities. However, people have different view regarding fairness. When people see a bunch of their neighbors are extremely rich beyond their imagination, they may feel it unfair and ask for or vote for redistribution. If the demand for redistribution is high, like in Europe, the political order is less stable when people choose politicians who redistribute instead of smart and responsible ones. People need a government because they have reasons to expect from government and/or politicians, where sometimes they cannot differentiate. Thus, clientelism and patronage, if not tamed, will play irritating parts in politics.  

I hope this summary induces you to read the book, not to stop here!!!

Title: Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy

Hardcover: 672 pages
Publisher: Farrar, Straus and Giroux (September 30, 2014)
Language: English

My rating: 5/5

See also his The End of History and the Last Man

Political Order and Political Decay

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A Review on The Commanding Height

As its title suggests, in this book the authors attempt to contemplate on who should control your life, who should run the economy, or how laws should be based on. This is the never-ending debate on big government versus small government, Keynesianism versus Classical Economics, liberal democracy versus communism, dictatorship, monarchy you name it. For those who are curious how popular economics can change life, this book is best.

The time frame this book deals with is mainly during the Cold War, the confrontation between communism of Soviet Union and China and Western democracy. Key players include Margaret Thatcher of UK, Ronald Reagan of the United States, Gorbachev of the Soviet Union, Deng Xiao Ping of China and some leaders of developing countries trying to lift their country out of poverty. Nonetheless, what is more interesting is ideas behind those leaders. Those ideas are from mainly economists including Milton Friedman and F.A. Hayek, the latter’s name is quite uncommon to even economists. 

Keynes lost the battle to Friedman and Hayek during the 1980s till 1990s at least in the United States and the UK. It was manifested that government cannot control the economy. The Fed could not and should not use its monetary tool to offset recession or create a free boom for the economy. Regulations hurt the economy. 

The battle is not over. Reagan’s tax cut, for instance, is seen, for instance by a Nobel laureate in economics Joseph E. Stiglitz (Globalization and Its Discontent, and the Price of Inequality), as widening wealth gap between the rich and poor and hurt the economy. Recently, since Bush administration up until now, Keynesianism is prevalent in the Fed. 

This book is so famous and influential that the U.S public media PBS made it into TV Show. I hope after reading and watching it, you will recommend it as a must-read book and/or must-watch show. 

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A Note on From Dictatorship to Democracy

In Why Nations Fail or related topics especially those of economic development or political science, we cannot see how to develop a country suppose you were a victim in a failed country. At least you are not the leader of a country [you would not read this piece of writing if you were!]. This book attempts to give guidelines, at least hope, for the victims, the suppressed, of dictatorship to topple dictatorship to set up a lasting democracy. Those who aspire to install democracy in their own country are the targeted audience of this book. Those who want to be a citizen of a country instead of a slave for other men are encouraged to read this book. 

Personally, this book gives me hopes, a hope that democracy can be set up in any country and there is a way you can switch from dictatorship to democracy. 

I read the 4th US edition, kindle version. Below are its sections:

1. Facing Dictatorships Realistically

In Cambodia, for instance, people around me always hope for the interventions of US, UN or EU to lift their country out of poverty and dictatorship. People need to know that they need democracy. Thus, it has to come from within. This is not to say that US interventions, for instance, are useless but it has to begin with that end it mine: teach them to democratize. 

Violence does not end dictatorship. It removes one for another to come. 

2. The Dangers of Negotiations

Negotiations can be used under certain situations. That is possible when there is a strong democratic opposition. In addition, political defiance is necessary. 

3. Whence Comes the Power?

Where does political power, or any kind of power, come from? Why people do what other people tell them to do? The answer to these questions also tell what weaknesses dictatorships have. 

4. Dictatorships Have Weaknesses

5. Exercising Power

Where should one start? Where is democratic opposition strongest? Military struggle? Of course not. That is where dictatorship is strongest. Tautology one may say. Political defiance is the answer. 

6. The Need for Strategic Planning

One may see the spontaneity of popular uprisings against dictatorship in many countries such as in Arab Spring. Dictatorship does not last as it can't have another good dictator to continue its unpopular regime. Democracy would not last as well if democrats do not plan for its full installation. The latter sections deal with the need to plan, how to plan, how to apply the political appliance to disintegrate the dictatorship and lastly how to make democracy last. 

7. Planning Strategy

8. Applying Political Defiance

9. Disintegrating the Dictatorship

10. Groundwork for Durable Democracy

Full title: From Dictatorship to Democracy: A Conceptual Framework for Liberation

Publisher: Albert Einstein Institution, May 2010

Author: Gene Sharp

My rating: 5/5

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The Worldly Philosophers

A graduate student who could write such a good book is an exceptionally brilliant person. His novel style of writing manifested in this book keeps readers curious and allows readers to be back in the time of those economic thinkers. 

Although the author well summarizes main ideas of those philosophers, he frequently focuses less on their defects and weight them against their main theory. Any thinkers have their philosophical opponents, at least in their time. This book is not about which school of thought is right or describes economy more correctly, but about the ideas of those worldly philosophers. 

Although it is a good book, it is not very good. I do not rate it 5 over 5 because, firstly, when one can summarize opposing ideas, one should be able to see which is more reasonable. Secondly, I expect more rigorous study on an idea and its opposing view. For instance: 

Adam Smith

It is very safe to admire Adam Smith in economics. He is known as the father of economics by many. However, I really doubt people actually read him. It is a sad thing that the author of this book who also wrote Essential Adam Smith missed contradictory points in his books. We tend to think that those free market ideas such as laissez faire, free trade, wealth vs gold were originated from Adam Smith. 

I read Adam Smith’s The Wealth of Nations, the abridged edition with summary inside for each section, a few times and found many contradictory points in principle in this same book. For example, the government role in the economy should be big instead of three main ones: promoting rule of law, national defense and high cost public investment. Here I am not discussing in details. I suggest another book An Austrian Perspective on Economic History which deals with this issue comprehensively. 

Alfred Marshall

Standing on the shoulder of marginal economists, Marshall could develop the demand and supply curve as we know it today. This is the beginning of modern mathematical economics. In this book, credit was given to Marshall but least to previous marginal economists. In addition, I also feel how powerful this idea is to solve Adam Smith’s Diamond Paradox is not even touched. Those who are curious why P-curve is vertical, not horizontal, are advised to dig into this part.

Joseph Schumpeter 

Schumpeter opined that capitalism would not work. Growth in capitalism is promoted by entrepreneurship of capitalists. Capitalists invest to increase profits. In the long run, they would run out of ideas on what to invest or the profits become zero by competition from other capitalists. This idea of creative destruction is today denied. The author this time takes side.

John Maynard Keynes

Keynes biography, accomplishments and theory are very well summarized. However, his main philosophical opponents Milton Friedman and F.A Hayek are not included. Hayek and his book The Road to Serfdom, however, was used as a wake-up call on Keynes theory that might lead to nothing but socialism. Keynes acknowledged that possibility but put more trust (or hope) on government officials. 

Final Say

As its full title suggests, this book is about the lives, times and ideas of those economic thinkers. Those who are puzzling on which school of thought is better, for instance Classical versus Keynesianism, or those who try to find the connection between long run and short run economy may not find the answer here. (I suggest The Clash of the Century). In conclusion, however, this is a good book for its title.

Full title: The Worldly Philosophers: The Lives, Times And Ideas Of The Great Economic Thinkers, Sixth Edition (1986), Touchstone

Author: Robert L. Heilbroner  

My rating: 4/5

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Theoretical Research vs. Empirical Research in Economics

Back in Waseda University, I was wondering what a theoretical research in economics is and how different it is from an empirical one. Most students from Cambodia, at least, choose empirical research for both undergraduate and graduate studies. I do not like empirical research because  I would have to look at computer screen with millions of data there. It took me quite a long time to see the difference and finally I chose empirical research. Here I hope to help you see the difference in a short period of time.

Theory, as it sounds, is about explaining how things work. For instance, you may say consumer behavior of spending this month is dependent on their income this month. If you think this is correct, you will find proof to prove that your income this month affects your spending this month. Thus, your research here is empirical. If you think that your behavior of spending this month is dependent on your income this month, next month and several months ahead, you will do a theoretical research because you are modifying the previous theory. 

Is theoretical research about description? If you are a genius, it is true! your description of the theory is more than sufficient. For instance, F.A. Hayek's The Use of Knowledge in the Society is a theoretical paper which uses only words to describe his theory. You may find plethora of such paper as well. However, as a student, even in a Ph.D program, theory research tends to mean utilization of mathematics. You will have to use mathematics to prove your theory. Milton Friedman's Permanent Income Hypothesis, for instance, utilizes the simple concept of marginal utility of consumption. 

Mathematics is not about calculation only. Its underlying concept is the most important part in theoretical research. For instance, Y= X and X=Y are different, with the latter meaning that Y causes X; X happens as a result of Y.  If you like this kind of concept in mathematics, you will find theoretical paper interesting. 

Empirical research is about proving or disproving an existing theory. The theory may not be a perfect one for you to prove or disprove. Using the above example, you may think incomes for two months determine your behavior of spending this month.  In that case, you have to modify the theory first; that means somehow you will include the theoretical part in addition to the main part of your empirical research. Still, your research is an empirical one. Nonetheless, it is not important to classify if your paper an empirical or theoretical one. You definitely can do both in a paper. 

See my Master's Thesis as an example of theoretical research in economics.

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An Example of Theoretical Research in Economics, Master's Thesis

My Master's paper is not the best paper, nor is it rigorous. It is not published any where else. I publish it here with the sole purpose: to allow you to take it as an example for your research and write a better one.

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Rich Dad, Poor Dad

I was curious about finance and surfed the web for the best book for laymen like me. The title came up but I did not dig into it. However, when I walked in different libraries in my graduate school of Waseda University, I frequently saw it in both Japanese and English versions, which means it is seemingly popular. So I decided to read it. I put it in my iPhone, printed out some pages and also borrow the English version from my library. 

The book is fun to read, plain, coherent and very insightful. I did not get bored reading any part of the book. In fact, I greatly enjoyed reading it. Not only his writing skill that keeps me reading it till the end but also the issues he is trying to deal with that arouses my curiosity. Below are some main ideas he deals with.

Work for Other or Run Your Own Business? 

If  you were born in a family who owns no business, like my family, you tend to focus on secure job and wage you receive per month. At worst, you even hate businessmen as you were taught, by religion perhaps, that profit is a sin. There is a high chance you were taught that aspiration to acquire wealth is bad and you have to control this kind of sinful ambition.

Even if you were born in a family who owns a (successful) business, perhaps it is not your choice to continue the business. You may like working in a company, for a government or charity organization or run a different business instead of fulfilling your parents' wish to continue their business. 

This book would help you answer this question. Spoiler: the answer of course varies from one person to another. 

Can You Become Rich?

Throughout this book, he teaches readers about financial literacy you may have not learned elsewhere. He teaches not only that you can become rich ( I am not talking about every one being a millionaire), but also that you should want to become rich. Of course not all people aspire to become rich or exceptionally rich. There are also significant number of people who desperately want to be rich. In either case, instead of saying you should become a millionaire, he just wants to share his experience of how you can unlock your potentials to increase your wealth, thus the wealth of the society.

Government or Entrepreneur?

Again, this book touches the debate of how far the government should intervene in private life. What the use of business is in the society?  What is the use of government then? Are you sure you know it? 

Does Smart Mean Rich? 

Of course not, exclaim you. Rich does not imply smart as well. However, it is a sad thing when you are smart when stay poor, or when you are rich but stay dumb. 

Final Words

What the most important concept in this book is that he does not say you have to be an entrepreneur, to work in a government sector, in a private company or else. Ask yourself what you like and do best, and plan for it, but in addition to it business is important. The concept of business can raise your wealth in a great deal. Raising your wealth is not a sin. In stead it means you provide goods or service in return for the wealth. 

I believe this book will change your mindsets, for good, toward education, business, government and society.

Full title: Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!
Author:  Robert T. Kiyosaki
Publisher: Plata Publishing; 8.2.2011 edition (August 16, 2011)
My rating : 5/5

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The Constitution of Liberty

The book as well as the author are well-known but not as one would expect, although the ideas have changed the world in a great extent. Most students of economics do not even know his name. Some professors do hear his name but never actually read his books. That is my experience while I studied in Japan as well as of today when I asked people around me about that... Of course, if you read only textbooks, you would probably never hear his name. I got to know his two most famous books The Constitution of Liberty and The Road to Serfdom when I read Milton Friedman's Free to Choose and Capitalism and Freedom. I borrowed The Constitution from my library, read a few pages of it, and decided to own it ( I mean buy it, not steal from the library!)

Academically, Hayek was lonely in his time until he won the Nobel Prize in Economics in 1974. The world faced the threat of communism, and in the free world governments were very big as well. From price floor, price ceiling, regulations to extensive government programs, one can find various examples of insatiable government intervention in the economy. Liberty and free market economy were considered obsolete.

Its Influences

As a member of a poor family and a student from a poor country, a country where communism took controls for approximately 25 years, I had no idea what the rule of law is, nor did I know what it mean by free market economy, liberty, democracy and communism. This book did shed light, very bright one, on me. Maybe leaders across the globe were as ignorant s as I was as well. After all, it was Margaret Thatcher and Ronald Reagan that applied theories in his book and revolutionized their  economic policies against the mainstream.  

Main Points

The Institute of Economic Affairs reserves the rights and published this book for sale and for free in the internet. In that version, there are summary, forewords and comments from other professors that already well summarize the main points. Thus, I will talk only about the main points of the book that influenced me and in my own words.

This book is about the interconnection between all factors in the society, not limited to economy. It deals with law, politics, human and economics altogether. By that, it seems the foundations of law, politics and economics, among others, are just one. For instance, freedom in politics is freedom in economics if there is freedom.

This book mainly is a compilation of Hayek's article in various journals. One article that won my deep admiration is Why the Worst Get on Top. People tend to think that a country, for instance, would prosper if it is run by a good king. Or an economic policy would be successful if the policy maker is a good and well qualified person. What its relation is there with that the bad people getting on top then?I challenge you to read this chapter, to begin with.

Conundrums

Even among Hayekians, there are debates on the necessity of social safety net and subsidy on education.

Keynesians believe, at least in the short-run, that lowering interest rate can cut short recessions or boost the economy in the short-run and hitherto it may end up in inflation in the long run. Hayek disagreed and became the main opponent of Keynes in this matter. (See also Free to Choose) Mal-investment is another huge problem. High risk high return. The high interest rate, in the same sense, reflects the high associated risks. If the government makes the interest rate artificially low, investors are misled by the cheap credit and invest in the wrong way, resulted in for example housing bubble and dot com bubble.

Keynes believed that macroeconomy can hardly be at equilibrium. Thus, the government must take a very active role in matching the demand and supply of macroeconomic factors, especially control the money supply. Hayek disagreed. He thought private sectors can supply the money to match with their own demand the way they do in other supply. Private sectors respond to the fluctuation of demand and supply faster and more efficiently. Thus, Hayek proposed the denationalization of money.

My Intervention

Denationalization of money? Is it the first time to hear this? When I read this book, it was my first time to hear it, and all I thought of was the considerable cost of money exchanges between currencies issued in one country. Can you imagine the U.S having 60 currencies for instance?

As time goes by, I read more books on economic history. It has been the state that requires by law all people in their territory to use single currency issued by the state. I think one can infer from this fact. Politics plays higher role than economics in this debate.

Author: F.A. Hayek (1899-1992)
Publisher: The University of Chicago Press (October 15, 1978) and Institute of Economic Research
My rating: 5/5.
This book is complimented by another book of his The Road to Serfdom

See also: Econlib review of Hayek

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Free to Choose

Prof. Mankiw of Harvard has written two worldly popular textbooks in economics: Principles of Economics and Macroeconomics. There are many universities and professors who use his textbooks in classrooms. In my university, Kobe University, his textbooks are popular for undergraduate and graduate levels. I enormously like his books, and that is where I got to know the book Free to Choose. 

 

In his note on his further reading at the end of the Principles, Mankiw put it as something like How market economy improves society. This description of him did not catch my attention that much. However, the title Free to Choose did catch my attention. What does it mean by free, and choose what?

Smart people who make themselves easily understandable are admirable. Milton Friedman, a Nobel Laureate in economics science, is also a brilliant writer. This book is fun to read, coherent and stick to the point. His main idea is simple: as long as you are free to choose, the society is prosperous and the economy keeps growing. This principle is loud and clear. All examples throughout this book follow this principle except one (see Conundrum below). 

His ideas in the book largely were built upon those of Adam Smith and Bastiat. To put it in two simple sentences: voluntary cooperation between individuals in the society is the main engine of prosperity and justice. Government role in the society is to facilitate those voluntary cooperation. Did I just say Justice? Friedman is in the school of thought that postulate that voluntary cooperation is a just action. (For more on justice, see Justice: What’s the Right Thing to Do, by Michael Sandel, not yet reviewed here).

The most important parts of this book, to me, are the prefaces and the first chapter The Power of Market. The power of market is exemplified by that fact that people from East Germany risked their lives crossing the Berlin Wall to find opportunities, to where they can freely choose and make the decisions they think are right and not the decisions imposed on them by people in the government in the name of love. 

The most eye-opening examples the authors used that make readers (including Nobel Laureate Gary Becker) see how relevant economics in the society is choice in education: What’s Wrong with Our Schools? Have you ever asked who should run a school? Is it not ubiquitous that schools are run by the government? People also take for granted that good schools are run by government, and to be a prestigious schools, they have to be run by a government. Cambodians would look at examples of prestigious universities in Singapore, for instance the National University of Singapore. People in Japan are also in a similar situation where they see national universities such as The University of Tokyo, Osaka University etc. as the prime examples of superiority of state-run universities over private-run ones such Waseda University and Keio University. If you think so, I challenge you to read this book. If you are an educational reformer who have no specific idea in mind yet, this book is best for you as well. Friedman popularized the concept of school choice, or voucher school.  

Because the authors explained how economy works and people cooperate in societies in plain language, various Third World leaders were thankful to the book, for instance, Estonian Prime Minister Mart Laar.

The Conundrum

There are two main opponents of Keynes: Milton Friedman and F.A Hayek. As a student, however, Friedman was a Keynesian. Every one tended to be one in his time. As a matter of fact, he later won the Nobel Prize in Economic Science by disproving Keynesian fiscal policy. Keynes postulated that consumers consider their current income before making decision to spend. Friedman, in contrast, theoretically and empirically proved that people make decisions on how much to spend basing on their expected long-term income (Permanent Income Hypothesis). Thus, according to Friedman, a tax cut to increase spending is ineffective. 

Another debate is with regard to monetary policy. Instead of discretionary monetary policy, he favored rule-based policy. The reason is the market is stronger that government and so complicated that government can manipulate it with its monetary tool. Thus, supplying money basing on expected economic growth is the safest measure. For example, if the economy is expected to grow 2 % next year, the central should just supply money 2% more, not less to impede growth, not more to induce inflation.

One point that people tend to misunderstand Friedman is with the regard to the abolition of the Fed. Milton Friedman was for the abolition of the Fed. He agreed with Hayek that market can supply money more effectively and efficiently to meet their own needs of money than the government can. Because the possibility of the abolition of the Fed was too slim, he postulated the above-mentioned Monetarism. This is where Friedman did not focus on freedom to choose. Is freedom to choose who to supply your notes good for the society? 

My Intervention

There are many providers of phone service around you. Why do you think we need many providers? Why not ask government to keep only one? Competition is favorable to the economy, you may say. Decentralized management, i.e. two companies managing it instead of one big company, is more efficient, you continue. You name it. So why government allows only one money supplier, namely itself? 

Economists divide functions of money into three: unit of account- what you use to count how much a goods is, store of value- for what you save, and medium of exchange- you can use money instead of changing a book for a tire of a bike. These functions make money special that require central control. I agree with this description (cause I am the one who wrote it here!). However, it is not enough to restrict the supply to only government. No king wants an opposition party!!!

Full title: Free to Choose: A Personal Statement Paperback – November 26, 1990

Authors:  Milton Friedman (1912-2006) , Rose Friedman(1910-2009)

Publisher: Mariner Books; LATER PRINTING edition (November 26, 1990)
My rating: 5/5
This book is complimented by another book of Friedman: Capitalism and Freedom.

See also: 
PBS TV series: Free to Choose (1980) and Free to Choose TV (www.freetochoose.tv/)

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Economics in One Lesson

I have no reservation to say that Economics in One Lesson is one of few books in economics that can explain economics in simplest ways for laymen and economists alike. Giant economists such as Adam Smith, John Maynard Keynes and F.A. Hayek were far from being able to do so. This is one of the reasons that I include it in my 5 must read books in economics.

Clearly this book is an updated version of Bastiat’s That Which is Seen, and That Which is Not Seen.  Although on which the emphasis of the cost is or should be is different from one another, economists of every school of thought agree to this concept of Opportunity Cost, . This is the only one lesson that the author tried to emphasize throughout this book by using extensive examples of national policy debates. 

The Economy Only Grows by Productive Activities

 

 Negative Effects of Taxation

 

Suppose you buy one bottle of $1 Coca Cola every day for ten days. Then you spend $10 in ten days. Now the government taxes imposes tax on the Coca Cola drink, which now cost $1.1. Now you have to spend $11. And the government receives $1 through taxation. The negative or positive effect of taxation depends on how the government spends the money. If the government spends it on the enforcement of contracts, for example, the government provides a service back to you, to the Coca Cola Company as well as to the whole economy. Thus, it provides something as a return for the money. It is the same way as your income of $10 where you get via a job, through which you offer something in return. This is how the economy grows. However, if the government uses it, for instance, to give to your friend, the government does not produce something new or offer something in return for it. Thus, this activity impose a negative effect on the economy. In this regard, as examples in the books go, random taxation such as tariff, excise, income tax, consumption tax etc. tend to induce negative more than positive effects on the economy.

Price System

 

They say economics is all about demand and supply. Understanding what the demand and supply together produce is one step further. I won’t take the credit by trying to explain here.

Why are you employed? Because the employer thinks you would provide something in return for the money he offers. Why you choose this employer over that employer? Because that employer offers something better than this employer, be it relationship, monetary benefits or social status. Those are factors of supply and demand which eventually determine price, in this case wage. Along the way, the author continues to explain that the minimum wage, price control, price floor and various kinds of subsidies are counter-productive. Neither are efforts to keep workers employed to keep unemployment rate in the economy fruitful.

 

Is Profit a Sin?

 

This is a very old question. Students of religions like to debate about this. In fact, Christianity and Islam in the past (and now to some extent) forbad the lending of money with interest rate. You think about profit when you do good deeds, thus it is a sin. Is it? How many sins Steve Jobs committed when he thought about profits, along with the sense of achievement, producing iPhone, iPad and MacBook? How about the methods to get profit? “How to get the profit” is the question then. What kind of policy should a government focus then to make profits least associated with sins? I believe you would find the answers in this book, in addition to what the free market economy is, how a country grows rich and somehow on the rule of law and property rights.

 

The Conundrum

 

Here comes the great debate in economics. Inflation is bad for the economy in the long-run, most economists agree, but is it good in the short-run, say several months to a few years? Can or should a policymaker induce inflation to lift an economy out of recession? As a member of Austrian School of Thought, the author disagreed. In contrast, members of Keynesian School of Thought such as Harvard prof. Gregory Mankiw, Nobel Laureates Paul Krugman and Joseph E. Stiglitz, agree.

 

My Intervention 

 

I agree with the idea that prices do not adjust immediately in response to sudden changes in the economy such as oil supply shock. However, I do not think it is a problem. Prices are the result not a cause of their respective demand and supply, thus the speed of price adjustment is totally dependent on the demand and supply itself. In addition, one cannot differentiate long-run sectors with short-run sectors. In a simpler example, a country is big; some parts are cold and some parts and hot. The average of temperature does not represent the situation of the country. Thus, in economics, using aggregate data are not effective.

Full title: Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

Author: Henry Hazlitt (1894-1993)

Publisher: Crown Business; Later Reprint edition (December 14, 1988)

My rating: 4.5/5

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