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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The End of History and the Last Man

What does it mean by The End of History? and the Last Man?

Both expressions are highly correlated. Although the author, Francis Fukuyama, does not quote Ibrahim Maslow, his arguments follow him closely while debating with old time philosophers such as Hegel, Karl Marx, Plato, Socrates etc.

While Maslow depicts human needs in order from basic to the need of recognition, political philosophers emphasize that those needs shape the form of government. Human history is about the history of those development, from tribal rule, monarchy, communism, Nazism, dictatorship so on and so forth. The need of recognition is the considered the highest form in human- the last man- and the political system that in principle recognizes this and sticks to it is the final form of government i.e. this will be no more history.

The desire to be recognized as a human being with dignity drove man at the beginning of history into a bloody battle to the death for prestige. The outcome of this battle was a division of human society into a class of masters, who were willing to risk their lives, and a class of slaves, those who gave in to their natural fear of death. But the relationship of lordship and bondage, which took a wide variety of forms in all of the unequal, aristocratic societies that have characterized the greater part of human history, failed ultimately to satisfy the desire for recognition of either the masters or the slaves.  He suggests that the evolution of the system of government will end in liberalism where human have equal rights, at least in principles and institutions.

He suggests that the evolution of the systems of governments will end in liberalism (liberal democracy) where human have equal rights, at least in principles and institutions. Thus, the Cold War is the test of the theory, and liberal democracy will last (that does not mean democratic countries have no issue to solve in a daily basis.)

While he argues that the system of liberal democracy is the only system that makes human human, he also raises the need of the debate between liberty and equality. Liberty promotes prosperity but the result may be disappointing for some. The sense of liberty also removes, at least to some extent, the sense of community and the sense of belonging to it. 

In his simple expression, Liberal Democracy = free market economics + freedom of democratic politics.

Convinced or not, I believe it is worth reading.

"A bold and brilliant work. Very, very impressive."~ Irving Kristol.

The End of History and the Last Man, 1992

Author: Francis Fukuyama.

Publisher: Free Press.
My rating: 4.5/5.

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Essays on Liberty

Summary 

The birth of modern government system began with two simple principles: one is government is to protect one citizen from being abused by another citizen. Two is government is to protect itself from abusing citizens. The first principle requires that government sets up laws to protect property rights of all citizens. The second principle requires that government assigns limited roles to itself and there be clear laws specifying that the government cannot do specific actions such as taxes on this or that. That is government should be small. As a matter of fact, the war for independence began with the British government charged too high tax on American colony. 

Current U.S governments are far from being small and more principles, in addition to the simple two, are implicitly included. Medicaid, Medicare, Social Security, those social programs are added to the government spending, which eventually requires higher and higher taxation.

"Paul wants some of Peter's property. For moral as well as legal reasons, Paul is unable personally to accomplish this desire. Paul therefore persuades government to tax Peter in order to provide funds with which the government pays Paul a 'subsidy'. Paul now has what he wanted. His conscience is clear and he has proceeded 'according to law."

Does it change the situation if it is the government that persuades Paul to vote them in exchange for the subsidy?

Set your principles first, then degree. 

Who should read it

This book is a collection of essays by freedom lovers, some may call it libertarian or classical liberal (because it is the original sense of liberty in its creation). For Cambodians, and other people from developing countries, I believe it is crucial to understand the concept of liberty.  Because liberty refers to the freedom you would get from the rule of law, it is far from what most people in developing countries misunderstand. Currently, governments in developed countries differ in  degree of their belief in the principles of liberty. More and more taxes are imposed on citizens.

It is a good beginning for those who are interested in the principle of the rule of law, democratic government and free market economy. Those who are familiar with example of minimum wages, labor union rigor in socialist countries in Europe may find these essays disturbing. Keynesian economists, as prominent as Paul Krugman and Joseph Stiglitz, may find these essays archaic. 

Authors: Henry Hazlitt, James Madison, Ludwig Ludwig von Mises, et al.
Publisher: Foundation for Economic Education, July 3, 2013.
My rating: 4.5/5

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