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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