How an economy grows and why it crashes

I recently finished reading the book How an Economy Grows and Why It Crashes on the inter-city train between Chengdu and Chongqing.

This is a fascinating economy book with very interesting stories which explains economy in a nutshell successfully. It uses the language that Children understand to explain a lot of big words such as the emergence of economy, credit card, money, saving, government, China-United States relations, financial crisis, housing price and European debit crisis. I can’t recall every detail very clearly now, which makes me decide to read it again after a while, but those buzzwords now make more sense to me than before.

I can recall the essence of economy quite clearly here, and here is the story. There was an island of three people. To waive the effort of math, I simplified it to two people here. Both people on the island made their livings by fishing and eating the only fish they can catch every day.

They had to work everyday, regardless of the weather or health condition, otherwise they would starve on the day in the absence of work.

Luckily, the extreme condition in which they couldn’t work never happened, so they lived quite a peaceful yet boring life.

One day, one of them suddenly had the idea to make a tool so they can fish more effectively, they would therefore be able to rest if they didn’t want to work. However, nobody could assure the success. If the time is invested in making tools, there would be no time spent on fishing. That means the person who chose to make tools would starve if the attempt to make tools failed.

The person who came up with this idea decided to take the risk. They starved on the first a few days while making the tool, but eventually they made a net.

This net soon returned huge benefits to them because now the person who owned the net could work one day and rest on the next day because their productivity doubled due to the newly invented tool.

Seeing the benefits of the net, now the other people on the island also wanted nets, but they are less risk tolerant than the trailblazer. After some negotiation, they made a deal of fish loan to support other people so nobody starved while they tried to make their own nets. This was only possible when the net owner worked everyday so there were some fish savings which could be consumed by everyone. In return, the other people would pay the loan issuer double amount of fish they borrowed.

As a result, everyone on the island owned nets. Now they had more time to relax, research and explore other things of their interest on which they never had the time to spend. The economy on the island grows.

This is a very interesting story. It reveals the essence of the economy growth is the acceleration of productivity. This is probably why GDP (Gross Domestic Product) is usually the measure of the scale of national economy.

I also learned a few new things from this book:

1. capital is not always evil

As I am quite skeptical to the capitalism system, I usually thought the capital is evil because the capitalists earn their livings by exploiting and harming the benefits of workers.

I haven’t change this thought so far, but now I understand it doesn’t mean the capital itself is bad. Thinking the story of net, after the first person had the net, how could everyone else also have it?

The net owner could selflessly lend the net to other people, but that would be generally unfair. Other people may not use the net responsibly either since it can be acquired too easily. In fact, this would impose a great risk to the net owner, and it would not be systematically beneficial to the general economy growth either.

The net owner could also lend their saving, which is what they chose to do in the story. Although it seems the net owner took advantages of the worker, they still took the risk of losing their saving if other people didn’t successfully make their nets, hence the debt could never be paid off given the limited productivity without the net. Comparing this option with the previous one, this in whichever perspective looks more fair.

The authors of this book pointed out that egoism fuels the economy. If people are not motivated by their individual benefits, no one will work hard for the whole economy.

2. Cash is a tool

I always understand that the amount of cash in the market can be controlled by the government, but I never figured out what implication it means. After reading this book, I understand that the cash is a tool of the government to manipulate the economy and society.

In the western democracy, the national leader is elected by everyone. This sounds cool, but from the history, it doesn’t seem to work so amazingly. Since the candidate who gets the highest votes win the election, those candidates who make unrealistic promises always have a better chance than those who are honest and righteous.

For example, as the fundamental principle of economy growth in point 1 (i.e. egoism), candidates who guarantee low tax or governmental paid public projects are usually more likely to win, as people like free things. However, only a limited number of people would care where these money would come from.

And here comes the cash. Cash is something the government could print as many as they wish. Once they put more cashes to the market, the value of each unit of cash will drop, and here comes the increase of price, hence inflation.

In the purest logic of economy growth, as the productivity continues to grow, the price of products should decrease because the manufacturing process becomes less expensive. That means things will become cheaper and cheaper, which is quite contradictive to what I perceive in my era. This book claims this is due to the efforts many selfish politicians have put for years to make people believe price drop is a bad thing because everyone would wait for lower price and hence there will be no consumption, which leads to the breakdown of economy. To prevent this catastrophe, the price of product must not drop. Therefore, the brainwashed people are never too worried about the inflation, as the impact of price increase is usually equally counteracted by the growth of productivity, unless the government has been really too mad to exceed the limit.

3. China actually feeds the US up

I always thought the relationship between China and the United States is competing and collaboration. That’s why I was quite shocked to learn that the economy of US is actually supported by China.

I wondered how long the government could survive if the filthy politicians always win out the righteous ones. This book points out it won’t be long, and actually there was a time that in the history of the US that the inflation was too high that the economy really stalled. According to this book, the inflation decreased the prospect of savings, so people tend to spend all their money once they had them. Given the saving in the bank decreased, the loan which could be issued to corporates decreased too, which consequentially led to massive hardship of operation and even bankruptcy. That hugely increased the unemployment rate. The US government seemed to wish to give more free money to get over this hardship. No matter this is another political gimmick to win the election or from the genuine hope, this certainly wouldn’t work, as the root cause of the issue is the stalled growth of productivity, not the apparent unemployment or shortage of money. Sarcastically, there should be plenty of money in the case of inflation, but people found they don’t have enough money. I used to not understand how this happened, till now I realised it’s because the rule of economy growth is broken by the politician for their personal interests (win the election).

In the economy brink of the US, China decided to change our way of production and open our market. As a result, we rapidly grew our economy, thanks to egoism still and the development market of the US. The US was hugely benefited from this deal too, as the money from China becomes their lifesaver to cope with the inflation. It was a win-win situation at last.

But the situation in the US didn’t become better. After getting through the current crisis, the US continued to live their unrealistic luxurious life, and of course the US people were still more than happy to vote whoever promised this life to them. Thanks to the status of US dollar in the world, every country needs the US dollar to deal. US could still transfer their shortage of economy (the gap between product and consumption) to other countries, and China is the largest country who has been taking it.

In other words, China is feeding the US up.

The authors of this book wrote a very funny ending that the Chinese people finally decided not to work for the US people. In that story, China decided to gradually stop buying the US securities. This brings the hyperinflation back, which damages the economy of China as well because our US dollars become valueless too. But since China still has its productivity, so they get through the hardship, while the US eventually becomes helpless. One day, the ship of China arrives the border of US again. The US politicians are overjoyed, but this time China doesn’t bring good news. What we are about to do is to purchase every infrastructure, tool and school and bring them back. What is left to the US is the US dollars we saved for years, apparently not as valuable as before. Amid the confusion of many economists and politicians in the US, the speaker of the House of the Representatives said:

Does anybody here remember how to make a net? I think it’s time we all went fishing.

As hilarious as this story is, I don’t think this will be the real ending of China-United States relations anyway. The process of globalisation has bond all countries together. Although the likelihood that China will eventually be better than the US is high, I don’t think this outcome is ideal for either side. Funny enough, I have heard this a lot from news, but this is the new look that really understand by myself.

There are also some points in the book I don’t fully understand. For example, this book seems to be very critical of many governmental intervenes and believe the market will follow the simple and plain rule to ensure everything runs well. I don’t know if that would be true, but it made me think a lot of crisis may not be resolved with little harm to the most in the absence of the governmental measures, even though the harm of those operations was also everlasting because the government didn’t stop at the right time. This book also described the Chinese authority as a feudalistic kingdom with an emperor. As a Chinese who feels and believes I am the owner of my country, I think the description in the book is not true.

Overall, this is an interesting book. I will read it again.

Note:

The original English version of How an Economy Grows and Why It Crashes on Goodreads: https://www.goodreads.com/book/show/7048818-how-an-economy-grows-and-why-it-crashes