Economics Explained first half discussion thread

[grantmeaname]

Economics Explained, by Robert Heilbroner and Lester Thurow, is the August 2012 MMM Book Club selection. This thread is for the discussion of the first two parts of the book: The Economic Background and Macroeconomics: The Analysis of Prosperity and Recession. In the fourth edition (released 1998), that's pages 1-142.

[kisserofsinners]

Every time i read "mechanism" i get "mustachism". It's in my brain...100 pages to go. :)

[grantmeaname]

I'm on the 'saving and investing' chapter right now. Around p.85-86, the authors argue that businesses effectively use their regular income for their operating expenses and they use money raised from selling stocks and bonds to fund capital improvements. On the other hand, when people use their income for consumption they buy the products resulting from the businesses' operating expenses, and when people save money they do so by purchasing stocks and bonds.
Thus the ratio of capital to operating expenses in businesses (technically, businesses and government combined) corresponds to the savings vs. consumption rate of individuals.

Several of the posters on this board argue that our economy would fall apart if everyone grew a mustache. Now I've started thinking it would spur on innovation, because businesses would spend more of their effort increasing their productivity and efficiency, and the government would be able to borrow for expensive works projects with a large but slow return; even something moderate like a 20% rather than 2 or 3% capital spending rate would dramatically change the way our economy looks and works!

Thoughts?

[kisserofsinners]

I was thinking about what the change would look like... After the initial reduction in demand and invetory sell off, the busniesses would be run by Mustachians. I'd imagine that may larger companies would fail in this environment, no doubt, However, the population is assumed to be significantly more capable and resourceful then what is running around now.

When considering this possible future, i find it curious that some don't take the assumption very far. There seems to be a large hurdle between imagining the crash (and i imagine it would suck for sure for a while) and imagining the potential future. I'm not saying i have any specifics. I just find it curious.

I will say that i struggle with the age of the book. Once getting to the passive consumption that up until vietnam we used taxes to fight inflation during war time, now we're lowering interest rates and cutting taxes. This seems like the opposite... I just really wish this book wasn't almost 20 years old. I just got to the govrn chapter, maybe it'll explain.

[gooki]

Once getting to the passive consumption that up until vietnam we used taxes to fight inflation during war time, now we're lowering interest rates and cutting taxes. This seems like the opposite.

Because you're currently fighting deflation during this war as it coincides with a global economic downturn.

But prior to the economic down turn the war was contributing to inflation hence the increase in interest rates and housing costs just before the bubble burst (2002 to 2007).

[kisserofsinners]

I'm finding supplementing with planet money to be really helpful with this... I might re-read the book after i'm done going through their content.

Once i release my desire to look for some shit...I'm really feel optimistic about everything. :)

[grantmeaname]

I finished the first half yesterday! Although I started the book in early July and had 50 pages of it read by the time the month started...

I've found the book really incouraging too. The rules laid out by the authros don't describe every quirk of the system, or even come close, but as vague general laws they're a relatively complete set and cover more things than I would have expected to.

That said, there's just so much information! I am a huge fan of the writing style, though, which makes it pretty digestible if I don't read too much at once.

How's everybody else doing? Is everyone enjoying the book?

[grantmeaname]

We're almost halfway through the month! How's it going?

[arebelspy]

We're almost halfway through the month! How's it going?

Well my whole county apparently has one copy of the book, which someone had.  But I had a hold on it and was able to get it yesterday, so I've read the introduction.  Hope to contribute more in the next week.

[grantmeaname]

My city's about the size of yours ... luckily, I checked out my system's entire stock of one book in early July before the challenge started. Sorry, other Columbus mustachians.

I was thinking a book like Where are the Customer's Yachts? would be a great book club read, but given how hard it's been to find Economics Explained, we may want to stick to the really common ones like YMOYL and free online ones like The Richest Man in Babylon until we've exhausted them. It seems like personal finance books not written by Phil Town are not common in libraries.

[arebelspy]

I just finished the first quarter of the book (Part I, The Economic Background).  It's a much easier read than I was picturing, very light and enjoyable.

I decided to post my comments on the first part now, lest this get too long, and then when I finish the next part I'll put it in this thread as well.  After I read the second part of part one, I'll read the other comments in this thread and start discussing those as well.

Comments below were typed in notepad as I read.  Feel free to comment back on any you think are worth discussing.

My copy is the 3rd edition (1994), so my pages are off from everyone's, so I'm not going to bother listing them.

- In reading the background about how the market society emerged, and prior societies without the free market idea, it struck me how important that is to our unique (historically speaking) chance to early retire.

In this post, I looked at how productivity and technological advances have furthered our ability to FI (through only abou 1/4 of our wages needing to go to necessities to have a 1950s standard of living of food, housing, etc., leaving 75% discretionary income that can be saved).  The fundamental underpinnings even more important though is the ability to invest those savings due to the market and earn a return.  Relevant quote from EE: "There were no factors of production before capitalism" and "The idea of a liquid, fluid capital would have been as strange in medieval life as would be the thought today of stocks and bonds as heirlooms never to be sold."

It's not an idea I'd try to explain to a newcomer to early retirement as the big reason why we can early retire (instead telling them more like the stats in the article above), but it definitely is a major factor, and something interesting to consider, for me at least.

- I liked the short three field rotation versus two anecdote, and am tempted to read the cited book, "Medieval Technology and Social Change" by Lynn White.

- The capitalism described in the Marx section sounds eerily like what is happening today.  Relevant quote: "Thus the social structure will be reduced to two classes - a small group of capitalist magnates and a large mass of proletarianized (i.e. propertyless), embittered workers."

- Reading all these statistics from 1988 and 1990 on income and net worth really makes inflation hit home once again. Examples: top 5% income in 1990 was  105k.. top 10% assets in 88 was >250k - and that's counting home equity.  In 1988, only 940,000 of households had at least 1MM in assets.  In 2008, 20 years later, around 6.7 million Americans had at least 1MM (and that's NOT counting first homes, and is 2.5 million people ower than it had been due to housing prices dropping, presumably on second homes and income properties).

- I find it interesting that the authors spend so much time on GNP introduction talking about how 1980-1992 (in my version) wealth was redistributed to the rich, and the middle/lower class stayed the same or got poorer, despite GNP growth.  And how much more has that happened in the two decades since?  We've all obviously seen articles on how much the 1% has, which sharply came into focus last year with the Occupy Wall Street movement, so I was surprised that a book from '94 was focusing on this difference starting in 1980, over three decades ago now!

- After reading the union part and reflecting back on what I've read so far, I feel that the authors have a quite liberal slant.  Not a big deal, but something to keep in mind.

[grantmeaname]

Heilbroner was a known Marxist, FWIW. In the public sphere that conjures McCarthy-style images of burning the American flag and swinging the hammer and sickle, but in academia it's a bit more innocuous: it means that the paradigm he brought with him to the analysis focused on class struggle, and likely that he subscribed to Marx's conception of capitalists extracting more of the value than is 'fair' from their act of combining means of production. That said, it does put him solidly on the left.

I think the authors were quite clear when they were presenting things that all economists accept versus when they were presenting their liberal, contentious views. And when they presented liberal views, they almost always included the conservative alternative views and devoted equal space to supporting each. So all in all, I'd say it's not like the work is fatally flawed due to the authors' slant. Really, they're doing us a service by pointing it out as heavily as they do.

[Dee]

I'm now next in line to get the book from my local public library. I could have borrowed it from a university library but I took the path of least effort and just waited for the public library copy. To get the university one, I would have had to get a card as an alumnus or a special card through my public library -- an extra step.

I thought I'd take a peak at this thread to see how much I'd missed... it doesn't seem that many people have been participating by posting. I wonder if many others are reading the book nonetheless?

In any case, I doubt I'll read the entire book in August but maybe there will be others like me who read a little beyond the book club month.

Reading the last comment about the book being light and enjoyable made me look forward to reading it.

Meanwhile, on my last trip to the library, I picked up "What's the Economy for Anyway? Why It's Time to Stop Chasing Growth and Start Pursuing Happiness" by John de Graaf and David K. Batker. It sounded potentially mustachian... I want to at least peruse its contents and see what it's all about -- I'm not sure whether I'll read it in full, though.

[James]

I started the book two weeks ago, but spent last week in North Carolina, so I'm just now half way through it and have time to make some comments.

The book is definitely from a liberal slant, which isn't a big deal, the author states his position up front.  I've read both neutral economics textbooks and lots of Thomas Sowell, so I have both a good understanding of general economics as well as the conservative viewpoints.  I am enjoying seeing things from a new perspective, the information on Marx is especially welcome, I've been meaning to read some of Marx when I get the chance and this peaked my interest even more.  So far I wouldn't say he has been very good at presenting the conservative opinion, while he is pretty good at defining the liberal opinion and glossing over the down sides of it.  No surprise or problem there, it's exactly as would be expected from a liberal author, and is exactly what is seen from authors like Sowell.  Which is why you can't get all your info from one perspective no matter how hard an author tries to stay neutral or give both sides.

I enjoyed the opening couple chapters the most, his thoughts on both the history and development of capitalism were excellent and thought provoking

Arebelspy: One thought I had regarding the concern of Marx and the quote "Thus the social structure will be reduced to two classes - a small group of capitalist magnates and a large mass of proletarianized (i.e. propertyless), embittered workers.", was that the separation in classes in America (if we take that as a given) are not being created by the mechanism of capitalism as Marx described.  The vast majority of the "propertyless" class is willfully rejecting the choice to build up property, rather than that ability being taken from them.  I'm not sure that I have any great implications from that thought, it's just something that occurred to me.

grantmeaname:  I really enjoyed The Richest Man in Babylon when I read it this spring, certainly wouldn't be a bad choice even though I just read it.  It had a lot of Mustachian principles at play.

I agree with Kisserofsinners on the age of the book, but I'm still enjoying reading it.

[darkelenchus]

Just finished the first half. The discussion of income inequality and company size was pretty interesting. Reminded me of an article I read years ago on the similarity in patterns of income/wealth inequality throughout history and a more recent  complex system analysis of the inter-connectivity of ownership in the current global economy. 

One thought I had regarding the concern of Marx and the quote "Thus the social structure will be reduced to two classes - a small group of capitalist magnates and a large mass of proletarianized (i.e. propertyless), embittered workers.", was that the separation in classes in America (if we take that as a given) are not being created by the mechanism of capitalism as Marx described.  The vast majority of the "propertyless" class is willfully rejecting the choice to build up property, rather than that ability being taken from them.  I'm not sure that I have any great implications from that thought, it's just something that occurred to me.

I think it's more complicated than that. Some may willfully reject their ability to own property (i.e. have some claim on the means of production and the fruits that come from it). However, to willfully reject acting on an ability implies that one is aware they have that ability and that they believe they can act on it. It's not clear that the majority of the property-less in the US sufficiently understand what ownership of property is, how they might become property owners, or believe they're positioned to own property. Property owners might not put concentrated effort into denying the property-less the ability to become property owners themselves, but why would they have to if the property-less's ignorance about that ability has the same consequence?  It's disputable whether the lack of understanding among the property-less is a result of the mechanism of capitalism itself, though it sure seems to have played out that way in the US.

Even those who willfully reject property ownership may be doing so as a result of becoming accustomed to the comfort and convenience that the consumer lifestyle affords, and therefore see the hardship required to become a property owner as a turn-off. Again, the consumer lifestyle might not be a necessary feature of capitalist systems, but it's pretty clear that it can be a consequence of capitalist behavior.

So, at least historically, capitalist systems tend to propagate class division even when such divisions aren't enforced as a matter of policy.

Still, the great thing is that our system is such that the property-less can become property owners. MMM, ERE, and similar/related websites and projects are a great way education for the hows and whys of becoming a property owner.

[James]

So, at least historically, capitalist systems tend to propagate class division even when such divisions aren't enforced as a matter of policy.

Still, the great thing is that our system is such that the property-less can become property owners. MMM, ERE, and similar/related websites and projects are a great way education for the hows and whys of becoming a property owner.

List one system that doesn't tend to propagate class division. In other words, I think the tendency toward class division is a feature of humanity, not capitalism, which would be an important distinction if we wish to fight class division.  I would suggest that capitalism can provide the best system in which class division is not enforced and movement between classes is most free.  That doesn't mean I'm happy with our current circumstances, but I don't blame capitalism for the unequal outcomes.

I don't remember the author addressing that idea in the present, but he did stress the fact that class division has always been present in the systems prior to capitalism.

[darkelenchus]

List one system that doesn't tend to propagate class division.

There's two systems that come to mind:

• Marxist Socialism, in which the workers are the owners of the means of production and thus there is no working class/ruling class division (and, therefore, being classless, the social arrangement will also be Stateless).
• The Distributist State, in which property-ownership is distributed as widely as possible to individuals, households, or communities rather than centralized in the State (Social Democratism) or in the hands of a wealthy few (i.e. Capitalism).

When talking about class division in this context, I'm talking only about the socio-economic division of the working and ruling classes. Other class divisions based on custom, tradition, or religion (e.g. brahmin-ksyatriya-vaisya-sudra, patriarch-bishop-priest-deacon-laity, doctor-master-bachelor-novice, etc.) may still be present.

In other words, I think the tendency toward class division is a feature of humanity, not capitalism, which would be an important distinction if we wish to fight class division.

You may be right. The links I provided in the previous post might lend credence to this view. If that's the case, then the systems mentioned above may never be realized in practice.

There are some factors to consider, however.

Marx viewed capitalism as the final step in humanity's inevitable progression towards a classless society. All previous social arrangements had class division, however. He wasn't being nostalgic about the past; rather he was predicting the emergence of a social arrangement that hadn't yet (and still hasn't) come to fruition.

In The Servile State, Hilaire Belloc (early 20th Century Distributist) cites certain economic arrangements of the Middle Ages as examples of Distributism (e.g. guilds and the serf's right to property). Contemporary Distributists cite Mondragon Corporation and other cooperative businesses as current examples of Distributism.

I'd say class division is a potentiality among potentialities, albeit one that's been more frequently cultivated than its alternatives. It's common but not necessary.

I would suggest that capitalism can provide the best system in which class division is not enforced and movement between classes is most free.  That doesn't mean I'm happy with our current circumstances, but I don't blame capitalism for the unequal outcomes.

I don't remember the author addressing that idea in the present, but he did stress the fact that class division has always been present in the systems prior to capitalism.

Yes, there was some discussion of upward mobility and the like (followed as a result of serf land being seized and offering their labor in exchange for a wage), and lack thereof in past systems. Of course, mobility can only be a feature of systems with class divisions. If class divisions are unavoidable, some form of capitalism might provide the most just social arrangement, so long as no one is denied the opportunity to improve their condition, whether through policy or in practice. However, I wouldn't support a social arrangement because it allows for mobility. If one of the classless social arrangements are possible, one or more of these might be preferable to a social arrangement with class divisions.

I know others around here differ on this, but unequal outcomes aren't inherently blameworthy/condemnable. If Sally and Jane engage in separate endeavors and Sally produces 10,000 units of value whereas Jane produces 1,000 units of value, there's an obvious inequality here. But so long as Sally's production didn't in some way come at the expense of Jane - whether through violation of Jane's rights or person, or through denial of basic needs - then all's well! In fact,  these inevitable types of inequalities could occur without issue under Marxist Socialism and Distributism (the former because productive forces have already created an abundance that covers everyone's needs anyway and people are just working for the fun of it rather than to get more for themselves, so they're just adding to the abundance; the latter because the fruits derived from one's own property and labor don't of themselves detract from another's property ownership, labor, and the goods they bear).