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1-Page Summary of How An Economy Grows and Why It Crashes

“The Fish Story”

Economists have not been able to predict financial crises. Aeronautical engineers, on the other hand, are able to send rockets into space and land them successfully. If this is possible, why can’t economists foresee these problems? The dismal science gets even more gloomy as it proposes that spending is the solution for today’s economic woes because of John Maynard Keynes’ policies in the 20s. Governments took up Keynesian economics with open arms and banks profited from government programs encouraging people to borrow money. Universities hired experts who taught generations of policy makers about Keynes’ ideas and they passed those ideas along through books and magazines which further spread his theories. Now we’re stuck with a massive debt problem that will only get worse if governments continue with their stimulus packages, tax rebates and bailouts because all they’ll do is make things worse.

Libertarian Irwin Schiff had a different explanation for the income tax. He believed that there would be no inflation if the currency was backed by gold and other precious metals. In addition, he thought that government debt could only grow if it continued to spend more than it earned in taxes. In his book, The Biggest Con: How the Government Is Fleecing You, he used an analogy about three fishermen on islands to explain basic economics. The updated version of this parable is now available for modern readers.

“Sharing the Wealth”

Able, Baker and Charlie live on an island. They each eat only one fish per day because that’s all they can catch. However, Able wants more than just a single fish to eat every day so he decides to invent something that will help him catch two fish instead of just the one he catches with his bare hands. He calls it a net and soon enough he is catching two fish at once. This means that Baker and Charlie can borrow extra fishes from Able in order to sustain themselves while they make nets for themselves as well, which also helps them catch even more fishes than before. Soon enough there are three men eating two fishes a day instead of just the one man who was eating only one before making his invention/capital (the net) and savings (an extra fish). The economy has grown thanks to their inventions/savings!

The men were able to spend less time fishing and store their excess fish for later. Baker realized that if they had a bigger trap, they could catch 20 fish per day instead of one. They saved up enough fish to eat while building the trap and then continued on with their other interests. Able started a clothing company, Baker made canoes, and Charlie built surfboards. They saved up enough to keep them safe from rainy days when they needed money again so that there wouldn’t be any setbacks in the future.

“Prosperity Loves Company”

Able was the first to come up with an idea for improving their lives, that of making a net. He then shared his fish with Baker and Charlie so they could make more nets too. The three men were able to produce goods that even other islands wanted to trade in. They hired immigrants from these islands and started selling their products. Soon enough, bartering gave way to trading in terms of currency as everyone knew what one fish was worth.

Specialization allows some islanders to build canoes. Their productivity increases and prices come down, so that everyone can afford a canoe. Falling prices give people an incentive to save more fish, which leads to deflation instead of inflation. However, politicians tend to favor inflation because it makes the economy look active and gives them an opportunity to spend money on vote-getting programs.