HOW AN ECONOMY GROWS AND WHY IT CRASHES

Peter D Schiff and Andrew j Schiff
Reviewed by Lubabah Bint Mahtab

At first glance, How an Economy Grows and Why It Crashes may seem like a childish encapsulation of the progress of a nation, but in reality, the authors Peter D Schiff and Andrew J Schiff have used humour and storytelling to explain multiple economic concepts in a manner that many will find easily understandable.

How An Economy Grows And Why It Crashes describes an island that started as a primitive society, where all fish that are caught are consumed, so there is no scope for other economic activities such as savings, investment, or production. From there onwards, the book depicts how the risk and under consumption carried out by one member of the island’s society in order to innovate a fishing net (so that he would no longer need to catch fish by hand, which, you can imagine, was very inefficient) led to a chain reaction of further innovation and growth.

Personally, I found the book a very interesting read due to the humorous depiction of economic principles and how neatly the chapters are organised. Each chapter tackles a new issue, which prevents the book from becoming repetitive. This, in addition to the cartoonish depictions of the islanders and the scenes as the island’s growth progresses, makes the book quite interactive as you can picture how these situations are coming about in the first place. 

Furthermore, whilst reading the book, I noticed that quite a few chapters correspond with real-life situations. Despite the funny use of fish as a currency, the situations and concepts discussed in the book are applicable to our lives as well, such as the issue of inflation, or “fishflation,” as the book calls it. We also get a brief explanation of why society moved on from a barter system to exchanging goods and services with money notes, which was also a rudimentary concept in economics. Interestingly, the authors also go on to add that this may not be the best system for exchange, as money can lose its value quite easily, unlike metals such as gold, which was an intriguing contradiction.

Essentially, the book focuses on a few core concepts. Whilst everyone knows that consumption accelerates growth, How An Economy Grows And Why It Crashes focuses more on the importance of savings, which corresponds with the Harrod-Domar growth model. It talks about how paramount savings are in a society, as savings are what allow banks to lend, which in turn enables borrowing and subsequently investment. 

Another focus was the issue of market bubbles; the authors successfully used their models to describe the real-world event of the 2008 housing market collapse, by describing how excess availability of money drives up prices of housing beyond what is normally expected, and unlike normal price increases, market bubbles are bound to eventually burst, where prices will rapidly decline. That being said, this book is a really great introduction to those who are unfamiliar with such concepts due to the simplicity of the explanations.

However, not all aspects of this book are as good as the others. After finishing this book, it was quite apparent that the writers are not that supportive of a governing body. Rather, they emphasise the importance of the invisible hands of demand and supply allocating resources, essentially being in support of the free market whilst mostly ignoring the impediments involved. In reality, free markets are not as self-sufficient as can be assumed through multiple real-life scenarios. To an extent, it felt as though the writers were overlooking the importance of a central control whilst only focusing on the flaws of the institution, which could be controversial.

Additionally, the writers seem to advocate for the importance of deflation strongly, whilst being entirely against inflation. While it may seem counterintuitive, deflation can also bring about serious problems for the economy by slowing it down as a whole. This directly contributes to other major issues, such as unemployment or a decline in investments as economic activity slows down. These problems almost instantly come to mind and are not exactly covered in this book. So for some readers, this book may be too simplified for their liking, which should be kept in mind.

Overall, I would recommend How An Economy Grows And Why It Crashes to first-time readers attempting to have a rudimentary understanding of basic economic problems or principles due to its simplicity and gripping use of humour, which makes the book highly entertaining, but it’s worth noting that some aspects may be slightly controversial as the book is biased towards the free market and heavily criticises the Fed and the government, nevertheless, it was still an enjoyable read.

The reviewer is an A-level student