Recently by Peter Schiff: The New Ideological Divide

If you want to understand what’s happening to the world economy, read Peter Schiff’s new book (co-written with his brother Andrew): How an Economy Grows and Why it Crashes. You don’t need any background in economics to understand it; an intelligent child could follow its arguments.

I mean that quite seriously. When Peter and Andrew were small boys, their father, Irwin Schiff, an anti-Keynesian economist and tax refusenik, used to tell them stories as a way of teaching them basic economic principles.

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Imagine, for example, three men on an island, each of whom catches one fish per day. It takes all day to catch a fish with your hands, and you need to eat one fish each day. Then suppose that one man chooses to go hungry for 24 hours and uses the time to make a net, allowing him to catch two fish per day. What should he then do with his extra fishes? Should he lend his surplus fish to the other men, enabling them to eat while building their own nets? (Their nets might fail, meaning that he would lose his investment; but he could compensate for the risk by demanding that they pay him back two fish for his loan of one.) Should he build two more nets and rent them out to the others? Or should he simply consume his extra daily fish?

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The Schiff brothers begin with this simple thought-experiment, and build it up, gradually introducing the concepts of specialisation and comparative advantage, inter-island trade, paper money, government, taxation and national debt. In simple language, and with logical steps, they take the island from its three-man closed economy to, as it were, the present day: a bubble in hut prices which prompts an unwise island senate to print more and more fish-credit-notes.

Why should we pay attention to Peter Schiff? Well, here’s one pretty convincing reason: he accurately and exactly predicted the recent crash. I don’t just mean that he said that there were bad times coming. A man who constantly predicts downturns will necessarily be correct every ten years or so. No, I mean that he foresaw the collapse in sub-prime mortgages, that he was right about when it would happen and that he explained why it would happen. He has, in short, earned the right to be listened to.

I wish I had had this book to read ten years ago. When I was first elected, I felt I ought to acquire a basic grasp of economics, so I set myself a reading list, starting with that trusty companion to first-year economics students, Begg, Fischer and Dornbusch. As I ploughed through the various texts, I became disquieted. So much accepted doctrine seemed counter-intuitive. Why, for example, did economists see consumer demand as a cause of economic growth rather than a consequence of it? Why was it desirable to spend more when nothing of real value was being produced in consequence? Why did almost every expert applaud the disconnection between currency and anything of intrinsic value, such as gold? Didn’t this breakage allow governments, in effect, to transfer wealth from private savers to themselves?

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