Thursday, January 13, 2011

Self-Educate on Economics – Seven Books to Read.

Selected based on three criteria: content (the book does a thorough and exhaustive review of the material) relevance (the book speaks to issues which matter in terms of current world events) and readability (writing style is accessible and engaging). With that said, here are seven good books for an economic self-education.

1. Exchange & Production: Competition, Coordination & Control. (1983) by Armen Alchian & William R. Allen.

Any student of economics has to start with solid principles textbook. While many different books could suffice, this Alchian & Allen book is readable, comprehensive, and avoids unnecessary complexity while providing excellent coverage. In spite of being several decades old and out-of-print, copies of this book are still available from various online retailers.

2. The Wealth and Poverty of Nations: Why Some are So Rich and Some So Poor (1999) by David S. Landes.

Landes’ book covers a broad spectrum of history, and has the benefit of being an easy read. The general thesis: richer countries tend to be those that embraced trade, private property rights, and intellectual inquiry (these three, historically, tend to occur together). Europe gained a developmental advantage because, by accident or historical circumstance, the conditions for innovation which made the Industrial Revolution possible happened to thrive there. Lest this seem overly Anglo-centric, Landes also does an interesting coverage of other civilizations, and attempts to explain what factors prevented them from making the same leap that occurred in Europe. This book situates the global context of wealth and poverty that exists today.

3. The Wisdom of Crowds (2005) by James Surowiecki.

A recently-published book that has already become a classic in some circles, The Wisdom of Crowds explains why decentralized knowledge informed by self-interest can result in highly accurate predictions. Contradicting the common opinion that experts are better at predicting outcomes than ordinary people, Surowiecki finds that not only are supposed “experts” much less accurate than they claim, but that guesses taken by ordinary people when aggregated are far closer than any single estimate. As this is the principle which guides most markets, it offers a compelling insight into why those systems work so well.

4. The Housing Boom and Bust (2009) by Thomas Sowell.

Probably the most important and relevant book on recent financial history there is to read. Unlike many other treatments of the financial crisis which focus the blame on one particular party, Sowell constructs a multi-faceted picture, including all the relevant policies, government decisions, and lobbying groups whose efforts unintentionally led to the recent financial crisis. He also debunks the common perception that “markets run amuck” caused economic downturn, and instead traces the series of government intervention which built the housing bubble and then led to its collapse. For anyone is convinced that more regulation can save the economy, this book will give reason to rethink that position.

5. Failure and Progress: The Bright Side of the Dismal Science (1993) by Dwight R. Lee and Richard B. McKenzie.

An interestingly prescient (but little known) book, this short publication by the CATO Institute explains why it’s best if the government stays out of the way when a business begins to fail. It exposes the inherent contradiction in political positions which desire the wealth which capitalist systems can attain, but also want to prevent the painful dislocations created by business failure or bankruptcy that occurs under a free market. Lee and McKenzie convincingly explain why wealth for all is impossible without failure for some enterprises; unprofitable businesses represent a misuse of society’s resources, so it is better they fail so those inputs can be put to better use by other firms. When government becomes involved in preventing failure it ends up creating further deprivation, by favoring producers with connections over those who can provide goods using the fewest resources. Political victories for inefficient producers are a loss for society.

6. The Mind of the Market: How Biology and Psychology Shape our Economic Lives (2008) by Michael Shermer.

This book does an excellent job of summarizing recent research in behavior psychology, neuroeconomics and similar fields, and explaining how they relate to behavior in a free market economy. While many studies show that humans have an altruistic, egalitarian and cooperative element to their interactions, this does not deny the role or importance of markets in shaping social behavior in positive ways. While a slightly more challenging read than some of the other books, The Mind of the Market provides a comprehensive look at how psychology and evolution have played a role in shaping economic interactions.

7. The Only Investment Guide You'll Ever Need
(most recent edition in 2011) by Andrew Tobias.

The first edition of this book was written back in the 70s, and since then it’s sold millions of copies world-wide. The premise: if a deal sounds too good to be true, it probably is. Tobias happens to be both very smart about money and also a highly enjoyable read. I went through this book several times as pleasure-reading when I was too young to understand what money, investing, or economics even was and still found it very entertaining. To secure your future wealth and have a good time doing it, this is probably the best book you could purchase.

It might seem from these summaries that I’ve chosen a highly partisan, libertarian or even “conservative” set of books to represent economics. While I will not claim this is the definitive “best books” list, in my personal and limited experience, I found the ideas contained very useful in interpreting economic events. There are obviously some giants not represented (Friedman, Hayek, and so on) but most of the relevant ideas can be found above. The summaries are just my biased take, but I honestly believe that all of these books are written from an open (if not apolitical) perspective. Even if you disagree with the conclusions, the analysis contained is worth thinking about for anyone.

The point: If someone wanted a crash-course on economic thought with a minimum of fluff, jargon, or general verbosity then the above list would be the direction I’d point them. If you think I left off something important or just disagree with all the above then let me know in the comments.

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