How an Economy Grows and Why It Crashes by Peter Schiff

Peter Schiff is Chief Economist at Euro Pacific Asset Management - an independent investment advisor providing investment strategies to clients globally. He is a well-known economist who talks about economics on national TV, blog, and his podcast.

The book "How an Economy Grows and Why It Crashes" by Peter Schiff is an easy to read, light-hearted, funny, illustrated, but also deeply serious book that explains how the economy works, how it brings prosperity, and how fashionable but dangerous ideas are destroying it.

Inspite of its light-hearted humor, fishing metaphors, and illustrations, the book covers serious topics. It has a serious message of profound importance to us.

The core message in the book is that governments and government economists get it wrong, create a crisis, and then do more of the same.

"Government creates problems, its solutions make them worse". The cycle goes on.

"In 2007 when the world was staring into the teeth of the biggest economic catastrophe in three generations, very few economists had any idea that there was any trouble lurking on the horizon. Three years into the mess, economists now offer remedies that strike most people as frankly ridiculous. We are told that we must go deeper into debt to fix our debt crisis, and that we must spend in order prosper. The reason their vision was so poor then, and their solutions so counter-intuitive now, is that few have any idea how their science actually works."

"Certainly, there has never been a greater need for a dose of economic clarity, and the story is the best tool we know of to give people a better understanding of what makes our economy tick."

Author "hope that the book can appeal to the kind of people who typically go numb when they hear economists drone on about concepts that seem to have nothing to do with reality."

The author teaches and inspires us to become "a full-blooded believer in sound money, limited government, low taxes, and personal responsibility".

Origins of government intervention in the economy

USA in early 1900s was doing very well economically due to limited government, low taxes, and respect for property and individual rights. This was known as a Austrian School/View of Economics - named so because it was first developed in Vienna, Austria.

There was no need for a new economic model. There was volatility and inequality, but it was a necessary and natural consequences of economics. Austrian economics considered volatility(ups and down, booms and busts)as a necessary evil to kill off inefficient businesses. Inequality also was a natural consequence of people's abilities. Cruel but fair, and natural. Americans were better off than most other nations with high level of prosperity and personal sovereignty.

This did not stop John Maynard Keynes in 1920s. He proposed a new theory: "At the core of his view was the idea that governments could smooth out the volatility of free markets by expanding the supply of money and running large budget deficits when times were tough."

Keynes proposed that by injecting money into the economy during bust, government can fix the bust. It sounds sensible. Help the economy when it is down.

The boost to the economy will boost taxes and create artificial booms. This was a win-win "pain-free" solution.

In other words, Keynes proposed government interference in the economy, and government control of money supply.

"Keynesians look to mitigate the busts, Austrians look to prevent artificial booms." Keynesians want to manage the volatility, Austrians consider it necessary.

Then there was the Great Depression - the great economic downturn of 1929-39. Keynesian economics offered a "pain-free" solution, whereas the 'cruel' Austrian economics proposed doing nothing while people suffered.

No points for guessing which theory won.

"Keynesianism was an instant hit with politicians."

"By promising to increase employment and boost growth without raising taxes or cutting government services, the policies advocated by Keynes were the economic equivalent of miracle weight-loss programs that required no dieting or exercise."

Politicians loved it. Government bureaucrats loved it. The demand for Keynesian experts spurred universities to adopt it.

"Large banks and investment firms are more profitable in the Keynesian environment of easy money and loose credit." They supported it.

"a self- fulfilling mutual admiration society soon produced a corps of top economists inbred with a loyalty to Keynesian principles."

"Austrians were increasingly relegated to the margins."

Government creates problems, its solutions make them worse

With his customary humor, the author Peter Schiff comments on the logic of government intervention: "Yes, the satellite crashed into an asteroid, but it is an unexpected encounter that could lead to enticing possibilities!"

There are no failures or disasters in government. Just more "enticing possibilities", with bigger budgets, and promotions for bigger responsibilities that the "enticing possibilities" bring.

Those who should be fired, and their departments closed, are promoted to run even bigger departments with even bigger budget. Funding for government projects is never a problem as constant crisis encourages constant money pumping.

"The tragi-comic aspect of the situation is that no matter how often these economists completely flub their missions, no matter how many rockets explode on the launchpad, no one of consequence ever questions their models."

"the belief that worthless money[of government stimulus] can be an effective economic lubricant, is false and dangerous."

"In the months since the financial world imploded, a consensus emerged that a lack of adequate regulations brought on the crisis. The roles of government and the Federal Reserve in particular have been largely ignored. As a result, we are getting more of what we don’t need (spending and restrictive regulations) and less of what we do (savings and free enterprise)."

In other words: "Government creates problems, its solutions make them worse". The cycle goes on.

Caring Government lowers overall prosperity

Government taxes and confiscation in the name of caring society lowers overall prosperity as the victims cut back.

Book has examples using metaphor of fish. "The oppressed would cut back on their work when they realized the fruits of their labor would be stolen."

"while workers do respond to force when their self-interest is denied, they respond far better if they are the beneficiaries of their labor."

A better solution is to let the successful grow and create more opportunities for others.

"Banks and businesses that should have failed were propped up by government support. Capital and labor that should have been freed up to find more productive uses were instead calcified in unneeded activities."

"By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment, and help workers transition from the service sector to the manufacturing sector, the government has resisted the cure while exacerbating the disease. "

Freedom from confiscation creates prosperity.

"Unfortunately, examples of large-scale economic freedom are rare in global history. But when self-interest is allowed to flourish, productive capacity expands quickly".

Wall St and corporations get the blame

"Large banks and investment firms are more profitable in the Keynesian environment of easy money and loose credit." Why would they not capitalize on this? It is their job to make the best of the economic environment they are in.

"bankers were playing the distorted hand dealt them by government".


Inequality and volatility(boom and bust, recessions, ups and downs) are a necessary and natural consequence of economics. It is necessary to purge bad investments and shutdown inefficient businesses.

Economics, like nature is cruel. This cruelty makes it 'fair'. The alternative of caring government taking from the efficient and successful to support the inefficient and failed is even more cruel and unfair.

Those who fail can join or learn or work with those who succeed. Markets are good at reallocating people and resources based on supply and demand. There is no need for government intervention.

The only 'benefeciary' of intervention by 'caring' government is the government itself which gets bigger without adding to the overall prosperity of the nation.

Intervention from a 'caring' government creates cruelty, not reduce it.

Freedom from confiscation creates prosperity.

The best government is the one that governs the least.


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