[Book Shelf] Bad Samaritans

-Written by Jae-hyun Kim

A few years ago while roaming around my favorite Young-Pung bookstore, I found this seemingly interesting book titled “Bad Samaritans” written by Ha-Joon Chang, professor at Cambridge.

I am sure that you must be familiar with ‘good Samaritans’ if you are a pious Bible reader. According to the Bible, Samaritans are considered ‘good’ or morally straight as they were the only ones, out of a myriad of people passing by, who saved the person in danger about to get killed by a thief. Similarly, the birth of the Good Samaritans law, which prohibits anyone from bypassing people in danger even though the acting of saving them does not risk their lives, is not irrelevant to the story of Samaritans receiving the adjective.

However, the book’s title, unlike the good Samaritans from the Bible, represents ‘Bad Samaritans.” This is because professor Chang, throughout the book, sarcastically employs this metaphor to both illustrate and criticize the ‘economic strategies’ that rich countries use to block the path of poor countries to economic richness. According to Chang, rich countries are ‘bad Samaritans’ as they keep ‘helping’ poor countries to adopt a free-trade mechanism, a seemingly successful strategy for all countries in the world as most ‘developed countries’ already adopted this mechanism. However, as Chang claimed, adopting free trade system would be seriously detrimental to countries still in need of economic development as the free-trade mechanism would bring about economic stagnation.

Throughout the book, successful countries like the United States, the Great Britain and the financial institutions established by these countries such as International Monetary Fund and the World Bank are introduced to point out the self-contradiction of these entities. Primarily, Chang emphasized how the United States adopted protective trade in the late 1800s in order to protect its market from the superior goods overseas. According to him this is a self-contradicting history for the U.S. as it is now the number one advocate of free-trade, spreading the spirit of neo-liberalism over the world including poor countries. Not only U.S. did this but also did Britain follow the similar step. It also started as a poor trade country protecting its industry from superior goods by putting on tariffs.

But, just like the U.S., Britain forgot its ‘childhood’ too soon as it now claims that poor countries should adopt the free-trade system for their own profit instead of protective-trade system. How about IMF and World Bank? Chang said they act like ‘Bad Samaritans’ as well. For example, Korea was ‘rescued’ from financial depression by IMF’s monetary fund. Even though it is thankful for IMF’s decision of saving Korea from the debt, it is undeniable that their decision was for their own good and made at the expense of Korea’s future economic disadvantage, which fortunately turned out to cause no disadvantage. By averting Korea’s protective trade system to free-trade system, IMF enabled many rich countries to devour more profit from the additional free market recently opened in Korea. If Korea had not been an intermediately developed country at that time with a variety of industries prepared for international-level competitions, it would have suffered from tremendous economic loss following its opening the market to a myriad of ‘predator’ industries at the international level. Fortunately, when Korea adopted a free-trade system in 1998 pressured by IMF, it already possessed economically mature industries and markets such as Hyundai Motors and LG Electronics that were ready to fight foreign goods manufactured by the already gigantic companies like Sony, GM, Phillips, GE, and Nokia.

Anyway, professor Chang demands in his book for rich countries to stop being self-contradicting ‘bad Samaritans’ and do something authentically helpful for poor countries’ economy. In my personal view, I agree with Chang’s viewing of the world’s economy and rich countries’ intention. But, I believe it will be extremely difficult for self-interested countries to authentically sacrifice themselves to help poorer countries unless the whole world is unified under a religious unity characterized by philanthropy. Or, it could be done in another way by founding an international law-making institution whose laws have binding effects on all countries, neutralizing the self-interestedness of humans. Anyway, I really do hope that both rich countries and poor countries select a win-win strategy and find a mutual way to success.

[Book Review] How Markets Fail by John Cassidy

According to Adam Smith’s renowned ‘invisible hand” theory, the market system functions well when untouched. But, does it? Can the market system function at its optimal level when left alone? The debate could go on for days, but everyone will agree that this theory does not apply to the current global economy. The 2008 financial crisis explicitly showed the flaws in Adam Smith’s theory.

Today, I will introduce a book that provides thorough explanation and interesting analogies of the catastrophies that destroyed financial markets and drove economies into recession. Unlike most people who pinpoint the blame of the 2008 global financial crisis on Wall Street, John Cassidy digs deeper and concedes that the situation is a byproduct of an accumulation of diverse factors. This book will help you get an insight into the broader scope of the economic crisis that we went through.

The book starts by introducing the term Utopian Economics. What is Utopian Economics you ask? People have fantasies; whether it’s about their life-long goal, love life or career, everyone enjoys daydreaming once in a while. The important point here is that you recognize that it’s nothing but a mere fantasy, and be cautious not to trip into the rabbit hole. Once you fall, it will be too late to turn the clock.

This is what happened in 2008. People put too much faith in the market system, and believed that the most ideal society is formed when individuals freely pursue their self-interest in free markets: which Cassidy refers to as “Utopian Economics”. During the 20^th century, this theory might have fueled the economy, but in the 21^st century the loopholes of this theory surfaced and caused the market to crash.

However, Utopian Economics is exactly what it is as the name indicates: utopian. Pursuing individual self-interests does not always benefit the society. Utopian Economics is based on the premise that everyone: buyers and sellers, is provided with full knowledge of the economy, but this does not apply to reality. Some hold more information than others, and it is difficult to distinguish the genuineness of the information.

Then what is the real world like? This is where Cassidy introduces a new term “Reality-based Economics. Unlike the assumption Utopian Economics laid out, the market is incapable of self-correction. Being human, we can’t always make rational decisions and have a tendency of being selfish. While people pursue their individual self-interests, there’s always a crash that causes the market to plummet, and the market can’t fix itself.

Additionally, market prices are often misleading. There is no guarantee that the prices set by the market are reasonable, and the market system does not function like Adam Smith’s “individual hand” theory suggests. As a result, when market prices send the wrong signal, it could cause the market to go down spiral.

Cassidy goes on to discuss about the Great Crunch, which Alan Greenspan’s career itself displays the ominous outcome. Greenspan made the mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms. We can’t put the entire blame on Greenspan, but his assumption that the market can regulate itself acted as a potent propeller of the crisis. When the system crashed, the free market had no answers, no self-correcting mechanisms, and no solutions.

Although individuals may pursue their personal interests in a rational way, the outcome could be collectively irrational. Thus, the market needs intervention that lay out preventive measures for calamities in which individuals can’t anticipate.

So did we learn something from this catastrophe? It’s difficult to draw a clear line, because although people recognize the mistakes we made, a lot of the factors that contributed to the financial crisis remain in place, ready to surface when given the chance. Nevertheless, knowing the mechanisms behind the crisis that we went through can act as guidelines to prepare ourselves for the next financial crisis we may face.

By Min Ho Jung

[Book Review] The Theory of Money & Credit

I want to introduce you to a book called “The Theory of Money and Credit” written by Ludwig von Mises.

This book was originally published in German as Theorie des Geldes und der Umlaufsmitte in 1921. The English translation was published in 1934 but even today, it is still considered one of the best books that describe the value of money and economics!

Although we live in a capitalist society that makes money and credit the two most important concepts, it is not easy for citizens to completely understand them. This book is divided into 4 parts that include: nature of money, the value of money, money and banking and monetary reconstruction.

The first part, “Nature of Money” describes the general idea of money. Mises describes the functions of money, the value of money, different kinds of money and the enemies of money in this chapter. According to Mises, money functions as the commodity that facilitates the interchange of goods and services. The secondary function of money is to find economic order by becoming the medium of exchange.

“The Value of Money” is a chapter that explains the concept of value of money. According to the author, the central element is the purchasing power. This chapter also includes some of the subjective and objective factors of value of money, determinants of purchasing power and problems of measuring the objective exchange-value of money.

The third chapter, “Money and Banking” is a section that explains to the readers about banking, the media’s influence on money, credit and interest. Mises explains the connection between the amount of money in the market and the level of rate of interest.

“Monetary Reconstruction,” the last section of the book, introduces the principle of sound money, the current “Gold Standard” currency systems and the classification of monetary theories.

The author shows how money began in the market, what its values are and introduces several theories and terms that are reflected on the economies we have today. This book grabs the interest of readers by its extensive research on economic terms. This book may seem a bit stern and bewildering for readers to read. However, once you hold on to this book, you would be able to get a grasp on the problems you may face that involves money and credit. The book is available for free online in the Ludwig von Mises Institute.

Chow, everybody!

By Moon Jung Kim

[Book Review] What Money Can’t Buy

Hello readers, I am back with a new exciting book!

In the midst of capitalism the value of money is rising as ever. In time like this, it is crucial to go over the definition of money and learn about how people’s mentality can form special type of norms in society. Our daily lives consist of repeated exchanges of money and value. The book ‘What money can’t buy’ written by a renowned Harvard philosophy professor, Michael Sandel introduces the limitation of money and what money should not buy rather than cannot. In his books, there are various scenarios. Those cases start with simple events such as, paying to cut lines in airport, paying kids for good grades, to events that seem morally problematic such as companies secretly buying insurance betting on the death of their employees.

When looking around, everything has price. It is as if every product, service, experience, event and a person has invisible price tag that follows along. According to the book, pricing is the most efficient way of measuring values. Economists urge to price everything everywhere for they become the rewards for those who want them the most. Not to mention, pricing has enormous effect on altering the way people act as intended. However, Sandel also talks about exceptional cases when money can cause opposite behavior as it becomes the biggest source of stress.

According to Sandel, market is taking place of our lives. Everything we do can be calculated as economic activities and be measured in numbers. The author suggests such trends in life bring numerous dilemma regarding bargaining moral values with money. Before the concept of market oriented mentality was widely introduced, ideas regarding health, education, procreation, refugee policy and environmental protection stood strong and solid. Now, little by little money is replacing the place where those valued ideas used to stand. To exemplify, the author talks about increase in killing African endangered animal, black rhino in return for money.

Micheal Sandel suggests that there are certain things that cannot put on sale. He points out that there exist moral limits in the market. For instance, it is the horrible feeling that people get when they were put to do something unjust and corrupted. The main argument that the author presents in the book is that while money can also be the greatest motivation, it can also have corrosive effect on value.

It is a book that definitely helps us examine where we are at and our way of thinking. It covers until what extent money can exercise its power. People often say they want to earn a lot of money. What do they need to pay in return? Find out by checking out this marvelous book that will trigger you to challenge the most widespread thoughts about money.

By Jiae Choung (sammy7953@naver.com)

[Book Review] Freakonomics

Do you respond to incentives? Some students study hard to get straight As and some to get more allowance from their parents. Most of people work diligently to earn better salary the following year. A real-estate agent sells houses eager to earn the commission. People tend to avoid a traffic violation that levies fines. You may also have some economic incentives. Like these examples, we do respond to incentives on our daily life. The thing is, however, people do not really think that as a study of economics because economics mostly sounds too far from their ordinary life. For those, who regard themselves economics-unrelated-readers and wish to know about different kinds of incentives, here I recommend Freakonomics. Co-writers, an economist Steven D. Levitt and a NY Times columnist Stephen J. Dubner, suggest very interesting economic theories related to daily lives in Freakonomics.

Steven D. Levitt is not a normal economist in terms of his views for the world. He tends to unveil every incident happened in the world with economist’s point of view. He suggests two specific topics, a) incentives of modern life and b) informational advantage, in order to analyze the world mechanism. How are these connected to us?

Co-writers give us an example of a clash of economic and moral incentives in the first chapter. A kindergarten in Israel introduced a late pick-up fine of $3 on tardy parents in the hope of reducing the rate. The result turned out, however, doubling the rate of late-pickup. What happened with the fine? Here is the thing. Parents who usually were late used to feel sorry at least, however, after the enacting of $3 fine, they no longer had to feel that worries. They could only pay the “sin-tax of $3,” which means their moral incentive to pick-up their child early transferred to economic incentive of a small amount of $3 fine. Parents rather chose to spend more time at work or other sports thinking that way was more efficient for their utility. Unfortunately, co-writers say the Israeli kindergarten could not get rid of the problem even after abolishing the fine system.

The writers bring up more interesting questions other than the above example. Questions like if real-estate agent’ and a house owner’s incentives are aligned with, why drug dealers live with their mom, or if elections really have something to do with money things. Freakonomics tries to look at the normal things with extraordinary viewpoints and gives us matters to think about. How about understanding the stories of our lives in a way we haven’t done in Principles of Economics class this weekend?

Sincerely,

Gueran Jeon (gueran.jeon@gmail.com)

[Book Review] The Price of Everything

Hi, this is Frank here with a new book.

 Have you ever wondered how much you are worth if you were put on the market? It has become a habit of people to put prices on everything, and when I say everything I literally mean everything. The book The Price of Everything addresses this phenomenon and digs deep on the factors that influence the choices we make regarding matters that are not traditionally thought to have prices

In the book, Eduardo Porter gives numerous examples and cases to illustrate and analyze the factors that influence people’s decisions. Making rational decisions is everything in economics. Nevertheless, there are times when people make decisions that seem to be far from rational.  For instance, people will travel across town to save $20 off a $100 sweater but not save $20 off a $1,000 computer which is an odd choice considering that both actions are priced equally. In this case, we can assume that people put more value on computers than sweaters and are willing to pay more, or that $20 reduced $100 seems like a better opportunity compared to $20 reduced from $1000.

Eduardo Porter expands to discuss about prices on matters that are not visible. For example, the value of women are different from country to country. In the case of India, baby boys are more preferred than baby girls because the family will be obligated to pay huge dowry to the groom’s family in the future. Additionally, while sons can share the burden of supporting the family, the daughter can not do as much. Thus, due to the high price of raising baby girls, the gender imbalance is India is higher compared to other countries.

There is more than just supply and demand pulling the strings on prices. The decisions we make are driven more by the situation and the opportunity cost we face rather than finance and logic. Economists and experts constantly try to analyze the reasons behind the economic decisions people make, and if you are expecting an answer to this by reading the book, you will be disappointed. Nevertheless, Eduardo Porter’s book gives a thorough insight into the implicit and explicit factors that contribute to prices and the role it takes in our lives. As quoted in the book, “Prices do a pretty decent job organizing the world, much of the time,” prices dominate our world. However, do not forget that when such prices fail, it can shake the root of your life and the world.

Sincerely,

Frank

[Book Review: Beyond Greed and Fear] the application of psychology to financial behavior

Why even the best Wall Street investors make mistakes? Aren’t they calculating risks before making their investment? They may have accurate information, know the right timing, and advanced technology to lead to successful investment. However, those investors do make mistakes.

 

The reasons for such mistakes are due to financial practitioners’ bias, over-confidence, and emotion misguiding their financial judgment. This gave a rise to the appearance of ‘behavioral finance.’ It seeks to combine behavioral and psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.

 

Then what is conventional financial theory? That is, assuming that economic participants are, for the most part, rational ‘wealth-maximizers.’ This is fundamentally based on the efficient market hypothesis, which does not account for irrationality of individuals. There are some critics of behavioral finance, arguing that findings in behavioral finance are just a collection of anomalies.

 

However, there are so many instances where emotion and psychology influence financial/economic decision making, causing individuals to behave in unpredictable or irrational ways. The interpretation of behavioral finance is well addressed in the book, ‘Beyond Greed and Fear’ by Hersh Shefrin.

 

 

 

 

The author uses the findings of psychological research to depict how human behavior guides stock selection, financial services, and corporate financial strategy. Those findings indicate the investment pitfalls caused by human error, which cannot be explained if individuals are seeking profit-maximization only.

 

It does not matter whether you are a supporter of efficient market hypothesis or not. Whatever your perspective is to view finance, wouldn’t it be great to have a look at newly emerging insight? This is another way of analyze finance, and more specifically, ‘how individuals behave and react’. Understanding behavioral finance may allow you to recognize, and hopefully avoid, bias and errors in financial decisions.

 

[Book] The Shock Doctrine: The Rise of Disaster Capitalism

Hello readers. 

 

 Today, I would like to introduce you a book called The Shock Doctrine: The Rise of Disaster Capitalism, written by Naomi Klein. This book criticizes Milton Friedman’s free market doctrine. It argues that the free market policies were pushed through without considering citizens’ welfare, letting them confront some social upheavals or disasters. In doing so, some of the unfortunate events were intentionally pushed in order to make unpopular reforms accepted by citizens.

 

 

In the first few chapters, Klein compares capitalist economic policies to shock therapy. Shock therapy seems to make a person’s personality fonder, but is, in fact, distorting it. This is same as the economic policies that only strive for economic growth disregarding other social values. Although it may seem effective at an initial phase, rising economy and improvement would be limited and temporary only. Darker side of such growth model exists within the economy. There are some previous cases of shock therapy, for instance, during Asian Financial Crisis in late 1990s and the US occupation in Iraq. Particularly, the author depicts that the occupation in Iraq is considered the most comprehensive and full-scale implementation of shock therapy.

Naomi Klein gives us comprehensive interpretation of the terms ‘disaster capitalism’ and ‘shock therapy’ in her book. Her explanation reminds readers of the previously understood knowledge about free market economy, by explaining how the market economy has been exploited in shocking and extremely violent moments of history. I guess what we can learn from this book is not a mere argument of how desirable capitalism is, but a new conceptual thought on capitalism.

 

I hope you get a chance to read this fascinating book and share your thoughts with us!

 

  

[People; Ha-joon Chang] New Interpretation of the International Trade System

 

Hello readers! Do you enjoy reading finance books? I am sure you have heard of the recent best-selling books ‘Kicking Away the Ladder’ and ‘Bad Samaritans.’ They are all written by Ha-joon Chang, economics professor at Cambridge. He has been the hot potato on the table in the field of economics these days. He graduated from Seoul National University in Korea, and further pursued his educational achievement at Cambridge University. Now, I will briefly introduce you those two books mentioned above, as they are drawing lots of attention today.

 

Let me begin with the book, ‘Kicking Away the Ladder.’ In this book, the author addresses some flaws of the international trade system. His critique mainly stems from a historical perspective examining how developed countries take their roles in international economy. Do you know the implication drawn by kicking away the ladder? For you to have a look at it, I added the image of book cover below. ‘Ladder’ has more than its literal meaning, referring to ‘opportunities’ for developing or under-developed countries to step towards a higher level of economic advancement. That is, ladder is a tool for those countries to catch up with the developed countries in terms of economic growth. Thus, the title ‘kicking away the ladder’ means vicious and unjust acts by developed countries intentionally halting developing countries’ economic prosperity.

 

 

The author argues that this act of kicking away the ladder is the most fundamental and problematic obstacle in international trade system. Imminent actions are in need to resolve this issue so as to alleviate global poverty. Mr. Chang’s this perspective and creative interpretation of the current international economy let him win the Gunnar Myrdal Prize.

 

Then, let us move on to the next book, ‘Bad Samaritans.’ In this book, Mr. Chang casts doubt on the optimistic vision of global economy in which money, commodities, and people stride over borders, creating a flat world. ‘Bad Samaritans’ refer to self-centered and cunning entities, implying the developed countries seeking neo-liberal economies. Although such nations call for a globalized open market without borders, the author criticizes their attempt to make developing economies highly vulnerable to side-effects of globalization. While the developed countries have strengthened their economic capacity through closed-economic strategies and protectionism in the past, they now assert that developing should remove barriers and open their markets. Addressing such irony is exactly how Ha-joon Chang has become the focus of spotlight to readers all around the globe. 

 

If you want to know more about Mr. Chang’s interpretation and perspective, why not pick up those books and read them? You may gain a new insight to analyze the current international trade system.

 

 

[Book Review: Nudge] Are you making rational economic choices?

Nudge by Richard Thaler & Cass Sunstein

 

Have you ever persuaded someone to change his behavior? If you have, was it easy? I don’t really think it is. Well, the book, ‘Nudge’, may help you to become an influential and persuasive person without forcing someone. ‘Nudge’ means pushing someone lightly with your elbow to grab attention. In other words, it induces people to the right way while the freedom of choice still depends on the individuals. For example, just by asking people whether they would like to vote, the action of questioning contributes to increase the turnouts. The authors, who are behavioral economists as well, combined psychology with economy to help you select more rational choice.

 

The innovative idea that changes one’s way of thinking became extremely famous after Mr. Obama applied it to his policy. (Sunstein, one of the authors, has actually joined the Obama’s administration!) In the introduction, the authors mention ‘choice architects’ (this is the keyword in this book!). “A choice architect has responsibility for organizing the context in which people make decisions.” (p.3) Meaning that like a traditional architect, the choice architect has to plan and follow guidelines to “influence people’s behavior in order to make their lives longer, healthier, and better.” (p.5) This is a nudge.

 

 

 

 

In the first chapter, Thaler and Sunstein talk about a curve in Chicago’s Lake Shore Drive that uses a nice visual illusion to nudge drivers to slow down. Road planners in Philadelphia have been experimenting with painted illusions of speed bumps on some roads to accomplish a similar effect.

 

 

 

Nobody immediately warned drivers to slow down but by this nudge effect, the drivers will automatically slow down. So, how can we apply this effect to economy? I’ll give you an example.

 

Minnesota State did an interesting experiment on their taxpayers. The taxpayers were divided into 4 groups and received each different type of guidance.

 

1. Your tax will be used to make our state better: education, defence and fire prevention.
2. If you do not follow the tax policy, you will be punished under the law.
3. Here is a guideline for you to fill in your tax bill.
4. 90% of Minnesota residents have already followed the liability to pay taxes.

 

Which of these do you think was the most effective way to increase the payment of taxes? Lot of people predicted that the third one would be the most effective one but the answer was ‘4’. The phrase that creates anxiety leads to a successful self-assessment!

 

In Nudge, there are two comparative types of human: One is called ‘Econ’, short for ‘Homo Economicus’ and the other one is just human. Thaler and Sunstein tell us that, according to the traditional economics, humans are ‘Econs’ with profit-seeking motive who always act right and make rational choices. However, are we actually ‘Econs’? In reality, we are not. For instance, we all know that saving is the best way to become wealthy, but we often fail to make regular savings and spend our earnings to gratify our desires. This shows how the traditional economics fails to explain human desires. It illustrates that theory does not always match the reality! Tired of traditional economic theory which keeps talking about ‘rationality’ of our decisions? Why not read this book, ‘Nudge’, to learn something new about behavioural economics?