[Book Shelf] Bad Samaritans

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-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.

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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.

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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.

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[Book Review] How Markets Fail by John Cassidy

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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.

howmarketsfail_smallerToday, 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 20th century, this theory might have fueled the economy, but in the 21st 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

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bookcoverI 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

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

moneyIn 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

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signDo 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.

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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

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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.

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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

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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.

 

 

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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.