Philip Murray is an associate professor of economics at Webber College in Babson Park, Florida.
If anyone doesn’t know U.S. economic history or how exciting business can be, wait until this book makes its mark. Although Peter Lynch and John Rothchild direct this book to a young audience, older readers will also find several worthwhile lessons to learn in economics and business.
It starts with “A Short History of Capitalism.” Don’t be misled by the title. Lynch and Rothchild devote 70 pages to the subject. Economic historians will respect their interpretation, which emphasizes individuals. We learn that the colonists at Jamestown and Plymouth abandoned communism for private property. The authors paraphrase Adam Smith as follows: . . . when each person pursues his own line of work, the general population is far better off than it is when a king or a central planner runs the show and decides who gets what.
This tale of U.S. capitalism features inventors, immigrants, and the companies rooted in our past and still alive today. Free-market economists will quarrel with the authors’ assertion that: Another factor that may have contributed to the national prosperity is that our borders were effectively closed to many foreign-made goods by prohibitive tariffs. But elsewhere the authors sound like students of Ludwig von Mises: with more efficient machinery, the workers’ time became more valuable, not less, and the factories could afford to raise the workers’ wages. Concerning the Great Depression, the authors cite government mismanagement of the money supply as the cause, but not the Smoot-Hawley Tariff Act.
Lynch and Rothchild are pro-saving and investment, as they make clear in the introduction: Investors are the first link in the capitalist chain. Their advice is: Save as much as you can! You’ll be helping yourself and helping the country. Take this to mean that we may safely ignore John Maynard Keynes and his followers who reason that consumption spending leads to economic growth and worry that saving will not become investment. In fact, discussion of Keynes is conspicuously absent from this book.
In the chapter on “The Basics of Investing,” the reader will learn, among other things, that cash investments fail to keep pace with inflation, that a house is a smart purchase, and that stocks outperform bonds. Of course, Lynch and Rothchild prefer stocks and encourage the reader to use what he knows to pick his own stocks. The beginner will encounter stock market basics such as dividend yield, P/E ratio, and the important role of profit. The authors do their part for economic education by recommending The Wealth of Nations and explaining such statements as: “Capitalism is not a zero-sum game.”
Their discussion of the business cycle endorses an environment of low taxes and minimum regulations but is marred by the view that government has the responsibility to stabilize the economy. They do, however, note that government deficit-spending is crowding out private investment.
Lynch and Rothchild do a superb job of making entrepreneurs into heroes. They give a bullish description of contemporary American business and address the public concern over layoffs. Of 25 large companies they select, such as Exxon and General Electric, layoffs amounted to 400,000 from 1985 to 1995. However, the 25 small companies in their sample, such as Microsoft and Toys R Us, created over 1,000,000 jobs during the same period. This phenomenon of big companies downsizing to survive while small companies add jobs to grow is an excellent example of what Joseph Schumpeter dubbed creative destruction.
Try Learn to Earn for a solid introduction to the workings of the market economy and business.