Learn to Earn — Summary

The Father of Modern Economics — Excerpt

Markets were opening all over the place, and people were buying and selling at a furious pace, and to many people the whole situation was out of control. Never in history had masses of individuals been allowed to go their own way and work for their own benefit. There didn’t seem to be any rhyme or reason to it.

This is where the economists came in. They were a new breed of thinker. For thousands of years, religious philosophers had tried to figure out how mankind could live according to God’s wishes. They debated politics and the best form of government, and who the leaders should be. But it took economists to describe what happens when individuals have the freedom to seek their fortunes.

The first and the smartest early economist was a Scotsman named Adam Smith, a nerd of his day who lived at the time of the American Revolution. Smith avoided parties and picnics to stay at home thinking and writing, and he was so absorbed in his ideas that he got the reputation of being absent-minded. His great work was called An Inquiry into the Nature and Causes of the Wealth of Nations, which today goes by the shortened title, The Wealth of Nations.

The Wealth of Nations was published in 1776, the year America declared its independence, and it’s a shame that Adam Smith didn’t get more credit for writing it. He deserves a prime spot in history along with John Locke, Benjamin Franklin, Thomas Paine, and other revolutionary thinkers who argued that political freedom is the key to a just society where people can live in peace and harmony. The others didn’t say much about how to pay the bills—but Smith did. He made the case for economic freedom.

Smith argued that 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 dictates who gets what. His point seems obvious today, but in 1776, it was a novel idea that millions of individuals making and selling whatever they pleased, and going off in all directions at once, could create an orderly society in which everybody had clothes, food, and a roof over their heads. What if ninety-nine out of one hundred people decided to make hats, and only one out of one hundred decided to grow vegetables? The country would be flooded with hats, and there would be nothing to eat. But this is where the Invisible Hand comes to the rescue.

There wasn’t really an Invisible Hand, of course, but Smith imagined one working behind the scenes to insure that the right number of people grew vegetables, and the right number of people made hats. He was really talking about the way in which supply and demand kept goods and services in balance. For instance, if too many hat makers made too many hats, hats would pile up in the market, forcing the hat sellers to lower the price. Lower prices for hats would drive some hat makers out of the hat business and into a more profitable line of work, such as vegetable farming. Eventually, there would be just enough vegetable farmers and just enough hat makers to make the right amount of vegetables and hats.

In the real world, things don’t work out quite as perfectly as that, but Smith understood the basics of how a free market works, and they still hold true today. Whenever there’s a demand for a new product, such as computers, more and more companies get into the business, until there are so many computers for sale that the stores have to drop their prices. This competition is very good for you, me, and all the other consumers, because it forces the computer makers to improve their product and cut prices. That’s why every few months, they come out with fantastic new models that cost less than the clunky old models. Without competition, they could keep selling the clunky old models and consumers could do nothing about it.

The Invisible Hand keeps the supply and demand of everything from bubblegum to bowling balls in balance. We don’t need a king, a Congress, or a Department of Things to decide what the country should make, and how many of each item, and who should be allowed to do the manufacturing. The market sorts this out, automatically.

Smith also realized that wanting to get ahead is a positive impulse, and not the negative that religious leaders and public opinion makers had tried to stamp out for centuries. Self-interest, he noticed, isn’t entirely selfish. It motivates people to get off their fannies and do the best they can at whatever job they undertake. It causes them to invent things, work overtime, put extra effort into the project at hand. Imagine what lousy carpenters, plumbers, doctors, lawyers, accountants, bankers, secretaries, professors, center fielders, and quarterbacks we’d have if people weren’t allowed to profit from their talents, and success was never rewarded!

Smith said there was a “law of accumulation” that turned self-interest into a better life for everyone. When the owner of a business got richer, he or she would expand the business and hire more people, which would make everybody else richer, and some of them would start their own businesses, and so on. This is where capitalism created opportunities, unlike feudal agriculture, where a small number of big shots owned the land and kept it in the family, and if you were born a peasant, you would live penniless and die penniless, and your children and their children would be stuck in the same rut forever.

At the time Smith wrote his book, and throughout the century that followed, great thinkers were trying to find laws for everything. Scientists already had discovered physical laws, such as the law of gravity, the laws of planetary motion, and the laws for certain chemical reactions. People believed in an orderly universe, in which, if there were laws for how the planets move and how apples fall from the tree, there had to be laws for business, and laws for politics, and laws for how people react in different situations. Once you figured out the formula for how money gets passed around, for instance, you could predict exactly who would end up with how much.

It was one thing to say there was a law of supply and demand, or a law for how money travels, and quite another to find a formula that could nail it down. But economists kept trying, coming up with new theories to reduce the hustle and bustle of the marketplace to a single equation.

Investor Protection — Excerpt

When you buy stocks, bonds, or mutual funds, you’re taking enough of a risk already, without having to run the risk of being misled by false information or of being cheated. Investors deserve to be protected from fraud, hype, and shoddy merchandise, the same as customers in a retail store.

When you’re buying a jacket, you want to know it’s the kind of jacket the salesman says it is, that it’s made out of the material listed on the label, and that you’re paying a fair price. That’s why the government has passed truth-in-advertising laws. When you’re buying a stock, you need to know that the company is doing as well or as poorly as it claims to be doing, that its financial reports are reliable, and that in general you’re getting what you pay for. That’s why the government has passed strict rules for stockbrokers, traders, mutual funds, professional money managers, corporate executives, and companies themselves.

Prior to the Great Depression, many of these safeguards didn’t exist. Companies weren’t required to file detailed reports, and by not saying anything, they could hide their problems from investors. The so-called insiders—people who had advance notice of positive or negative developments in a company—could buy or sell shares before the news got out and make big profits from this “insider trading.” Insider trading was frowned upon in theory, but a lot of insiders did it anyway.

Before the Crash of 1929, it was common practice for some of the robber barons and their cronies to run the price of a stock up and down for their own benefit. They knew how to manipulate the market in their favor, scaring the public into selling stocks at a low price, then luring them back to buy those same stocks at a ridiculously high price.

Few investors bothered to learn much about the companies they owned, because they realized that the gyrations in any stock had little or nothing to do with the fundamentals of a company. Instead, investors tried to figure out which way the smart money was betting—an impossible task, unless you were one of the insiders. Buying stocks in those days was like being in a poker game with the pros, where the pros could look at their cards, and you had to wear a blindfold. They should have put a warning label on the stock market: Invest at your own risk.

It was after the Crash that Congress held hearings on the various forms of Wall Street hanky-panky, and the government stepped in to put a stop to them. An agency known as the Securities and Exchange Commission (SEC) was established to lay down the law and punish the violators. The SEC has done such a good job that it is admired all over the world, where other stock markets may not be as fair and honest as ours is, and where small investors suffer as a result.

The situation on Wall Street is far from perfect, and you still hear about cases of insider trading, but these days, the perpetrators usually get caught and punished. It’s against the law for employees of a company, from the top executives down to the mail clerks, to buy or sell shares when they know something’s about to happen that will affect the price. Friends, relatives, bankers, lawyers, even people who overhear the inside information in the men’s room or the ladies’ room aren’t allowed to profit from the tip. The SEC is very strict about this.