The latest book review here at Richer by the Day is False Economy: A Surprising Economic History of the World by Alan Beattie.

The stated aim of False Economy is to “explain how and why countries and societies and economies got to where they are today” without succumbing to fatalism.  Analyzing the past, it is argued, often leads to improper conclusions, since the eventual outcome is already known.  As such, ’causes’ of an outcome may have had far less actual influence than hindsight allows us to credit.  To prove the point, the author uses some events in US history that might have been used as evidence of the inevitability of failure, had failure of the US actually occurred.  For example, rather than import the graceful and artistic game of soccer from Europe after our independence, as isolationists we instead created the brutal and violent game of football in its place.

Comparisons have been made between Alan Beattie and Thomas Friedman, though after reading False Economy I doubt it will receive such popular support as the works of Friedman.  That is not to say that False Economy isn’t a good book –it’s quite good — just that the appeal is for a more limited demographic.  You expect economic history to be rather dry and Alan Beattie did a reasonable job avoiding that stereotype, though a few lapses were evident.  False Economy started and ended well, but dragged somewhat in between.

Many of the touted historical tidbits (e.g. why our asparagus comes from Peru and QWERTY keyboards are the standard) were indeed interesting, though too sparse for readers looking towards False Economy solely for such facts.

The major topics covered in False Economy are as follows, complete with a synopsis or my interpretation:

Making Choices

Beattie argues that, despite popular belief, a single event rarely changes a country.  To prove this theory, he examines the similarities between the United States and Argentina at the end of the 19th century and shows some of the many, many events each country took to eventually diverge as greatly as they now have.  In the conclusion of this analysis comes the warning that that divergent paths of the two countries were not predetermined and neither is the continued economic dominance of the United States.

Cities

False Economy explores not just the rise of cities with similar backgrounds but the general trends that nearly all cities face when they grow.  For example, how urban draw and rural push interact and the contributions of price imbalances between cities and surrounding countryside.  I found the analysis of the importance of keeping a capital separated from the masses particularly interesting, having grown up in New York state where visitors are shocked to learn that Albany (and not NYC) is the capital.  As a full time telecommuter, living way out in the country and 1000 miles from my corporate office, I thoroughly agreed with the questions about whether advances in transportation and communications make cities less necessary today.

Trade

An economy with a natural advantage in a limited market may turn out to be a poor performer in a larger one.  The example of Egypt as one of the Mediterranean’s wetter countries, but one of the world’s dryer ones, was given.  The concept of water as an import, in the form of embedded water in agriculture, left you wondering if water is the new oil.

Natural Resources

Oil and diamonds are curses for many countries.  This is particularly true when a country is a source for the raw material but doesn’t provide the value added services that benefit the economy as a whole.  African nations that export raw diamonds, rather than providing cutting and polishing services as well, miss out on much of the potential economic benefit.  Extraction industries also tend to be capital intensive, relying on few workers to operate expensive machinery.  If those machines are designed, developed, and manufactured elsewhere, the extracting economy also gets little benefit.  A final problem is that success of the extraction industry (even with little benefit to the country itself) tends to raise the value of the currency, hurting other exported products and services.

Religion

Religion was also shown to play a major role in economic development, but mostly from the religion’s political influence rather than it’s theology.  Those cases where economically inconvenient laws, based on religion, could be challenged and replaced found the most economic prosperity.

Politics of Development

Many industries are shaped by politics as much as economics.  The government tends to protect failing industries, not successful ones.  The argument is made that it isn’t so much that the government picks these failing industries to support as these industries have the political clout to garner protection.  For a much more thorough look at these themes, I recommend the works of David Cay Johnston.

Trade Routes and Supply Chains

Logistical and infrastructure difficulties often preclude work from being done in an otherwise capable location.  Many of the economic troubles in Africa are amplified because of the terrible infrastructure there.  Value added services go elsewhere because of the uncertainty and risk of getting goods in, processed, and then back out.  The side effects of improved transportation, such as the need for standard times zones and the reorienting of the US from a North-South country (following the course of rivers) to an East-West country (following the new railroads) was quite interesting.  The difficulties in adapting new technologies, even if they are clearly more efficient, was also discussed.

Corruption

It was interesting to read that corruption itself doesn’t necessarily condemn an economy to failure.  Stable and predictable corruption basically acts much like a tax.  It’s when uncertainty surrounding corruption emerges that it has the most damaging effect.  Isolationist self-sufficiency stands to do more damage than ordered corruption in a country with otherwise favorable economic policies.

Path Dependence

Some economies are on a path towards ruin and find it difficult to leave that path for factor’s beyond the government’s control.

I personally find behavioral economics (see Predictably Irrational or Freakonomics) more surprising, and entertaining, than False Economy whose subtitle is A Surprising Economic History of the World.  That being said, False Economy still does manage to offer some surprises and historical insight that could certainly be applied to many current situations.  In that sense, I would be more inclined to list it as required reading for government leaders than the average consumer.  History and economic buffs would surely enjoy the book, as I myself did, though most visitors to Richer by the Day would probably find the behavioral economic books, listed previously, to be more enjoyable.

False Economy will be released on April 16, 2009 and is currently available for pre-order.