I finished this book three or four weeks ago. It's a comment on how busy I've been since July that I have only finished two books (this and the other review I'm posting today).
This book comes in second place behind Jared Diamond's Guns, Germs and Steel as one of the great books of the last ten years. Similar to Diamond, Greenspan comes with no pre-determined ideas. He looks at the world as a great, functioning whole and meticulously tries to work out the individual mechanisms that shape and control it. As a non-politician and technocrat working in Washington, he has been in a unique position to observe and experiment with the basic building blocks of western culture.
AN IRRELEVANT ASIDE
Greenspan fits exactly my preconception of the perfect intellectual. There are very few things that we as individuals can actually know about the universe. Scott Adams argues that what we see, experience and work our science with is but a shadow of reality. What we perceive is only a small portion of the real world, and we have trouble determining what is real.
Color is a good negative example. It does not exist in the real world. Anyone who has spent time in a color darkroom or worked with color printing or output of any sort doesn't need to be told that our perceptions of color are difficult to recreate. Images from space probes undergo meticulous work to get natural seeming colors. There is no independent way of confirming the color on Mars' surface. NASA engineers/PR flacks have decided on a particular color pack and kept it there. One of the reasons for the Hubble Space Telescope's success is that the images were released with the most vibrant possible colors. (Hat tip to the Economist for pointing this out in an article last year).
What do we know is real? There are two forms of intelligence that are undoubtedly linked to the real world — mathematics and music. These are the only two areas where a particularly talented six year old can perform on the level of an adult.
Greenspan is one of the few individuals to peak in both areas. He was a professional musician early in his life. He left it only when practicing with some truly talented players realized that some people simply had more innate ability than he did. He switched back to math/economics, which was a secondary choice for him.
GREENSPAN'S VISION
I have little interest in the parts of the book dealing with Greenspan's early life, or the history of his decisions as the Chairman of the Fed. I am more interested in his diagnosis of the world economy.
CURRENT STATUS - Inflation has disappeared around the world (there are four minor exceptions - Zimbabwe, Cuba, Argentina and one other I forgot). The world is currently awash in investment capital. While most economists (including Greenspan at some times) have pointed to changes in technology and astute functioning of the central banks, in his book Greenspan says these are minor or even non-existent factors. The key factor is the end of communism and the entry of billions of new workers and consumers in the western economies.
When I was growing up, the western economies held less than a half billion people - the populations of the US and Western Europe, with a few minor additional players. Today, it includes virtually everyone outside of sub-Saharan Africa. And these new entrants are not only keeping prices down by working (in factories, over the internet, etc.) at lower prices than those in rich countries. They also save more of what they earn than workers in rich countries.
This has created an immense—AND VERY TEMPORARY—pool of capital that the established western economies are currently feeding on. This surplus of capital has led to the dot-com boom, the real estate bubble and a probable new expansion of stock market values. It has led to the rise of the Euro, despite extreme structural and demographic pressures against it.
At some point, probably very soon, conditions will stabilize. There will be no more new entrants to the global economy. Wages worldwide will come closer to equilibrium. Workers in the developing world will begin to consume more (spend a larger fraction of their income) like their peers in the US, France and Germany.
Inflation will re-enter the picture for the first time in twenty or more years. Economies which have not prepared themselves to effectively control economic conditions (Europe without a doubt, US depending on the political independence of the Fed and other factors) will find themselves with rapidly depreciating fiat currencies.
OTHER AREAS
I focused on the inflationary area since I think a) Greenspan is completely on target, b) this has relevance for my future decisions and actions. Watch for them.
He also discusses at length Medicare and Social Security, and the apparent inability of an elected Congress to deal with these long-term issues. He is concerned about the strong tendency for elected officials to stuff the Federal budget so full of pork that the central government will forever be borrowing to sustain itself.
Two key areas that concerned him: education (for which he is a strong proponent of market-oriented school plans such as Milton Freeman's vochers), and intellectual property. In the fifty years he has been a part of the economy, he has seen the influence of physical product devolve to the point of near irrelevance. We no longer care how much about the steel industry. Most value is in intellectual property.
The problem is that the legal framework for dealing with intellectual property is not only incomplete, it is self-contradictory. He points to the issues facing the music industry over the past decade as the harbinger of these problems. A completely new framework is required, and one that can be accepted by all parties in the worldwide economy, on how best to manage and adjudicate intellectual property disputes in order for the economy to expand properly. Without this support, the economy is in for a bumpy ride as no one can be sure of who holds what, or what it might be valued at.
CONCLUSION
When reading this book, it is clear that what most of us view as stagnant and unchanging (or slowly changing) — cost of bread, cars, CD's; value of a paycheck — are in fact in near free-fall for someone with an overview of (and responsibility for) the whole thing. It's a breathtaking book.