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An Open Letter to the Fans of Robert Kiyosaki in the Philippines

An Open Letter to the Fans of Robert Kiyosaki in the Philippines

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Published by Elevic Pernis
This is my message to fans of Robert Kiyosaki in the Philippines. I urge them to study economics.

The blog post can also be found here: http://elevicpernis.com/economics/an-open-letter-to-the-fans-of-robert-kiyosaki-in-the-philippines
This is my message to fans of Robert Kiyosaki in the Philippines. I urge them to study economics.

The blog post can also be found here: http://elevicpernis.com/economics/an-open-letter-to-the-fans-of-robert-kiyosaki-in-the-philippines

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Categories:Types, Speeches
Published by: Elevic Pernis on Dec 17, 2010
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05/12/2014

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An Open Letter to the Fans of Robert Kiyosaki inthe Philippines
http://elevicpernis.com/economics/an-open-letter-to-the-fans-of-robert-kiyosaki-in-the- philippinesTime flies so fast! I feel it’s just yesterday when I first got exposed to the ideas of RobertKiyosaki. It happened during the final quarter of 2008, at the peak of the Global Financial Crisis,which resulted from the bursting of the US Housing Bubble. I often saw
 Rich Dad Poor Dad 
in book stores, but did not read it until then because I felt that I have already read and consumed toomuch inspirational books. Too much of that genre is not good.But this book was different. It’s not the usual which simply urges a person to improve himself and word hard towards important goals. It’s about a world view and a call towards improving hisfinancial know-how.One important take-away from this book is this distinction: assets v. liabilities. According tostandard accounting convention, a person’s house is an asset. In Kiyosaki’s parlance, it is aliability for the simple reason that it generates negative cashflow. It only becomes an asset if it’sused as rental property yielding positive cashflow. There are other items which are consideredassets in conventional accounting but are actually liabilities such as cars, gadgets, and so forth.While the debate on whether or not “a house is an asset” can be simply viewed as a matter of semantics, Kiyosaki’s unique distinction between assets and liabilities has proved helpful for melater in trying to understand the difference between capital goods and consumption goods,whereinit’s a useful analogue.
Consumption goods
(also known as
goods of the first order
) are economic resources that coulddirectly satisfy a person’ needs or wants. On the other hand,
capital goods
(also known as
goodsof the higher order
) are produced goods that could indirectly satisfy a person’s needs or wantsthrough its ability to produce consumption goods or another capital good. Cars are examples of consumption goods, while the plants used to manufacture those cars are examples of capitalgoods. Sometimes one person’s consumption good is another’s capital good, but let us notexplore complicated cases for now. Suffice it to say that Kiyosaki’s books have kindled mysleeping desire to study business, economics, and finance. It’s probably not mere coincidencethat at the period when I was imbibing the Rich Dad philosophy, I also came to like Ron Pauland the Austrian School of Economics.To those whom this letter is addressed, let me tell you this. If you like Kiyosaki’s ideas but areapathetic to issues of politics and economics, I urge you to include them in your study. Youcannot go business as usual if you don’t understand them. With that in mind, I introduce you tomy first major point.
Financial Literacy is a Special Case of Economic Literacy
 
First, letme introduce some working definitions.
Economics
is
the study of how individuals act and choose among various alternatives of meansand ends in order to reasonably satisfy their needs and wants in the face of scarcity
.This isslightly different from the textbook definition of economics as
the study of how society properlyallocates scarce resources.
While both definitions agree that economics is about the proper allocation of resources, my definition shifts the focus from society (or God forbid a centraleconomic planner) to individuals. This is in line with the principle of 
methodologicalindividualism
, i.e. only individuals act; and any observed collective behavior and effect can betraced to the actions and decisions of an individual. And this principleis key to the great insightof economist Ludwig von Mises: Economics is about real people. (see his great book 
 Human Action
)
Economic literacy
is possession of competent knowledge of fundamental economic conceptsand the ability to properly apply them in daily living. Consider the concept of 
opportunity cost
or the trade-off between one choice and another. A person who desires to enjoy life wants to doeverything he pleases, but scarcity of time is a reality. Suppose Mark has ten activities that hetruly enjoys engaging in, but he can only do up to three on any given day. He is forced toconstruct a scale of values, which changes on any given day. If for a particular day an activity ishigh in his hierarchy of values, he will prioritize it over that which is on the low end of his valuescale. If Mark loves hiking, fishing, and camping on Tuesday, the 11
th
of January, he’ll choose todo them over other enjoyable activities such as reading, reflecting, and writing. While Mark mayenjoy doing the latter three, he’ll not engage in them during those days when they are not on topof his scale of values. In light of scarcity of time, we say that Mark chooses to engage in hiking,fishing, and camping and at the same time chooses
not
to spend time reading, reflecting,andwriting. This is opportunity cost at work. To recognize that there’s opportunity cost in everychoice we make is just being realistic. It is a conscious use of our faculty of reason. When youchoose to apply the wisdom of applying economic principles in life, you are beginning todevelop economic literacy. Ignore this at your own peril.The same insights about opportunity cost can also be applied in financial matters. If there arecompeting goods, choosing to buy item A is also a choice not to buy itemB. In the same manner,choosing to buy A because it is cheaper and also of the same quality as B is also a choice not to buy B notwithstanding that B may have better packaging.At this point, it should be noted that economics is a descriptive science. It does not tell us whichchoices to make. It merely recognizes that individuals make choices based on their subjectivevaluations. It also guides us in analyzing the consequences of any given choice, but the finaldecision is left to the individual.There’s also a related concept called
time preference
. It is the tendency to value goods now thanin the future. As the saying goes, a peso today is worth more than a peso tomorrow. To put theconcepts of time preference and opportunity cost together, suppose the person above has chosento buy A, but he’s not decided yet when to buy. A decision to buy A now is a decision not to buyA later and vice versa. If he desires and chooses to buy A now, we say he has high time preference; if, on the other hand, he chooses to buy A later, we say he has low time preference.
 
The rate of a person’s time preference is always positive; it can never be negative. The degree of which it is high or low depends on the person and how he values a certain good on any giventime.There areother concepts in economics that are worth knowing and applying in finance, but theabove would suffice for now. My point is that financial literacy is a special case of economicliteracy. This is worth repeating and putting to heart. The problem I have with people who followKiyosaki and promote financial literacy is that their version of financial literacy is so myopic. Bychoosing to ignore economic literacy, they are in danger of committing
false economy,
i.e. anapparent saving that leads to long-termexpense. The purpose of knowing and applying financialliteracy is to maximize one’s use of every monetary unit; not merely saving more for saving’ssake. Financial literacy by itself is important. It will help people live better lives. But havingeconomic literacy provides a bigger and much more complete picture.Without economic literacy, even a relatively financially literate person would not fully grasp thesignificance of Kiyosaki’s statement:
Savers are losers
. He will merely think that if you onlysave and deposit your money in the bank, inflation will eat your savings. By treating inflation asa normal phenomenon, he will fail to see the evil role that governments and central banks play inmaking inflation so perennial. Without a sound theory of thebusiness cycle, he will fail to seethat (price) inflation is the effect of the expansion of the supply of money i.e. monetary inflation,which is the true definition of inflation.Furthermore, there are some quacks out there who shout that they are followers of Kiyosaki byseverely disparaging savers and finance people. Their marked ignorance of economic principles blinds them to the fact that savers and their habit of saving play a crucial role in economicdevelopment notwithstanding the shenanigans thatthose in power do. Without real savings, theamount of money that could be lent to entrepreneurs is severely limited. But if and whenentrepreneurs obtain a loan notwithstanding the low savings rate of an economy, they do so atthe price of artificial credit expansion, which leads to more distortions in the economy. If thereare few people saving, the natural rate of interest should be high in order to encourage more people to save. Alas! Central banks artificially set lending rates much lower than market clearingrates. This leads to the boom and bust phases of a business cycle. This deep knowledge about theeconomy, in my opinion, is severely lacking in Kiyosaki’s works. Sure, he mentions some of them, but you won’t get them if you merely read his Rich Dad series. To those enlightened byKiyosaki, you must expand your intellectual horizons by choosing not only to be financiallyliterate but also economically literate.
Entrepreneurship and the Government Cannot Go Together
As mentioned in the previous section, economic literacy is crucial in understanding the worldand living a better life. However, without this type of literacy, people would continue to believeand utter statements that are contrary to their purpose. The popularity of Kiyosaki has generatedinterest in entrepreneurship and financial literacy. These concepts by themselves are good.Entrepreneurs are the drivers of the economy. Without these people, jobs won’t be created. Tosee that more jobs are created, more entrepreneurs must be willing toundertake risks. Therefore,entrepreneurship must be encouraged.

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