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

http://elevicpernis.com/economics/an-open-letter-to-the-fans-of-robert-kiyosaki-in-thephilippines

Time flies so fast! I feel it’s just yesterday when I first got exposed to the ideas of Robert Kiyosaki. 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 too much 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 his financial know-how. One important take-away from this book is this distinction: assets v. liabilities. According to standard accounting convention, a person’s house is an asset. In Kiyosaki’s parlance, it is a liability for the simple reason that it generates negative cashflow. It only becomes an asset if it’s used as rental property yielding positive cashflow. There are other items which are considered assets 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 me later in trying to understand the difference between capital goods and consumption goods, wherein it’s a useful analogue. Consumption goods (also known as goods of the first order) are economic resources that could directly satisfy a person’ needs or wants. On the other hand, capital goods (also known as goods of the higher order) are produced goods that could indirectly satisfy a person’s needs or wants through 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 capital goods. Sometimes one person’s consumption good is another’s capital good, but let us not explore complicated cases for now. Suffice it to say that Kiyosaki’s books have kindled my sleeping desire to study business, economics, and finance. It’s probably not mere coincidence that at the period when I was imbibing the Rich Dad philosophy, I also came to like Ron Paul and the Austrian School of Economics. To those whom this letter is addressed, let me tell you this. If you like Kiyosaki’s ideas but are apathetic to issues of politics and economics, I urge you to include them in your study. You cannot go business as usual if you don’t understand them. With that in mind, I introduce you to my first major point. Financial Literacy is a Special Case of Economic Literacy

First, let me introduce some working definitions. Economics is the study of how individuals act and choose among various alternatives of means and ends in order to reasonably satisfy their needs and wants in the face of scarcity. This is slightly different from the textbook definition of economics as the study of how society properly allocates 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 central economic planner) to individuals. This is in line with the principle of methodological individualism, i.e. only individuals act; and any observed collective behavior and effect can be traced to the actions and decisions of an individual. And this principle is key to the great insight of 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 concepts and 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 do everything he pleases, but scarcity of time is a reality. Suppose Mark has ten activities that he truly enjoys engaging in, but he can only do up to three on any given day. He is forced to construct a scale of values, which changes on any given day. If for a particular day an activity is high in his hierarchy of values, he will prioritize it over that which is on the low end of his value scale. If Mark loves hiking, fishing, and camping on Tuesday, the 11th of January, he’ll choose to do them over other enjoyable activities such as reading, reflecting, and writing. While Mark may enjoy doing the latter three, he’ll not engage in them during those days when they are not on top of 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, and writing. This is opportunity cost at work. To recognize that there’s opportunity cost in every choice we make is just being realistic. It is a conscious use of our faculty of reason. When you choose to apply the wisdom of applying economic principles in life, you are beginning to develop economic literacy. Ignore this at your own peril. The same insights about opportunity cost can also be applied in financial matters. If there are competing goods, choosing to buy item A is also a choice not to buy item B. 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 which choices to make. It merely recognizes that individuals make choices based on their subjective valuations. It also guides us in analyzing the consequences of any given choice, but the final decision is left to the individual. There’s also a related concept called time preference. It is the tendency to value goods now than in the future. As the saying goes, a peso today is worth more than a peso tomorrow. To put the concepts of time preference and opportunity cost together, suppose the person above has chosen to buy A, but he’s not decided yet when to buy. A decision to buy A now is a decision not to buy A 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 given time. There are other concepts in economics that are worth knowing and applying in finance, but the above would suffice for now. My point is that financial literacy is a special case of economic literacy. This is worth repeating and putting to heart. The problem I have with people who follow Kiyosaki and promote financial literacy is that their version of financial literacy is so myopic. By choosing to ignore economic literacy, they are in danger of committing false economy, i.e. an apparent saving that leads to long-term expense. The purpose of knowing and applying financial literacy is to maximize one’s use of every monetary unit; not merely saving more for saving’s sake. Financial literacy by itself is important. It will help people live better lives. But having economic literacy provides a bigger and much more complete picture. Without economic literacy, even a relatively financially literate person would not fully grasp the significance of Kiyosaki’s statement: Savers are losers. He will merely think that if you only save and deposit your money in the bank, inflation will eat your savings. By treating inflation as a normal phenomenon, he will fail to see the evil role that governments and central banks play in making inflation so perennial. Without a sound theory of the business cycle, he will fail to see that (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 by severely 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 economic development notwithstanding the shenanigans that those in power do. Without real savings, the amount of money that could be lent to entrepreneurs is severely limited. But if and when entrepreneurs obtain a loan notwithstanding the low savings rate of an economy, they do so at the price of artificial credit expansion, which leads to more distortions in the economy. If there are 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 clearing rates. This leads to the boom and bust phases of a business cycle. This deep knowledge about the economy, 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 by Kiyosaki, you must expand your intellectual horizons by choosing not only to be financially literate but also economically literate. Entrepreneurship and the Government Cannot Go Together As mentioned in the previous section, economic literacy is crucial in understanding the world and living a better life. However, without this type of literacy, people would continue to believe and utter statements that are contrary to their purpose. The popularity of Kiyosaki has generated interest 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. To see that more jobs are created, more entrepreneurs must be willing to undertake risks. Therefore, entrepreneurship must be encouraged.

However, in light of being versed in economic principles, I judge it as absurd the call to involve the government in promoting entrepreneurship and financial literacy. Variations of this absurdity include the call to include entrepreneurship as well as financial management in the current curriculum: on the grade school level, high school level, or even college level. Let me tell you the inconvenient truth: the government is the worst entity to promote these. To be financially literate, one must have savings so he can spend more in the future. He should not be in debt. If ever he decides to go into debt, it should be good, productive debt that’s channeled to buy cashflow-generating assets, not bad debts to buy luxury items. This is not what practically every government does. To the minds of bureaucrats, government should spend as much money as possible in providing welfare for the poor. This is made possible through taxation. Yet, this is financially unsustainable. Over time, governments will have to spend more than they earn through taxation. Instead of leaving the poor to fend for themselves and work hard to improve their lot, people in power think it is moral and practical to tax the productive members of society in order to provide for those who have not. These people sitting in the ivory towers of bureaucracy have continually failed to grasp the implications of interventionism. Is this what you want? Are you serious in your proposal to have the government promote entrepreneurship and financial literacy? I don’t think Kiyosaki would agree with you. He understands that no politician including Obama could fix the economy. The visible hand of government should be off. This is the very reason he encourages taking personal responsibility in your finances. I agree with Kiyosaki on these big issues, although not on some specifics. Robert Kiyosaki Endorses Austrian Economics If there is one thing that Kiyosaki has done lately that I absolutely approve of, it is his endorsement of Austrian Economics. As far as I’m concerned, only the Austrian School has consistently and soundly explained the nature and causes of business cycles. The findings of this school of economic thought provide a basis for the advocacy of human rights, personal responsibility, entrepreneurship, and every other factor that would make an economy vibrant. Perhaps Kiyosaki and his so-called Rich Dad were not trained in the Austrian tradition. But I can’t help but be amazed that certain gems I found in their books are consistent with what I have learned in Austrian Econ. I provide a video link where he discusses his endorsement of this school: http://www.richdad.com/RichDad/Seminars/2010_GoldVsTheUSDollar/videos/robert2.html He advises people to go to mises.org, and study the books about economics given there freely. While he endorses AE, he does not endorse libertarian political theory. Keep that in mind. Nevertheless, I strongly urge you that once you’ve read a book or two by Kiyosaki, go to the next level by investing time in making yourself literate in basic economics. Recapitulation

Robert Kiyosaki serves as a gateway drug for me, so to speak, to Austrian Economics. His materials in my opinion can be wisely used to have a person who is apathetic in matters of politics and economics be interested in these subjects since the topic of

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getting rich through having a proper view of the world appeals strongly to his selfinterest. Financial literacy is a special case of economic literacy. Without economic literacy, your view of the world is incomplete, although having financial literacy by itself is powerful. Governments cannot be expected and trusted to bring genuine change and prosperity.

Studying Austrian Economics is the next level. To just read the Rich Dad series without studying the more technical and sophisticated lessons about the world is to be trapped in infantilism.

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