Mike Price sends: In the second part of the books series, I’ll go over my favorite history and intermediate economics books.

To find the first part, which focused on beginner economics and investing books go here.

Intermediate Economics Books

An Austrian Perspective on the History of Economic Thought (2 Vol. Set)
Murray Rothbard was the dean of the Austrian School of Economics in the second half of the twentieth century. He wrote books on economics , early American history , libertarian political philosophy , the federal reserve , fractional reserve banking and the ethics of liberty .

He was the center of the libertarian movement in the 70’s and 80’s (He was a founding member of the Cato Institute, the Mises Institute, the LP and probably any other libertarian think tank or organization you can think of). He essentially created the anarcho-capitalist philosophy and was critical to its expansion in the Austrian School.

This book is Rothbard’s history of Economic Thought. He starts with the Greeks and Lao Tsu and shows how economic history evolved from the Spanish Scholastics, to the first ‘real economist’ (Richard Cantillon), where it fell back a step with Adam Smith, then got better with the French-classical school (including JB Say), was perverted through Marx and finally where the laissez faire tradition started with Frederic Bastiat.

The book is a two volume set comprising over 1,000 pages total. In it Rothbard goes over the economists above and all others. He writes about their economic theories and their lives, showing how they were influenced.

I consider this book the best introduction to the many economists and their theories, unfortunately Rothbard died before he could get into the Marginalist Revolution and the huge onslaught of economics that followed.

PJ O’Rourke On The Wealth of Nations
I find the actual book by Adam Smith virtually unreadable (and for those who can read it, unnecessary as there are so many economists who have said it clearer and better), but this book by P.J. O’Rourke has the essence of the book and allows readers to understand the same theories while laughing and not creating migraines without compare.

The Price of Everything
This was the first book I read on the Hayekian spontaneous order theory. Basically, in a free market prices are the feedback mechanism which create order, sort of spontaneously since there is no one in charge. For example, if there was a hurricane those who needed to build a new house would bid the materials away from someone who had a lesser need for the materials. Without a market there is no way to calculate who is most needing of the materials.

Roberts goes over this in much greater detail in a novel setting. In the story the local grocery store doubles prices after an earth quake, and an economics professor must convince a student activist that this is not the end of the world.

Atlas Shrugged
I read Atlas Shrugged and The Fountainhead in the summer after my senior year of high school. I had planned on only reading The Fountainhead, and it took me basically the whole summer to struggle through it.

Then with a couple days before school started I decided to read a chapter of Atlas Shrugged, and ended up not putting it down for the next two days and finishing the 1,200 page novel with a whole new perspective. Thankfully the arrogance and selfishness subsided, but the main economic theories remained.

In the book Rand follows two different parties - the good businessmen and the government leaders. She shows how government meddling has a bad affect on the economy. In fact one of the characters of the book is so tired of government meddling that he convinces every great business leader or likewise minded person to quit and move into the mountains of Colorado where a kind of paradise is made and everyone trades with gold.

The non-stop sexual references and “selfishness-is-the-only-way,” are annoying, but the book is the best I’ve read at showing all the incentives in an economy and how people are affected by them.

The Failure of the New Economics
I took a macro-economics class last year at college. In the class we basically went over all the Keynesian models, and talked about the Monetarist models for a week and that was it. Thankfully I had this book to use to refute the stupidity I was learning in the class.

Keynes’ General Theory came out in the mid-thirties, just in time for the government to use it to justify more and more government spending. Unfortunately the book is an unreadable blob which seemingly contradicts itself every other sentence.

Thankfully, Henry Hazlitt wrote this chapter-by-chapter (and sometimes line-by-line) refutation of the General Theory. Hazlitt destroys Keynes, and for those who like that kind of thing uses pretty funny writing to do it.

The Austrian Theory of the Trade Cycle and Other Essays
This book contains essays by Ludwig von Mises, Murray Rothbard and F.A. Hayek (probably the three foremost macroeconomist of all time) and has a forward and afterword by Roger Garrison, who is probably the foremost macroeconomist today. Note: none of these labels are accepted by the mainstream economists, who probably haven’t heard of any Austrians except for Hayek.

The essays go over the Austrian Theory of the Business Cycle (wherein a surplus of fake money unnaturally reduces the interest rate and discoordinates investment with consumption, causing malinvetsment and an eventual, but necessary, recession or depression to realign investment with consumption).

Meltdown
Thomas Woods is a historian, and a great one at that, but late last year he took up the task of being the first one to explain the current crisis, and do it from the Austrian point of view.

In this amazing book (the first ever that focused on the ABCT and ended up on the New York Times best seller list), Woods goes over how Greenspan reduced the interest rate to a negative rate and then legislation pushed all the easy money into the housing industry. He also goes over why bailouts won’t work and a recession is the necessary cleaning of malinvestment.

Plus, he backs it up with a history of the priors panics, depressions and recession in the US.

Antitrust: The Case for Repeal
This book is a more focused one.

In it the author, Dominick Armentano, shows how the history of anti-trust is that of lesser competitors trying to find a way to compete without being more efficient or better satisfying their consumers than their better competitors. Armentano also uses monopoly theory to show why Anti-trust is not needed.

Great Austrian Economists
Most of the good advances in Economics have come from Austrian Economists. This book goes over the 15 most prominent, from a Spanish Scholastics in the 1500’s to Murray Rothbard, and shows their additions to economic theory.

The Case Against the Fed
In this booklet Rothbard not only goes over the history of the Fed and shows how it was created frivolously, but also why it is unnecessary and a negative for free societies.

Economic Science and the Austrian Method
In this book Hans Herman Hoppe (the current foremost Austrian) destroys positivism and shows why economics must absolutely be deduced from the action axiom, or praxeology.

History
The Politically Incorrect Guide to the Great Depression and the New Deal

The current crisis is very comparable to the Great Depression, realizing this Bob Murphy (of the PIG to Capitalism) wrote a great guide to it and destroyed all the myths surrounding it.

Unfortunately, his book centers more on destroying myths then the ABCT. But, it is full of great stats and facts and arguments to use to destroy the myths (apparently that’s what it does seeing as I’ve said it three times in two sentences). The book also has a chapter on the current crisis and what the government should do.

America’s Great Depression
Rothbard’s book was the first great one on the Great Depression.

Rothbard goes over the ABCT, kills the arguments against it, then shows how the money supply and easy credit rose in the late 20’s. He also goes over how interventionist Hoover was and how Hoover turned a 2-3 year correction into the Great Depression.

Mobs, Messiahs, and Markets
I just finished this book last night. In it Bill Bonner (of the Daily Reckoning)and Lila Rajiva take readers on a gallop through history to show how mobs are usually wrong and why one should take this into consideration when investing.

Final Thoughts
Most of the books here are more specialized than in the prior list, I believe this allows readers to pick and choose which subjects are most interesting to them at the time and read about that. Again, you do not need to read all of these books right away, though it would do one well to read them all eventually.

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I recently finished reading Stephen McClellan’s revised and updated book Full of Bull: Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio. McClellan spent over 30 years as an analyst of technology stocks, and had a front row seat to the evolution of the modern sell-side analyst.

McClellan covers a diverse set of topics, and although there are occasions when the book doesn’t flow right – he frequently jumps back and forth between advice and sometimes tenuously-connected anecdotes – that’s a minor problem at worst. More glaring - and perhaps a consequence of when it went to press (February 2009) or his personal investment outlook - is the negative undertones and myopic focus on the current bear market. I wonder if recent market events have changed his disposition…

The best lesson this book offers is for the individual investor who believes they can benefit by listening to headline recommendations of upgrades and downgrades – i.e. new “buy” (or equivalent) calls. Wall Street analysts, as McClellan says, aren’t judged by the accuracy of their stockpicking, but instead by client relations and related business they generate. Helping individual investors is at the bottom of their priority list.

By now, that overwhelming urge to be optimistic (at least in public) about stocks should be well-known, even if the situation doesn’t warrant it. Most research disclosures still show that a “sell” rating is used less than 20% of the time, and that’s part of the game played by analysts with the company’s they cover – many of whom McClellan says take petty actions against analysts who aren’t favorable on their shares.

Another important takeaway for emphasis: the short-term is overanalyzed, and individual investors don’t really have a chance of gaming those movements. Particularly in the large-cap space, dozens of analysts will be following a company, and there’s no edge to be had from ratings changes or earnings estimate revisions. Stick to the small-cap space where more inefficiencies can be found, and take a longer-term view of a company’s competitive positioning.

One prominent part of the book that won’t directly help you as an investor, but I nonetheless found to be great reading, was the description of how the analyst’s role has evolved. Research has become entwined with other functions at an investment bank, and most research today is paid for indirectly. McClellan bemoans this, and how it compromises the ideal purpose of research, but no solution to this problem is offered. That’s one idea I’d like to see more thoroughly developed should another edition of Full of Bull ever be published.

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Disclosure: The book publisher provided me with a free copy to review. If you purchase the book using a link from this page, I earn a small commission, but that does not result in you being charged anything extra.

This isn’t going to be a typical book review, because my thoughts on the book can be summed up in a concise manner, and I think the real story is much more relevant in regards to current events.

Goldman Sachs: The Culture of Success is written by a former Vice-President at the company, detailing the path taken to the firm’s 1999 IPO. It’s a fairly involved historical work that covers major events and people that made Goldman what it was at the time it went public (the book was published in early 2000, so no vampire squid references). My two complaints:

That said, Goldman Sachs (GS) makes for a good story, albeit one that is not overly colorful – chalk it up to Goldman’s insistence on teamwork, but there are few real characters; the typical biography is a dignified portrayal of top management.

With Goldman’s success, there’s a temptation to view this as a case study in how to great a global financial services company, or manage an organization. I think that’s misleading for two reasons. First, there’s certainly an element of change to surviving as a Wall Street partnership through a tumultuous century-plus. Second, there’s no identifiable hard-and-fast rule beyond “be long-term greedy,” and management’s judgment at various times led the firm to move aggressively into and quickly away from the same business, like asset management.

One theme that runs through the book is the changing culture at Goldman Sachs, and how it became more short-term greedy at times; normally this led to a period of bad results down the line. A central issue: can Goldman (or any investment bank) compete with its clients through proprietary risk-taking, and still play the proper role in serving their clients? Goldman’s actions have indicated they believe it’s possible, or at least beneficial to them to do both. Compounding that issue is the capital structure of the firm, which was a partnership (with unlimited personal liability for members) before the IPO removed that onus.

When Goldman was a partnership, there was significant downside to prop trading and other risky activities – namely, a large failure could bankrupt the individual partners at Goldman. Under the current structure, that isn’t the case, as the classic equity call option exists. Did the reformulation of Wall Street into a corporate world, as opposed to a partnership world, come with the creation of systemic risk? I don’t have any hard evidence, but I can’t imagine that the risks being taken in the middle of this decade would have occurred had personal liability still existed.

Roger Ehrenberg wants to make the compensation of traders more equity-like, which he says is the real story behind Andrew Hall’s potential $100 million payday from Citigroup (C). The partnerships of old risked their own capital to serve customers; the modern quasi-hedge fund risks the capital of others to primarily benefit employees. As unlikely as it might sound, looking back in time to smaller, more focused financial companies based on the partnership model offers a starting point for reframing the debate about Wall Street reach and compensation.

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Editor’s Note: Mike Price sends this list of books on economics and investing he has found helpful.

Economics

Economics in One Lesson
This book by (one time New York Times and The Nation writer) Henry Hazlitt, is widely considered the best intro to free-market economics.

It starts with the simple lesson (from Bastiat) that in economics one must evaluate every outcome for every group of people, then applied this lesson to a multitude of topics, all popular when he wrote the book 50+ years ago, and most still valuable today.

An Introduction to Economic Reasoning
This is a text book, it starts with the simple axiom that humans act and logically concludes economics from there.

Gordon fills the book with humor and easy-to-understand examples, plus, since it’s a textbook it comes with many question each chapter to solidify the knowledge learned.

Economics for Real People
Gene Callahan is one of my favorite thinkers today, this is his intro to Austrian Economics book.

Callahan starts by introducing real economics as an a priori science, one that must deal with real individuals, not aggregates. Then, like Mises & Rothbard, shows how economics logically follows from the action axiom.

I have read a lot of economics books before this one and understood likely outcomes of different situations, but this book is the one that tied it all together logically in my head.

The Politically Incorrect Guide to Capitalism
Bob Murphy is my favorite blogger, and his guide is the best for ending arguments (by winning them).

Like all the books in the PIG series (a couple of which are great, but some are crappy) he goes through the main arguments against his position and then destroys them.

It’s great for when you think you found a weakness in the market or can’t find a good way to show someone with whom you’re arguing why they are wrong.

The Politically Incorrect Guide to American History & 33 Questions About American History You’re Not Supposed to Ask

I own about 7 Tom Woods books and have read all but one of them - he is my favorite modern author. These two are great introductions to revisionist US history, showing how, in the US times of prosperity have always come from times of little government and much free market.

The Concise Guide to Economics
This book is more of an index, it contains 37 chapters, all economics topics, with 1-3 pages on each and 3-4 book recommendations for each.

I use it whenever I need a quick refresher on a topic.

Basic Economics
Sowell has written a litany of good economic books, and has a talent for finding examples for what he is trying to say and making it very easy to understand.

Sowell says economics is a science of scarce resources with alternative resources and show economics in that light. The book is very good, but does have some problems.

What Has Government Done to Our Money? Case for the 100 Percent Gold Dollar
In the best book on money ever written, Murray Rothbard shows that money always starts as a commodity, and that the same laws of supply/demand prevent government from doing any good when money is involved.

Investing

The Warren Buffett Way
This book is probably the most read book about Buffett, Hagstrom has written about 7 books about Buffett, Munger and how they invest and use mental models (a couple of which will be in future articles).

In this book, Hagstrom introduces the tenets Buffett uses to evaluate businesses - he looks at the Business, Management, Financials, and Valuation.

The Little Book That Beats the Market
Greenblatt has two books that are in the top ten investing books of all time. This one introduces earnings yield and return on capital, and shows how a screen of these companies returned 30% a year over an 18-year period.

The book serves as a great introduction to value investing and evaluating businesses.

Financial Fine Print & Quality of Earnings

The next two books serve as great introductions to accounting and starting to dig into the footnotes to gain a better understanding of the business and the integrity of those who run it.

Mosaic: Perspectives on Investing
The last book on this list is by, possibly, the best modern thinker in investing - Mohnish Pabrai. I have been to three of his investor’s meeting and can attest that they live up to the expectations.

This book is a collection of articles on investing, Pabrai has a lot of unorthodox views, he talks a lot about finding a company’s DNA, using a latticework of mental models and using a DCF that has a lot of conservatism built in.

The book starts at $130 on Amazon and is approaching Margin of Safety like prominence, but most of the articles have been archived on the internet and you can find them here.

Conclusion
My public speaking professor showed our class a statistic that claimed humans, on average, retain only about 20% of what they read - so don’t get let down if you’ve read 3-4 of these books and still don’t quite ‘get it,’ I am still not as proficient in economics and investing as I’d like after reading these books and many more, but after each book I read more and more of the whole framework ‘clicks’ in my head and I not only understand that part, but the rest of what I understand seems to make more sense.

Also, I welcome any and all suggestions of different books that also serve as great introductions to investing and economics.

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