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

8/8/2019 An Open Letter to the Fans of Robert Kiyosaki in the Philippines

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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-the-philippines

Time flies so fast! I feel its 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 sawRich Dad Poor Dadin

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. Its not the usual which simply urges a person to improve himself

and word hard towards important goals. Its 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 to

standard accounting convention, a persons house is an asset. In Kiyosakis parlance, it is a

liability for the simple reason that it generates negative cashflow. It only becomes an asset if its

used 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, Kiyosakis unique distinction between assets and liabilities has proved helpful for melater in trying to understand the difference between capital goods and consumption goods,

wherein its 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 persons 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 capital

goods. Sometimes one persons consumption good is anothers capital good, but let us notexplore complicated cases for now. Suffice it to say that Kiyosakis books have kindled my

sleeping desire to study business, economics, and finance. Its probably not mere coincidence

that 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 Kiyosakis ideas but areapathetic to issues of politics and economics, I urge you to include them in your study. You

cannot go business as usual if you dont understand them. With that in mind, I introduce you to

my first major point.

Financial Literacy is a Special Case of Economic Literacy


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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 properallocation 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 ofmethodological

individualism, i.e. only individuals act; and any observed collective behavior and effect can betraced 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 bookHumanAction)

Economic literacy is possession of competent knowledge of fundamental economic concepts

and the ability to properly apply them in daily living. Consider the concept ofopportunity 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 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 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, hell choose to

do them over other enjoyable activities such as reading, reflecting, and writing. While Mark mayenjoy doing the latter three, hell 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, andwriting. This is opportunity cost at work. To recognize that theres 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 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 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 subjectivevaluations. It also guides us in analyzing the consequences of any given choice, but the final

decision is left to the individual.

Theres 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 chosento buy A, but hes 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.


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The rate of a persons 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 economicliteracy. 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. anapparent saving that leads to long-term expense. The purpose of knowing and applying financial

literacy is to maximize ones use of every monetary unit; not merely saving more for savings

sake. 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 Kiyosakis 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 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 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 principlesblinds 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 atthe 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 clearingrates. 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 Kiyosakis works. Sure, he mentions some of

them, but you wont 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 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 wont be created. To

see that more jobs are created, more entrepreneurs must be willing to undertake risks. Therefore,

entrepreneurship must be encouraged.


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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 currentcurriculum: 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 befinancially 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 thats channeled to

buy cashflow-generating assets, not bad debts to buy luxury items. This is not what practicallyevery 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 earnthrough 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 ofbureaucracy 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 andfinancial literacy? I dont 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 isthe 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 Im 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, personalresponsibility, 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

cant 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 youve read a book or two by Kiyosaki, go to thenext 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 inmatters 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 self-interest.

Financial literacy is a special case of economic literacy. Without economic literacy, yourview 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 studyingthe more technical and sophisticated lessons about the world is to be trapped in infantilism.

Documents

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