Dear Posterity,
If I told you that the federal government’s decision to give stimulus checks to its citizens is a really bad idea, or that the government’s plan to “create jobs” with public works programs is equally horrifying, or that the government’s low-income, subsidized housing is catastrophic to local communities, or that American citizens should immediately demand the overthrow of the Social Security program, or that raising the minimum wage (assuming higher wages are not justified by existing labor productivity in dollar terms) is a deceitful trap…would you call me heartless? Callously indifferent to the suffering around me? Misguided? At the least, I would you hope you call me a good economist.
It’s to this end I offer you this month’s Book of the Month: Economics in One Lesson by Henry Hazlitt.
Hazlitt’s target audience is a reader with no previous acquaintance with economics, which is a good reason why I selected it. Most of us have a limited amount of time in a given month, and after a cursory glance at the field, we know how complicated and intimidating the field of economics can be.
Instead, Hazlitt presents a practical, common sense approach to the field, and it is refreshing and approachable. This is important because you, posterity, need a fundamental understanding of economics in order to wisely manage your finances, vote responsibly, and refuse to tolerate deceitful policies enacted by our government.
Hazlitt sets out to dismember the “restless straining for novelty” in the form of hundreds of schools of economic thought by firmly asserting a traditional, classical approach to the field. Forever seeking a revolution or “fresh start” in economic scholarship actually undermines the principles of economic thought, believes Hazlitt. He also forgoes statistics, recognizing their tendency to become out of date and superseded by later figures, in favor of basic economic principles.
Hazlitt claims that Economics is haunted by more fallacies than any other study known to man (physics, mathematics, medicine, etc.) for two reasons:
- It possesses a factor that no other field does: the special pleading of selfish interests.
- The persistent tendency of men to see only the immediate effects of a given policy and neglect to inquire what the long-run effects of that policy will be not only on one special group but on all. In this lies the whole difference between good and bad economics.
At first this may seem like an obvious observation. After all, we see this plainly demonstrated in many areas of life—doesn’t everyone know that there are all sorts of immediate delightful indulgences that will turn out disastrous in the end? Doesn’t every child know if he eats too much candy he will get sick? Doesn’t the drunkard know that he will wake up the next morning with a ghastly headache and stomach? Thus, in the economic realm, doesn’t the spendthrift know that even in his glorious spending, he is heading toward a future of debt and poverty? Yet, Hazlitt points out, when we enter the field of public economics, these elementary truths are ignored.
As a result, we’re already suffering from the long-run consequences of the policies from the remote or recent past. “Today is already tomorrow,” which the bad economist yesterday urged us to ignore. “The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed,” writes Hazlitt.
From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence:
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Looking only at the immediate effect of a policy on some special group, and not having the patience or intelligence to trace the long-run effects of the policy on everyone is working dreadful harm in the world today. It’s made worse, Hazlitt states, by an audience that finds this correct approach to economics “too long of a chain of reasoning, too complicated, and too full. Thus, they soon become bored and inattentive, while bad economists rationalize this intellectual debility and laziness by assuring the audience that it need not attempt to follow the reasoning. It is often sadly remarked that the bad economists present their errors to the public better than the good economists present their truths.”
To demonstrate this simple but poignant truth, Hazlitt resorts to Bastiat’s following example:
A young hoodlum heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor. Now let us take another look.
The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer. The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
Hazlitt next moves to an odd but persistent phenomenon: why is goverment spending presented as a panacea to all our economic ills? Is there unemployment? We must increase government spending. Stagnant industry? More government spending. This is a pervasive fallacy, with an enormous amount of literature based on it. Hazlitt uses a simple but effective example to demonstrate a fundamental truth: everything we receive (outside of a free gift of nature), must in some way be paid for. You cannot get something for nothing. In other words, there’s no such thing as a free lunch. In the government’s case, all expenditures must be paid by the taxpaying citizen. Hazlitt demonstrates:
A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money if it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.
A bridge built primarily to provide employment instead of to meet genuine need results in a wrecked economy. How? Because the bridge will be paid for by the government. And where does the government get its money? From individual tax payers. Therefore, if the bridge costs $10 million to build, the taxpayers lose $10 million…money which they would have otherwise spent on things they needed most. For every public job created by this “benevolent” government project, a private job was destroyed. At best, there will not been an increase in jobs but rather a diversion of jobs due to the bridge project. You’ll see the bridge every day on your way to work, but you’ll never see the unbuilt homes, cars, washing machines, and a host of other uncreated things. This applies to every other form of public work (like the construction of government housing for people of low income, etc.).
It doesn’t create employment, and it doesn’t help the community because the cost to the taxpayer is greater than what it would have been without the government project. The low income housing destroyed jobs via the taxes levied on the people to fund the project…money that could have been used on uncreated things.
Be wary of every time you see government projects touting slogans like “put people to work,” or “create jobs.” It means a handicapped economy that hurts everyone in the long run. Instead of being forced to surrender part of their earning to the state, the taxpayers themselves would have contributed to wealth and welfare of the community far more than the government ever could, had they been individually permitted to spend their money how they saw fit.
Hazlitt continues to make a compelling but common sense argument on the destructive impact of government loans instead of private ones…which leads to socialism: eventually, if the government—instead of a private bank/organization—is going to bear all the risk when giving out loans, then why shouldn’t the government receive all the profits? Voila! Socialism.
Hazlitt presents his case: private lenders have a much more vested interest in giving good loans because it’s their own money at risk. They’ll vet, research, and carefully investigate proposals to ensure a successful investment. The government however, is using other people’s money, removing any concern for mistakes/overspending/bad judgment. Private lenders lose their money if they make a bad investment, and they have no more money to lend. The government, however, never learns from mistakes because it never runs out of money. This means private lenders are highly motivated to be responsible with money while the government isn’t. Government loans decrease production, and waste capital and resources.
Equally convincing is Hazlitt’s argument against the government’s artificial inference in fixing a minimum wage, let alone increasing or lowering it. In short, “Wages can be raised only at the expense of profits,” writes Hazlitt. We cannot artificially pay labor more than it naturally produces, a common pitfall overlooked by impassioned advocates for increasing the minimum wage.
The following video condenses his argument:
Profits are not achieved by raising prices, but by cutting costs of production. Hazlitt illustrates this when he writes: “The price charged by all firms for the same commodity or service must be the same; those who try to charge a higher price do not find buyers. Therefore the largest profits go to the firms that have achieved the lowest costs of production.” The cost of production cannot be reduced if the employer is ordered by the federal government to pay his employees at a fixed, artificial wage irrelevant to the natural, free marketplace transaction.
Hazlitt continues with many more compelling, common sense arguments, but what more can I say? For time does not permit the discussion of inflation; the truth behind “foreign economic aid” packages; why it’s a bad idea for government to step in and save struggling industries; the argument in support of lower taxes; the absurd practices and false beliefs of labor unions (resulting in less work done and fewer goods produced); mercantilism and the correct view on imports/exports (although there is an important caveat to Hazlitt’s example on exports in that we now have foreign exchange services available), and even more!
Instead, I’ll summarize with saying that these are possibly the five best sentences on Economics you’ll ever read:
- You cannot legislate the poor into prosperity by legislating the wealth out of prosperity.
- What one person receives without working for, another person must work for without receiving.
- The government cannot give to anybody anything that the government does not first take from somebody else.
- You cannot multiply wealth by dividing it.
- When half the population believes that they do not have to work because the other half is going to take care of them; and when the other half believes that it does no good to work because someone else is going to receive what they themselves worked for, that is the beginning of the end for any nation.
With every esteem and respect,