Title & Author: Economics in One Lesson by Henry HazlittGenre: Nonfiction--Economics
My Rating: 7.5
Summed Up:
Henry Hazlitt (1894-1993) was an Austrian-school economist who wrote widley for American publications including The Wall Street Journal and The New York Times. He published this book in 1946 and was heavily inspired by Frédéric Bastiat's essay, "What is seen and what is not seen."
According to Hazlitt, economics is the science of studying secondary consequences and seeing general consequences, not just immediate or limited benefits on a single group. Many of the logical fallacies that arise in economics are due to people falling to take into account the whole picture and instead focusing only on the immediate winners and losers. "If we try to run the economy for the benefit of a single group or class, we shall injure or destroy all groups, including the members of the very class for whose benefit we have been trying to run it. We must run the economy for everybody." (139)
Hazlitt addresses many arguments that are still with us, despite the decades that have passed since he wrote this book. One such argument is that the government is able to create jobs and that government loans are helpful to the economy. Hazlitt deftly puts this down. He explains that it is easy for proponents of government expenditure to point to bridges or housing projects that are built with federal funds (i.e. taxes), but one must remember that for every dollar the government spends, the citizens who are taxed have a dollar less to spend on what they would prefer. At best, government spending simply shifts were money is spent. At worst, wealth is destroyed as the government spends recklessly on unnecessary projects simply to "create jobs."
Government loans or grants are also destructive because government bureaucrats are less careful with investments because they have no personal risk or stake in the investment. Thus, rather than worrying about a return on investment and ensuring the people they loan to are worthy for such a grant, they invest poorly and recklessly with tax payers money.
In regard to minimum wage, which has been a hot topic lately, Hazlitt comes down against mandatory minimum wage laws. He says that the first thing that happens when such a law is passed is that workers who are not worth the specified minimum will be unemployed. "You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn." (116)
The argument that higher wages can be accommodated by simply raising prices is not always true. A higher price for the product or service produced may not be possible because it may just cause consumers to buy something else. Or, if consumers to continue to buy the product or service, they will buy less of it. Simply put, "there is no escape from the conclusion that the minimum wage will increase unemployment." The best way to raise workers wages is increase labor productivity through innovations, improvements, efficient management, or more industriousness from workers. "Real wages come out of production, not out of government decrees." (119) He also argues that, "We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces." (118)
Politicians will also often argue that a certain industry (e.g. corn ethanol) require or deserve subsidies. Hazlitt points out, "What is forgotten is that subsidies are paid for by someone, and that no method has been discovered by which the community gets something for nothing." (109) This point is applicable to all government functions. Every dollar government spends is a dollar taken from the people and not spent in some other way. While one industry may benefit from government money, like corn farmers do with subsidies for ethanol, other industries suffer.
In regard to prices, wages, and profits, Hazlitt says, "The best prices are not the highest prices, but the prices that encourage the largest volume of production and the largest volume of sales. The best wage rates for labor are not the highest wage rates, but the wage rates that permit full production, full employment, and the largest sustained payrolls. The best profits, from the standpoint not only of industry but of labor, are not the lowest profits, but the profits that encourage most people to become employers or to provide more employment than before." (139) Thus, we should stop demonizing profits and instead recognize that profits help create more production, and, as Hazlitt repeatedly state, production is the key to real wealth and prosperity.
Hazlitt also discusses how government policy seems to assume that production will continue on no matter what is done to discourage it. One of the biggest limiters of people taking risks and investing capital in starting businesses or hiring new employees is if there is a limited profit potential, such as when the government fixes the price of goods or services or excessively taxes. He states, "The indignation shown by many people today at the mention of the very word 'profits' indicates how little understanding there is of the vital function that profits play in our economy." (141) So true.
When speaking of inflation, Hazlitt observes that the "oldest and most stubborn error on which the appeal of inflation rests is that of confusing 'money' with wealth." (146) Wealth, he explains, is actually made of that which is produced and consumed, i.e. actual services and goods, not paper money. But, because of this confusion, many think that in order to solve our economic woes, all the government has to do is print more money and everyone will then be wealthier. That is a very naïve assumption based on the confusion between money and wealth. Any substantial increase in the quantity of money will of course reduce the purchasing power of each dollar through increased prices and make people, in real terms, less wealthy. "Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships." (157)
In sum, I loved this quote speaking of how people are always willing to spend other people's money on things they think are just and good, an act Hazlitt calls "vicarious generosity." "It is C (the middle class, the tax payer, the worker, etc), the Forgotten Man, who is always called upon to stanch the politician's bleeding heart by paying for his vicarious generosity." (179)
You can read my review of Economics in One Lesson here.
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