Notes on Economics in One Lesson by Henry Hazlitt
The Lesson
Fallacies of economics, the self-interest of man ad the tendency to see only the immediate effects of a given policy (overlooking secondary consequences).
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.
Of course, the opposite error is possible. We ought to not concentrate only on the long-run results.
The Broken Window
A boy smashes a bakers window. Community members claim there's positive sum in this scenario, The payment of the glazer (to fix the window) will allow him to spend with other merchants, the smashed window will go on providing money and employment — The boy was a public benefactor. The public fails to see the $ 50 the baker loses in repairs. The $ 50 would have gone towards a suit.
WYSIWYG (What you see is what you get).
Confusing need with demand.
The more war destroys, the more it impoverishes, the greater is the post-war need. But need is not demand.
Effective economic demand requires not merely need but corresponding purchasing power. The needs of China today are greater than the USA, its purchasing power and new business that it can stimulate, are smaller.
There's an increase in production for particular products i.e. diversion of
demand Post war demand in most countries will shrink in absolute amount as
compared to pre-war demand as a result of post-war supply shrinking.
Technological discoveries and advances during the war, may increase individual
or national productivity.
The destruction of war will, it is true, divert post-war demand from some channels into others.
A certain number of people may continue to be deceived indefinitely regarding their real economic welfare by rising wages and prices caused by an excess of printed money. The belief that a genuine prosperity can be brought about by a "replacement demand" is a fallacy.
Public Work Means Taxes
With such public works (infrastructure), necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of "providing employment" or of adding wealth to the community that it would not otherwise have had.
The bridge built will provide X jobs per year, however, for a bridge costing $Y, the taxpayers will lose $Y, which could have been spent on things they needed.
At best, a diversion of jobs happened as a result of the project, more bridges, fewer auto mobile workers, farmers. (I don't agree here) Essentially, one thing has been created instead of another.
The psychological benefit of government works are that men are seen to work on the houses, people live in them and proudly show their friends through the rooms.
The author continues to argue against government projects for the sake of creating jobs, (An argument for UBI?)
Increased in tax on corporations (hurting the ability to offset losses against gains) leads to slower expansion and enterprise.
With personal income, risk-taking shrinks (investing in markets?)
The larger the percentage of the national income taken by taxes the greater the deterrent to private production and employment.
Credit Diverts Production
Assuming non-inflationary government credit
Farmer A and B. Farmer A can acquire a loan from private bank, less risk for the bank as farmer A is reputable. Government hands loan to B as he is denied from the bank (due to likelihood of unable to pay back loan. In addition to losses from incomplete payments, increased interest rates hurt A or farm prices as the supply decreases (due to government credit)
Governments are encouraged to take on risks too great for private industry with taxpayers' money. Where private loans risk their own or face losing business (hmm...)
Another illustration of the fallacy of seeing a special short term interest, forgetting the general interest in the long run.
Government loans or subsidies to business; taxing successful private business in order to support unsuccessful ones.
Curse of Machinery
Smith's The Wealth of Nations, Chapter 1, without machinery, a workman could hardly make one pin a day, … with machinery he can make 4,8000 pins a day. The fallacy is thinking the jobs lost due to machinery and overproduction … may become chronic (Recent economic changes - David A. Wells).
- Elasticity
-
A fall in the price of overcoats causes a larger total amount of money to be spent on overcoats than previously, then more people may be employed even in making overcoats than before the new labour-saving machine was introduced.
In the case of no surplus of overcoats, just a reduced price for them, the extra $ z leftover can be spent on something else.
The result of the machine is to increase production, to raise the standard of living and increase economic welfare.
Technology helps increase voluntary unemployment, people can afford to work less hours. Children and over-aged aren't required to work.
Machines increase money wages or, by reducing prices, increase the goods and services that the same money can buy. Sometimes both.
Spread-The-Work Schemes
- Fallacy
-
there is a fixed amount of work to be done in the world, if we cannot add to this work by thinking up more cumbersome ways, we can think of ways to distribute it.
The case of cutting maximum hours, allowing additional people to be employed, reduces the wages of the original employee. Furthermore, the purchase of more leisure was probably not a voluntary decision.
In increasing hourly rate to compensate for a shorter working week, an increase in production costs may happen. A policy of monetary inflation, to enable prices to rise so the increased hourly wages can be paid disguises real wage rates.
The greatest downfall is the above fallacy.
"There is no limit to the amount of work to be done as long as any human need or wish that work could fill remain unsatisfied"
Disbanding Troops and Bureaucrats
Argument for encouraging troops to become self-supporting civilians i.e. integrated into normal civilian workforce.
They (soldiers, policemen, firemen, street cleaners, health officers i.e. key workers) make it possible for private industry to function in an atmosphere of law, order, freedom and peace. But their justification consists in the utility of their services. It does not consist in the "purchasing power" they possess by virtue of being on the public payroll.
The Fetish of Full Employment
The economic goal of any nation, as of any individual, is to get the greatest results with the least effort.
Maximize production, employment merely the means.
We can easily have full employment without full production.
The progress of civilization has meant the reduction of employment, not its increase. (Abolished child labour)
The Drive For Exports
Exports and imports must equal each other in the long run.
Deciding to increase our exports, also decide to increase imports … foreign exchange
National government loans (upside to loans not being repaid) -> ???
An export subsidy is a clear case of giving a foreigner something for nothing. It is another case of trying to get rich by giving things away.
Bad loans and export subsidies may have negative first-order effects, but greater long-run outcomes. (?)
"Parity" Prices
Example, rise in farmer prices so he can afford industrial equipment. Prices should rise relative to each other.
The farmers get more for their crops thus purchase power increases, more prosperous and buy more for industry products.
However, the increased commodity prices bump up the prices of goods related. Wheat and bread. The city bread buyer thus loses purchase power, no net industry gain.
The agricultural increase in business leads to city business decrease.
The farmer reducing production for "parity" produces less, his income does not increase in proportion to his prices.
So the alleged benefits of still another scheme evaporate as soon as we trace not only its immediate effects on a special group but its long-run effects on everyone.
Saving the X Industry
Saving industry x as a generalized parity argument/tariff.
In order that new industries may grow fast enough it is necessary for some old to be allowed to shrink or die for the sake of releasing capital and labour for new industries (Horse and buggy trade)
"Stabilizing" Commodities
Government intervention -> keeps high-cost producers in the game, causing inefficiency in the market. Without intervention, the inefficient producers are driven out, the efficient ones can expand and produce at a lower cost. Thus raising more capital for the economy. (?) (Advocating for monopolies?)
Government Price-Fixing
Argument for price fixing, keeping costs down so everyone can get a fair share than only the people with purchasing power allowed.
Minimum Wage Laws
Minimum wage caps the amount of man power by not being able to employ workers that are worth less than minimum wage. For a low wage you substitute for unemployment. (hmm...)
The benefit of minimum wage is for workers being paid below market value.
Argument for scrapping minimum wage states that industry X should be priced out if it can't pay above minimum wage. However, more jobs lost (whole industry) more than it produces.
The best way to raise wages is to raise labour productivity.
- Increase in capital accumulation (new machines to aid workers)
- New technology
- Efficient management
- Efficient and industrious workers
- Better education and training
The more he produces the more he increases community wealth, the more his services are worth to consumers and employers hence the more he'll get paid.
Lessons Restated
Economics is a science recognising secondary consequences and seeing general consequences.
There's no change in public taste/morals that would not hurt someone.
Less policemen, lawyers and judges without criminals (there'll be increase in another field (?))
Tariffs, destruction of machinery, restriction schemes: the insane doctrine of wealth through scarcity.
May always be privately true for any particular group of producers in isolation but a doctrine which is publicly false.
To see the problem as a whole, and not in fragments: that is the goal of economic science.
New Terminology :)
Dictionary
- Sophism
- A plausible but fallacious argument.
- Purchasing power
- the amount of goods and services that can be purchased with a unit of currency
- Impetus
- the force with which any body is driven or impelled; Momentum