Let’s Discuss: Economics in One Lesson
Economics in One Lesson was written in 1946 by Henry Hazlitt, an economist and journalist who wrote about business, the economy, and markets for many well respected publications. Hazlitt was a staunch supporter of free markets, which can easily be seen in this book. With this said, Economics in One Lesson is a surprisingly simple book, despite the large amount of exposition on many seemingly unrelated topics. Hazlitt begins by explaining a single rule, followed by the application of such rule in different contexts. Finally, the book concludes by describing a set of more general principles that can be learned from this analysis.
The single lesson that Hazlitt suggests is “looking not merely at the immediate but at the longer effects of any act or policy … tracing the consequences of that policy not merely for one group but for all groups.”
On the surface, this sounds not like a rule, but instead an articulation of common sense in regards to economic and political endeavors. His real, unspoken argument, however, is that adherence to this “rule” is not undertaken in current policies and schools of thought. In each chapter, Hazlitt examines a different singular example, first explaining how common thoughts fail to adhere to the rule, followed by the claim (with support) that free markets are a better solution. It is important to note, however, that in no place in the book does Hazlitt argue that free markets are a ”perfect” and “just” solution; rather he argues that free markets are merely the best solution out of often bad options.
I learned a lot from this book and I think there are some good ideas; however, I also have some (seemingly) large disagreements, especially surrounding actual policies. Not much more can be said without looking at some of the examples themselves, so let’s jump in. Like always, I’ll try to steel-man his positions before stating my own.
Chapter II. Broken window
While the example presented in this chapter, the broken-window fallacy, is very oversimplified, Hazlitt argues that the lesson learned will be applicable to hundreds of real world examples. The example goes like this: a criminal breaks the window of a shopkeeper, which for this example we will say costs $100. The shopkeeper must then spend this money to replace his window, thus supporting the glass industry. Indeed, if windows never needed replacement, the glass industry would be much worse off. So, because of this broken window, the glass merchants will be $100 richer, which they can use on further goods, ultimately stimulating additional industries.
Are the actions of the criminal, then, a good thing? Have they stimulated the economy? Of course not, Hazlitt says. It is certainly true that the glass merchant is $100 richer, which he can use to purchase more goods. But it is also true that the shopkeeper is $100 poorer. The same money that was spent by the glass merchant will now not be used by the shopkeeper. And accordingly, the economy is no better off for the broken glass.
This is of course a simple and rather obvious example, but Hazlitt will go on to make very similar arguments about many real world examples.
Chapter IV. Public Works
This chapter applies the broken-window example to government spending. In particular, let’s imagine the government spends money on some project, say, building a bridge. This may seem like a good thing not only because of the bridge itself, but also for the employment of the construction workers and the stimulation of the steel industry and so on. However, Hazlitt explains that, like in the broken-window example, we have forgotten the secondary, hidden effects of this project. To appreciate these effects, we must look at where the funds for the bridge came from in the first place. For this, there are three options:
1. Taxes
(If, instead of direct taxation, the money was instead initially borrowed, this will eventually have to be paid out through taxation).
If the government funded the bridge through taxation, a very common method indeed, then the people are poorer by the exact amount of the cost of the bridge. Each dollar that goes to the construction workers and steel industry is exactly not spent by everyone else. There are unmade cars, unbuild houses, unbought goods, and so on, exactly as a result of the bridge. So, yes, one small sector of the economy is better off, which can easily be seen. But other parts of the economy are worse off, by the same exact amount.
In order to determine if the bridge was a good undertaking, then, there is only one important question to ask: is the bridge worth more to the people than the goods they would have otherwise purchased? The answer to this question, of course, depends on the specific government project in discussion, and the price of such project.
2. Reallocation of Government Funds
Another way to fund the bridge is to defund another government project by the cost of the bridge. This example is very similar to taxes; the money given to the construction workers and steel industry are not given to a different industry. While one industry is again better off, another is worse off. It is then of course necessary to determine which project and which industry is more important.
3. Inflation
The third and least preferable way for the government to fund the bridge is to print new money. This of course, causes inflation, which is in many cases the most insidious form of taxation possible. There’s not much more to be said about this one.
This shows a nice application of the broken-window example in regards to government projects. The lesson we learn is not that government projects are bad. Instead, we learn that government projects are good only if the result is more valuable than the sum of the goods that would have otherwise been created. Additionally, we learn that government projects created “to give people jobs” may not be a good justification; the jobs created in the construction and steel industries are lost by the marginal workers in many other industries (the industries of the goods that would have been otherwise purchased).
With these two examples understood, I’ll try to articulate the general principle that Hazlitt is getting at. (I’m not a trained economist, so it’s possible that my analysis here will have some flaws). In particular, we can see the global conservation of money, or in other words, the principle that money spent in one sector must then not be spent in another. Furthermore, any one person’s loss is another person’s gain.
Of course, if new money is printed, this global conservation is broken. But this additional money would be paid for in inflation. Accordingly, the general principle is not that of conservation of money, but rather global conservation of the value of goods.
Except, if better technology is created, then this conservation is again broken. So we can explain our general principle as follows: the global value of goods remains constant without technological change, but increases with advancements and decreases with regressions.
Chapter X. The Fetish of Full Employment
A nice illustration of this principle is explained in chapter X, where Hazlitt argues that full production is a better metric than full employment. Hazlitt begins the chapter with the observation that much of the economic progress has come about because of the ability to create more production with the same amount of labor, such as people putting their goods on the backs of mules, and the creation of the wheel and wagon. (This ability to create more production with the same amount of labor is exactly what I would call technological progress).
Accordingly, Hazlitt argues that the true goal should be to maximize production. He then claims that, in doing so, full employment will be a result. But it is of the utmost importance, Hazlitt explains, that we do not forget the true goal. That we do not turn our attention solely to that of a full employment.
This brings us to my first major disagreement with Hazlitt. To me, the foundational goal is the happiness of the people, not economic growth for the economies sake. Simply trying to build up our economy can lead to cases where we sacrifice (or forget) the wellbeing of a smaller group in order to help the economy as a whole — an insidious effect indeed. Once we start thinking about policy positions, we’ll have to keep this in mind.
Chapters XVII-XIX. Price Fixing, Rent Control, Minimum Wage
It’s not surprising, given Hazlitt’s strong conviction about free markets, that he goes on to denounce rent control and minimum wage laws. Of course, we must fully understand his position before we can determine if it is good or bad.
We’ll first take a look at price fixing in general, which we can then apply to rent control and minimum wage as well. Hazlitt begins with the assumption that, when the government fixes the price of a good, then are doing so below the market price; for if they fixed it at the market price, Hazlitt explains, then it is equivalent to no fixing at all. When the price of a good is required to be below the market level, this discourages the production of such commodity. (Furthermore, the marginal producers are put out of business). In addition, such price fixing increases the demand of the good, since the price is lower. It is clear, then, that there would be a shortage of the good as a result: exactly the opposite of the goal in price fixing. Hazlitt also explains that, while price fixing can appear to work for a short while, but that demand will eventually surpass the supply of the good, thus causing many problems.
Rent control and minimum wage laws, Hazlitt argues, are just special cases of price fixing, and thus yield the same consequence. Rent control is generally proposed on the basis that housing prices are inelastic—that the quantity demanded does not heavily affect the price. Similarly to the case of general price fixing, Hazlitt argues that the negative effects of rent control become worse the longer the duration of such rent control. For example, the production of new houses are strongly de-incentivized, thus further exacerbating the shortage. Furthermore, the landlords will tend not to repair or remodel apartments (unless the appropriate rent increases are allowed). So we end with not only a shortage of housing, but in addition a downgrade in the quality of housing. Hazlitt then discusses a number of additional measures governments attempt in order to mitigate these effects, each of which he argues do not work in the long run.
In regards to minimum wage laws, Hazlitt first explains that an equivalent way to think of a wage is a price to the employer, and thus minimum wage laws are another form of price fixing. As a consequence of such a law, then, a shortage of the good (employment) would come about. For example, Hazlitt posits that workers whose values are less than the minimum wage would be laid off. Furthermore, marginal producers may be put out of business, again exacerbating the shortage.
One contention I have with these arguments are as follows: when the price of a good is fixed lower than it would otherwise be, what if the money is taken away from the profits of the companies rather than creating a shortage of the good? Of course, the marginal companies will not be able to withstand a reduction in profits and will still therefore be pushed out of the market. But for the non-marginal companies, those with sizable profits, they would certainly be able to lower their profits in accordance with the price fix. If my understanding of Hazlitt is correct, he would respond by saying that, while this is possible, it would also reduce the incentives for making such a good, and this would reduce the amount of the good made, therefore perpetuating the shortage. I agree that this price fixing would reduce the incentives for new companies to open within the industry. But for existing (non-marginal) companies, they are still incentivized to produce the good, even with reduced profits. Reduced profits are still profits, so the non-marginal companies should expand their production to meet the demand.
Accordingly, it seems that we may not get a shortage, but rather a reduction in the number of companies in the industry, a lack of new companies entering the industry, in the increase in wellbeing of the remaining workers (including those who left their old jobs to work in the remaining companies).
There are many more examples discussed in this book, but I feel that the main ideas and main disagreements are nicely illustrated by those discussed here. Ultimately, Economics in One Lesson was a fun read, and I learned a lot about how to think about economic concepts and policies. Of course, with this being my first economics book I still am very uneducated, and I therefore may be missing important considerations. With this said, I found myself agreeing with a lot of the general principles Hazlitt explains, but disagreeing with many of his policy positions. My critiques of Hazlitt’s analysis of price fixing, for example, are indicative of a more general disagreement that I have with his positions. Often, I feel that he is willing to sacrifice the wellbeing of a small group of people (often those already less fortunate) for general economic growth, which I feel can be particularly harmful.
Finally, it is important to note that all of the topics discussed in this book are largely done from a theoretical lens (especially given the age of the book). Accordingly, I would need to see an analysis of our current economy to determine if, in practice, the theory is correct. Unfortunately, my knowledge in this regard is lacking; I would need to do more research before having a stronger conviction about my thoughts.
In the next post, I’ll be discussing The Making of the Atomic Bomb by Richard Rhodes.
