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August 21, 2007

Economics in One Lesson

Henry Hazlitt – ISBN – 9780517548233

This is an accidental review . . . sort of. For several years I have been having ad hoc discussions—more correctly described as pleasant arguments—with a little old lady who frequents my shop. Sooner or later they revolve around economics, or rather her total ignorance of it. In her late 80’s she remains an inveterate if wholly uninformed altruist who makes decisions and forms opinions altogether without foundation. Woman’s intuition don-cha-no?

Hence I finally became frustrated enough to purchase the book as a gift for her with the proviso that she actually read it. Having not read it myself for at least two decades I decided to do that first.

It was then that I decided that all of you should be reminded to read it as well! Without doubt it is the best primer of economics ever written and remains in print 50 years after initial publication and 30 years after last updated. Adjust the dollar values of his examples and it remains a treatise which best explains the essence of economics to any lay reader with an I.Q. near ideal refrigerator temperature.

Throughout he challenges the willing role of government in areas it is neither needed nor has expertise. He explains that much of government means only increased taxes taken from more productive uses within the economy. The principal difficulty with individual understanding of this and other problems, he notes, is what is forgone . . . what is not done with the funds extorted by government for its own and usually unwise purposes.

His favorite all purpose example is the “broken window”: a shopkeeper with a window broken by a malefactor. While not good, per se, it is nevertheless results in economic activity for the sand pit operator, glass maker, transporter and glazier, all of whom profit by the replacement of the window. What is always overlooked is that the money spent to replace the window would not simply disappear. Had the shopkeeper the money he would have used it to buy a sweater. groceries, or something else of comparable value—perhaps even saved--thus providing profit for others. In the latter case(s) it would have been more productive than simply replacing what had already existed. Were the former case logical, then a state of perpetual destruction of the extant would provide wealth to all. Continuous wars, anyone?

Most all of his examples are that clear
, including positions against minimum wages, equal pay, credit, rent control, tariffs, governmentally fixed prices, etc. His arguments are devastatingly accurate and logically uninfringeable, which is why the book is so phenomenally caustic for received wisdom. He literally destroys the myths of “beneficial” government pensions, subsidies, make work projects, government welfare and monopolies, amongst many others.

He disputes the postulate that labor unions have raised wages, except perhaps temporarily for members, and insists and explains that the primary cause of increased wages and improved working conditions has been the creation of capital, and the increase in productivity. Even child labor was eliminated by the increased wages which permitted a man to support his family by himself. While he is not against unions, he rails against violence perpetrated by unions to enforce strikes or to intimidate employers and recalcitrant union members. To the extent that wages are increased they are cancelled out by the inflation they cause, inflation being just another form of taxation.

Only increased productivity increases wages. Profits are produced by the introduction of economies and efficiencies which reduce production costs and the largest profits inure to those firms which have achieved the lowest cost of production. Not incidentally they also pay the highest wages . . . without unions!

Virtually all of the wealth of the modern world, and everything that distinguishes it from the pre-industrial world of the 17th century consists of its accumulated capital. The steady reduction of unit costs of production by the addition of new capital reduces the costs of goods to consumers and/or increases the wages of the labor that employs the new equipment by increasing the productive power of that labor.

The section on governmental loans and subsidies emphasizes that government undertakes to support those activities “which private markets will not.” In so doing the government heavily taxes successful private businesses to support failing ones. Private capital is not nutty enough to risk these loans because of the all but certain loss of capital. As a result the country’s economy is lessened by that capital wasted by government risking the inane or the unproductive.

Another nugget is his clarification on saving, explained as just another format for spending. What is put in the bank or otherwise invested is used by others to generate additional capital (see above) and repaid with interest, providing ample passive return as profit to the investor. Spendthrifts, it’s true, provide employment and comfort for so long as their funds last, but savers provide ever increasing capital flows to the economy in perpetuity.

He offers clear explanations of profit margins as opposed to gross profit—currently a big debate with high oil prices—and indicates that the term profiteer is a pejorative term, but, has anyone ever heard of a wageer? In what way are they different? Somehow wages are acceptable but profits are not. Profits, after all, are the primary determining factor in guiding production: what and how much, indeed, even if! (Unless it is demanded by government.)

Government, he remarks, “always and everywhere tends to assume that production will go on automatically, no matter what is done to discourage it.” Untrue!

Would that he were still alive to dispute the current buzz encouraging “government investments” in the future, or mandates for health insurance which price it out of the reach of so many Americans. I’d find irresistible his predictably disparaging discussion of corn based ethanol and government support of this feeble-minded approach to our energy problems.

Arguments against governmental folly, no matter how logical, are derided because, as the old saw goes: My mind is made up. Don’t bother me with the facts.

Virtually all government attempts to redistribute wealth tend to smother productive incentives and lead toward general impoverishment. It is the proper sphere of government to create and enforce the framework of law which prohibits force and fraud, but it must refrain from specific economic intervention. The primary problem, he emphasizes, is not economic but political.

“When Alexander the Great visited the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: ‘Yes, stand a little less between me and the sun.’ It is what every citizen is entitled to ask of his government.”

It is a breezy read, easily understood, and ought to be required reading for every high school student along with anyone else who hasn’t read it.

Posted by respeto at August 21, 2007 11:23 AM