Monday, January 16, 2012

Economics in One Lesson

The central theme of Henry Hazlitt’s book, Economics in One Lesson, is that one must look beyond the primary effects of economic policies to see the secondary effects. Under such scrutiny, many policies lose their lustre. Hazlitt delivers on the promise of a useful lesson in economics in just over 200 pages. Originally written in 1946 and then updated in 1978, the topics in this book are still very relevant today.

“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.”

Hazlitt begins with a story of a vandal breaking a window. Superficially, this seems to create work for glass makers and window installers, but upon tracing through all the effects, the world on balance loses more employment than it gains from the broken window. It makes sense that vandalism would have a net negative effect on the economy, but this isn’t apparent if you focus on those who are paid to make repairs.

The book continues with lessons in many areas including government spending, taxes, credit, automation of work, shortening work hours, tariffs, fixing wages and prices, saving industries, rent control, minimum wage, unions, profits, inflation, and saving. Each sub-lesson is explained clearly for the reader to understand and accept or try to refute.

A common theme is that attempts to help one group often hurt other groups. What this says to me is that we should be very selective about which groups we choose to help. Shifting tax money to the less fortunate is a luxury of wealthy societies. However, we have to be careful about determining exactly how much such help we can afford. And we should not waste our limited capacity for helping the less fortunate by helping those who don’t need help.

For the rest of this review, I’ll discuss specific parts of the book that struck me as interesting.

Credit

Some believe that credit is something a banker gives to you. In fact, credit is something you already have. Your “character and past record have earned it. ... The banker is not giving something for nothing.”

Government Loans

Private lenders “are selected by a cruel market test.” They “are rigidly selected by a process of survival of the fittest.” Government lenders are those who produce “the most plausible explanations of why it wasn’t their fault that the loans failed.”

Unemployment

Many schemes for solving unemployment problems rest “on the false assumption that there is just a fixed amount of work to be done. There could be no greater 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 remains unsatisfied.” Some policies are based on the idea that there is a fixed list of available jobs “which has to be spread over as many people as possible so as not to use it up too soon.” On the contrary, “work creates work.”

Rent Control and Slumlords

When rent controls keep rents artificially low, landlords have little incentive to invest in their properties because they cannot get a sufficient return on such investments. “Where rent controls are particularly unrealistic or oppressive, landlords will not even keep rented houses or apartments in tolerable repair.”

Unions

Hazlitt points out many of the negative effects of unions, but has some positive things to say about them as well. “In some trades they have insisted on standards to increase the level of skill and competence. And in their early history they did much to protect the health of their members.” I suspect that the author would not find much positive to say about modern unions.

Inflation

Inflation is a consequence of many misguided policies intended to improve our welfare. However, we cannot consume more than we produce. Inflation restores “a workable relationship between prices and costs of production.” However, people fail to properly account for inflation when judging their salaries and raises. “Inflation is the opium of the people.”

Saving

Many argue that when people save money the economy suffers. However, saving “is another form of spending” because money saved in banks is lent to businesses for projects to increase production. Saved money creates just as much employment as spent money. Some believe that saving “is the cause of depressions” when it is really “the consequence of depressions.”

4 comments:

  1. Thanks for the breakdown of these concepts!

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  2. Very nicely explained, by you and the author!

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  3. I'll have to read the book. But it seems to be saying that the common quote about GDP measuring all kinds of bad things isn't exactly true if they also have side effects such as reducing employment (even wars conducted in other countries could reduce trade and increase the cost of imports).

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  4. @Value Indexer: I don't think I could do the book justice by trying to address GDP myself. The book should be available without much wait at most libraries.

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