The Lesson Restated   1 comment

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.

Image result for image of interest ratesThis is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.

 

We’re coming to the end of Hazlitt’s book and I hope we’ve learned something. Although I shouldn’t be surprised, I was very surprised by Hazlitt’s spot-on analysis of our 2017 economy. It’s been 50 years since he wrote his book and it appears we have learned nothing in the intervening years. Lela

 

Economics … is a science of recognizing secondary consequences. It is also a science of seeing general consequences. It is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run.

Economics is the science of tracing inevitable implications. The answer already lies in the statement of the problem. We may think we’re learning something new when we arrive at the result, but in reality, the inevitable result of a failed policy was just not recognized when it was proposed.

Few people recognize the necessary implications of the economic statements they are constantly making. When they say that the way to economic salvation is to:

  • increase “credit,” they fail to see that credit is debt, so they’re advocating for increased debt.
  • increase farm prices, they fail to see that city workers will now be poorer.
  • pay out government subsidies, they fail to see that means increased taxes on everyone eventually.
  • increase exports, they fail to see that will eventually increase imports.
  • increase wages, they fail to see that will increase to costs of production.

We must pay closer attention to the two-sided nature of these proposals. We also must stop looking at the effect of economic policies only on specific groups for the short run.

It would not occur to anyone unacquainted with the prevailing economic half literacy that it is good to have windows broken and cities destroyed; that it is anything but waste of men return to work; that machines which increase the production of wealth and economize human effort are to be dreaded; that obstructions to free production and free consumption increase wealth; that a nation grows richer by forcing other nations to take its goods for less than they cost to produce; that saving is stupid or wicked and that dissipation brings prosperity.

“What is prudence in the conduct of every private family,” said Adam Smith’s strong common sense in reply to the sophists of his time, “can scarce be folly in that of a great kingdom.”

But lesser men get lost in complications. They do not re-examine their reasoning even
when they emerge with conclusions that are palpably absurd.

The reader, depending upon his own beliefs, may or may not accept the aphorism of Bacon that “A little philosophy inclineth man’s mind to atheism, but depth in philosophy bringeth men’s minds about to religion.” 

A little economics can easily lead to the paradoxical and preposterous conclusions we have just rehearsed, but that depth in economics brings men back to common sense. For depth in economics consists in looking for all the consequences of a policy instead of merely resting one’s gaze on those immediately visible.

Hazlitt hoped we have rediscovered the “forgotten man” (from William Graham Sumner’s 1883 essay):

As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. . . . What I want to do is to look up C. . . . I call him the Forgotten Man. . . . He is the man who never is thought of. He is the victim of the reformer, social speculator, and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens
which are laid upon him.

Ironically, that phrase was revived in the 1930s, but it wasn’t applied to C, but to X. C was expected to support still more Xs and became more completely forgotten than ever.

It is C, the Forgotten Man, who is always called upon to stanch the politician’s bleeding heart by paying for his vicarious generosity.

The middle-class is C. You and I, dear readers, are C.

The fundamental fallacy that Hazlitt had examined in detail was, he felt, an almost. inevitable result of the division of labor.

In a primitive community, or among pioneers, before the division of labor has arisen, a man works solely for himself or his immediate family. What he consumes is identical with what he produces. There is always a direct and immediate connection between his output and his satisfactions. But when an elaborate and minute division of labor has set in, this direct and immediate connection ceases to exist. I do not make all the things I consume but, perhaps, only one of them. With the income I derive from making this one commodity, or rendering this one service, I buy all the rest. I wish the price of everything I buy to be low, but it is in my interest for the price of the commodity or services that I have to sell to be high. Therefore, though I wish to see abundance in everything else, it is in my interest for scarcity to exist in the very thing that it is my business to supply. The greater the scarcity, compared to everything else, in this one thing that I supply, the higher will be the reward that I can get for my efforts.

We each look to our own interests, but we don’t often realize the consequences of our actions. We rarely restrict our own efforts or output in order to create a scarcity in whatever it is we produce. It might make sense to do this if our aim is the drive up the price, but if there are others in our field, that doesn’t work, so we are concerned only with out own material welfare. We have no humanitarian scruples.

I want the output of all other wheat growers to be as low as possible; for I want scarcity in wheat (and in any foodstuff that can be substituted for it) so that my particular crop may command the highest possible price.

These selfish feelings wouldn’t affect only one else in ordinary circumstances, because wherever competition exists, each producer is compelled to put forth his utmost efforts to raise the highest possible crop on his own land. In this way the forces of self-interest are harnessed to maximum output. But if it is possible for wheat growers, for example, to cooperate to eliminate competition, and if the government permits or encourages this monopolization, the situation changes. The wheat growers may be able to persuade the national government or even the UN to force all of them to reduce the acreage planted to wheat, thus creating a shortage and raising the price per bushel of wheat. This might make the wheat growers better off. Everyone else is worse off because they must produce more to get less of what the wheat grower produces.

So the nation as a whole will be just that much poorer. It will be poorer by the amount of wheat that has not been grown, but it will be poorer also in everything else.

{W]hat applies to changes in supply applies to changes in demand, whether brought about by new inventions and discoveries or by changes in taste. A new cotton-picking machine, though it may reduce the cost of cotton underwear and shirts to everyone, and increase the general wealth, will throw thousands of cotton pickers out of work. A new textile machine, weaving a better cloth at a faster rate, will make thousands of old machines obsolete, and wipe out part of the capital value invested in them, so making poorer the owners of
those machines. The development of atomic power, though it could confer unimaginable blessings on mankind, is something that is dreaded by the owners of coal mines and oil wells.

There is no technical improvement that would not hurt someone, but there’s also no change in public taste or morals, that would not hurt someone. An increase in sobriety would put thousands of bartenders out of business. A decline in gambling would force croupiers and racing touts to seek more productive occupations. A growth of male chastity would ruin the oldest profession in the world.
But it is not merely those who deliberately pander to men’s vices who would be hurt by a sudden improvement in public morals. Among those who would be hurt most are precisely those whose business it is to improve those morals. Preachers would have less to complain about; reformers would lose their causes; the demand for their services and contributions for their support would decline. If there were no criminals we should need fewer lawyers, judges, and firemen, and no jailers, no locksmiths, and (except for such services as untangling traffic snarls) even no policemen.
Under a system of division of labor, in short, it is difficult to think of a greater fulfillment of any human need which would not, at least temporarily, hurt some of the people who have made investments or painfully acquired skill to meet that precise need.

This highlights the folly of the planend economy. It is impossible to create completely even economic progress. But the acolytes of economic planning repeatedly turn to protective tariffs, the destruction of machinery, the burning of crops … to a thousand restrictive schemes..

This is the insane doctrine of wealth through scarcity. It is a doctrine that may always be privately true, unfortunately, for any particular group of producers considered in isolation—if they can make scarce the one thing they have to sell while keeping abundant all the things they have to buy. But it is a doctrine that is always publicly false. It can never be applied all around the circle. For its application would mean economic suicide.

This was Hazlitt’s lesson in generalized form. Many of the things we think are true when we concentrate on a single economic group are really illusions when we apply them to everyone.

To see the problem as a whole, and not in fragments: that is the goal of economic science.

I got my copy of Hazlitt’s Economics In One Lesson from the Foundation for Economic Education. It was free. If you want to read the whole book, go find it.

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Posted February 11, 2017 by aurorawatcherak in economics, Uncategorized

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  1. Pingback: Introduction to “Economics in One Lesson” | aurorawatcherak

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