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January 25, 2009
Book Review - Economics in One Lesson
Some books are only relevant for a few years or even months after they are written. Others stay important for decades or more. The Bible is relevant for all time. Dale Carnegie wrote How to Win Friends and Influence People in 1936, yet is applicable today, as human nature does not change.
While economic issues change, the basic principles do not. As such, Henry Hazlitt's Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics is almost as relevant today as it was when first published in 1946. The latest edition and update, and the one I have, was in 1979. Still a bit old but with many lessons that we can use in analyzing the current situation. Anyway, since he died in 1993 the edition we have is the latest we'll get.
At just over 200 pages it's a pretty short book. Hazlitt states up front that he's not going to footnote everything or provide a dozen examples or pages of statistics, as that's not his purpose here. He wrote many other, longer works on economics and other subjects for readers looking for more depth. Rather, it is to provide a basic overview for the average person who has neither the time nor the inclination to wade through a longer treatise. When it comes to the "dismal science," that's my type of book.
Here, in a nutshell, is the thesis of the entire book:
Economics, as we have now seen again and again, 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. (emphasis in the original)
and elswhere
The whole argument of this book may be summed up in the statement that in studying the effects of any given economic proposal we must race not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone.
The difference between a good economist and a bad one, to Hazlitt, is that the good one sees secondary and general effects, while the bad one only the primary one.
Most of the issues discussed in the book are relevant today, but some are not. Relevant are discussions on the evils of public works programs, high taxes, tariffs, government price-fixing, saving particular industries, the minimum wage, rent control, and unions. Not relevant are disbanding large numbers of troops, parity pricing, stabilizing commodities, "buying back the product", and swatting down the alleged benefits of inflation. Some in this latter list will be unfamiliar to the modern reader, because no one anymore, for example, advocates price inflation as a good thing.
We all know that if we drink too much alcohol, the secondary consequence of a hangover will be unpleasant. There's a secondary, "hangover" effect from many economic policies as well. Yet the politics of the matter often mean that they're ignored.
The newspapers today carry news of an economic "stimulus" program that is mostly spending on so-called infrastructure projects. Hazlitt destroys the notion that this type of policy will bring any benefit whatsoever.
It's not that he's against infrastructure projects. If we need a bridge, he says, then by all means built it, and do so with public monies. But these projects should be justified on their own merits, not as part of a plan to "pump money into the economy" or whatever.
For every dollar spent on public infrastructure, a dollar is taken from the private sector, a dollar that would be spent elsewhere. As such, every job created in the public sector is a job destroyed somewhere else. We may be able to hide this with deficit spending, but in the end the piper must be paid. The immediate effect of this type of public works project is to put people to work. It is also highly visible and newsworthy. The secondary effect is to take money out of the economy that would be spent elsewhere. Because, though, this money isn't there and nothing is bought, it isn't directly seen and thus far less likely to be reported on.
Also in the news today are federal lending institutions such as Freddie Mac and Fannie Mae. The Community Reinvestment Act provided loans to people who would not otherwise qualify. The Bush Administration, a few months ago, even pushed banks to lend more money.
Hazlitt explains how by definition government will never do as good a job in making loans as will the private sector for the simple reason that people are more careful with their own money. That this is true is often hidden, because when there is a bank failure due to bad loans it's all over the news, whereby bad loans made by government are hidden with more federal spending. Political considerations also warp government lending, something that can happen in the private sector only if there is excessive or politically motivated regulation.
There is broad agreement today, I think that tariffs harm the economy. This, of course, was the rational behind NAFTA and other free trade agreements. Special interests want tariffs, something that we today call "protectionism," a word that was apparently before Hazlitt's time. We all know that tariffs hurt consumers, but Hazlitt shows that they hurt producers as well. The reason is that a tariff forces consumers to pay more for a product than they ordinarily would, and ever dollar they spend is a dollar less they can spend somewhere else. Thus, producers of other products do not get that money.
Hazlitt does not address issues such as protectionism or about saving industries for for reasons of national security. The book focuses strictly on the economic impact of government actions.
We're all supposed to worry about our trade imbalance because we import more than we export. While too much of an imbalance can be bad, Hazlitt points to John Stuart Mill's maxim that "the real gain of foreign trade to any country lies not in its exports but in its imports." The reason is simple; we import something because doing so is cheaper for the consumer. This is a good thing.
Small fallacies are also addressed, such as the idea that price is determined by the cost of production. If you break it all down it is determined by supply and demand.
Last year we were to believe that high oil prices were due to evil speculators. Hazlitt demonstrates that far from being our enemy, they are essential to economic stability and indeed our prosperity. Speculators protect us from fluctuations in price. None of this is to stay that their activity shouldn't be regulated to ensure honest transactions, simply that in and of itself it is beneficial to our well being.
While one can never say for certain what a historical figure would say about a current issue, it is hard to imagine Hazlitt approving of current government bail outs. Besides the perils of deficit spending, it is a good thing when inefficient businesses to close shop because bankruptcy is a signal that the capital they are using would be better spent elsewhere. Again Hazlitt stresses that he understands that their are negative consequences for individual workers, and that we must address their short-term needs. But by the same token the general consequence of inefficient businesses closing shop is good.
We've all seen the phenomenon whereby someone insists on regulation, price fixing, etc on some other business but "mine is different." Hazlitt addresses this as well in his discussion on government price fixing. Recently we saw this in action with the price of gasoline. No one wants to pay more for essentials, and it is a natural tendency to assume the worst motivations behind the businesses supplying those products. When in the midst of complaining, we forget that in addition to consumer each of us is also producer and taxpayer. As a producer, we want inflation so that we can charge more for our own product to justify salary increases, as consumer we want deflation or price fixing. Profits are only "obscene" when someone else is making them.
We've all heard or seen news stories in which reporters breathlessly go after a "slumlord" for conditions in his buildings. What these journalists fail to tell us is that in the majority of these cases the real culprit are politicians who put rent control into place. The immediate effect of rent control is that poor people have a better place to live. The secondary effect is that their landlord has no money to fix up their buildings. The general effect is that contractors don't build more housing (because if landlords can't make a profit, they won't have more housing built) and so there is a housing shortage. The people who end up suffering are the very people such polices were meant to help.
Liberal politicians and their enablers think they are helping people with policies such as minimum wage laws. They would do better to promote policies that would raise marginal labor productivity. The goal should be profits, which is only way to increase wages without putting other people out of work. Unions have the same effect as minimum wage laws when they agitate for higher wages. They benefit us only when they push for safe working conditions and the like.
We have been fortunate in this country in that for a variety of reasons we have generally had a strong economy. Even during times of depression or recession most of us are better off than 90% of the rest of the world. As such, politicians assume they can do anything and it won't have negative consequences, at least not serious ones. This is incorrect.
Much of the above will be familiar to the libertarian or conservative reader, and indeed most of Hazlitt's arguments were not terribly new to me, though he explains them more clearly than I have seen elsewhere.
At least one thing that was new to me was his explanation that "saving was only another form of spending." The difference was that with "savings" we give the money to someone else to spend, and it tends to be spent on somewhat different products.
When we as consumers spend money directly, it is of course on consumer items. When we put our money in a passport savings account, or mutual funds, or even corporate bonds, it doesn't just sit there. The banker lends it to a business, and the mutual fund and corporate bond managers give it to businesses through the purchase of stocks or bonds. Corporations take this money and spend it on capital goods such as buildings, plant, trucks, computer systems, whatever. The point is that it does get spent, though maybe it takes longer and is on different items.
Economics in One Lesson provides a simple and quick way to understand libertarian free market economics. You will not like this book if you are a fan of the current "stimulus" plan.
If you are of conservative or libertarian bent, I strongly encourage you to purchase and study this book. We need to learn to speak the language of economics in order to fight off the big-government liberals. Our arguments must be clear, concise, and easy to understand, and as such book provides a good primer on the subject for the average person.
Posted by Tom at January 25, 2009 9:00 PM
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Comments
This sounds like a fine utopian ideal of what economies should be AA. You also strike me as a person of reasonable intelligence and grasp. Left and right would agree that our government before all else is a gigantic social program. The poor sap on welfare gets some largesse. The big fatcat gets plenty also. Convince the masses to give up their share and their security blanket provided by government and their union.
I only read your synopsis and not the whole book, but I'm not ready to give up the security and level playing field provided by responsible government policy and regulation. The financial crisis showed us what happens when responsible regulation and oversite are abandoned for a failed idea of less regulation and the still ridiculous Reagan mantra of "voluntary compliance."
Posted by: truth101 at January 25, 2009 10:06 PM
Here's a thought. If we were in a situation where no nation placed tariffs on our products, I would agree with the "no tariff" idea. However, when we accept that others place tariffs on our products, and we do not counterbalance that inequity - we ARE placed at a disadvantage. The "free market" ideal is not in place.
I would want to see what would happen if the USA had a "dollar for dollar" tariff program. Like, we will not place a tariff on your products if you do not place one on ours. However, if you place a tariff on our products, we shall place an equal tariff on your products.
I think that would make the playing field even. I do not think we do well to allow tariffs on our products without an equal countermeasure.
Also, it would seem to me that the secondary effect of "free trade" would be the loss of American wealth. Why?? Because at the time we agreed to "free trade" we were a wealthy nation. The trade agreements into which we entered were a relational agreement of "partnership" with nations which were not wealthy. In my opinion, this "equalized" the wealth with those nations. It was not to the advantage of the USA. We lost our national wealth. The poor nations gained the wealth we lost. Things were equalized, but this was not to our capital advantage as a nation.
We should never have "outsourced" or allowed manufacturing to leave the USA. This is when the downward spiral began and Perot was correct, imo.
Rather, we should have maintained the policies that made us wealthy in the first place. We had nothing to gain from NAFTA. It was a transfer of American wealth outside American borders and was not to our advantage. We should have placed high tariffs on China's goods. We should not be trading with a communist nation. We didn't need to trade with them.
Had we remained self-sufficient as a nation, we would have retained our national wealth had we had lower taxes.
The self-sufficiency of America is how we became wealthy as a nation... as we were primarily self-sufficient and imported lightly.
Self-sufficiency creates wealth personally. It also maintains/creates wealth nationally.
This whole "global economy" line is a con job to the American people in which we are sold out to foreigners by our politicians. They are easily swayed by special interest groups - even foreign ones.
All this borrowing and debt and money supply stuff is nonsense. The gold standard would have presented all of this global ruin. We cannot trust liberals to utilize common sense. They will destroy us.
We must return to a self-sufficient economy of national sovereignty economically. Our new USA that splits from this USA will be a self-sufficient economy. We will never again trust in globalism, imo... and the time will be short anyway.
Just my thoughts.
God bless.
Posted by: l at January 25, 2009 11:09 PM
T101,
When will you get it through your head that the collapse occurred because if the Government guarantees something - then people are irresponsible. And this "Government guarantee" was absolutely shoved down the throats of banks as they were forced by quota to make bad loans. When will you understand that you cannot legislate wealth??
You cannot force a system to be more wealthy than it is. You need to understand how wealth is generated and maintained. It takes something called "profit" - not Government mandate.
When we spend more than we make, we cannot become wealthy. When we do not produce enough of what is needed efficiently, we cannot have disposable income whereby to amass surplus. Production and profit create surplus.
Lack of production and lack of profit creates lack.
You cannot legislate your way out of poverty by making a 'government rule' that people should not be poor and the government will "give away" wealth. It takes PROFIT and it takes PRODUCTION to create wealth.
Regulations do not create wealth. What these government programs and spending created was a situation where LOSS rather than PROFIT was generated. Get it?? Get it?? Can you just GET IT???!!!! The Government PROGRAMS did not produce EFFICIENT PRODUCTION... they produced Malarkey that profited NO ONE.
CAN YOU UNDERSTAND THE CONCEPTS OF PROFIT AND PRODUCTION????!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
REGULATE YOUR WAY ALL TO HELL...AND IT WON'T PRODUCE PROFIT AND PRODUCTION.
INVOLVE THE GOVERNMENT IN INCREASING OVERHEAD SO THAT PROFIT IS LOST AND LOSSES ARE GENERATED ALONG WITH INEFFICIENCY THAT PRODUCES LOSS AND LACK OF PRODUCTION SUFFICIENT TO CREATE PROFIT... AND THE AND THE WHOLE DAMN ECONOMY WILL TANK!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
How hard really is it to understand???
How bout you DUMP your f-bomb union card and start a business and learn about production and profit first hand so your head isn't stuck so far up your arse.... and you quit thinking "regulation" is the answer... because you don't know the first thing about life, the economy, or what it takes to create and generate wealth and keep your head above water... rather than up your arse.
You frustrate me with your union crap. You are blind. You need to run a business. You need to see how hard it is. You need to understand profit and loss and expenses and overhead and taxes and bureacracy so you start to see that governmetn is making it nearly impossible to produce at the level needed to generate PROFIT.... and our whole economy has gone to hell in a handbasket because of people like you who didn't realize you'd bankrupt GM, etc., and that TAXATION ALSO caused GM to fail.
Sorry it just ticksme off how smart you think you are and you have learned nothing by experience of focus on PROFIT!!! You think that's a cardinal sin. No, it's not. IT"S F-BOMB SURVIVAL and now our whole stinking economy is destroyed because of ignorant people who think government can generate wealth when it actually creates inefficiency, overhead, decreases production... and puts businesses out of business because they cannot make a PROFIT in the USA!!!! And so now we're all going to go broke.
Posted by: l at January 25, 2009 11:21 PM
I learned all about your ideas of deregulation after the savings and loan scandal of the eighties cost us taxpayers hundreds of billions on bailouts Tom.
I learned that unless you're willing to stand up to unjust treatment, via my precious Union, you will continue to be treated unjustly.
Smart regulation keeps the playing field level for labor and business. It keeps the consumer safe. Next time you open a Little Debbie thank God the govenment was watching out for your health and had the salmonilla tainted ones taken off the shelf.
And for your info, I did have my own business at one time. I've done alot of things at one time. The skills I learned help me be a better Union Rep for my Brothers and Sisters.
And also Tom. I'm not blind to the foolishnes of those that borrowed more than they afford. I also am not blind to the greed without consequence of those that lended these people more than they could afford. Plenty of blame to go around there. To clean this mess up will take vast government intervention and planning so it doesn't happen again.
But just so you know, I think the way the financial services industry bail out was handled was lunacy. Sometimes the weak don't survive.
Posted by: truth101 at January 26, 2009 11:22 AM
Tom and truth101,
People are not irresponsible, at least not necessarily. People are self centered--when it comes to the accumlation of wealth--many to the point of being greedy. My analysis of the past 8 years since our last recession, and perhaps b/f, is that we, as a society, concluded that b/c the rich guys made a lot aof money, they were smart. Obviously, we were wrong.
The subprime mortgage crisis has a number of causes, but the "sine qua non" was the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 which repealed a portion of the Glass-Steagall Act of 1933 which prohibited commercial banks from acting like investment banks.
If your neighborhood bank could not bundle and sell loans made to people who could not repay them, do you think the bank would have made those loans?
Yes, there are a lot of complicit players, but it never could have happened "but for" the GLBA. I have read that Preesident Clinton supported it but, if so, his support was irrelevant b/c the bill was veto proof.
One other point, or perhaps two. First, why are there unions? There are unions to protect workers from the excesses of employers. My family owned a manufacturing company for decades. The company's workers were represented by a union. Relations could not have been friendlier. Of course, that was in the old days. My father and my mother's cousin sold the company in the late 1960's so it may as well have been dream time.
Tom, only 30% of subprime loans were generated by institutions regulated by the Community Reinvestment Act of 1977. For the love of God, Montressor, abandon that argument. If the CRI were the root of the problem, it would not have taken 30 years for the collapse to occcur.
Regards.
The Loop Garoo Kid
Posted by: The Loop Garoo Kid at January 26, 2009 1:49 PM
Thank you everybody for your informed comments.
Just so you're all aware I am not the commenter who styles himself as "I".
Neither Hazlitt nor I think that there should be absolutely no government regulation. If you got that impression it is due to my poor skills as a reviewer.
However, in the review I did say that unions "benefit us only when they push for safe working conditions and the like." Neither Hazlitt nor myself have any problem when unions are used for that or a similar purpose.
Also, neither Hazlitt nor myself is against government regulation when it's used to ensure things like food or worker safety.
Lastly, I am against all of the bailouts. The point of capitalism is that businesses must be allowed to fail. That said, both Hazlitt and I agree that it is the government's responsibility to provide help for displaced workers, at least for a time.
Posted by: Tom the Redhunter at January 27, 2009 5:10 PM
We both want the same thing in the end result Redhunter. A better America for all of us. We just disagree on the level of government involvement.
And remember: Beware of Loop Garoo...
Posted by: truth101 at January 27, 2009 7:09 PM
Thanks, Truth, and I agree that we do need to remember our shared goal.
Understand that I'm not against unions per se. They have a long and honorable tradition in our country. A hundred or fifty years ago I'd have joined one if I worked in a coal mine or factory. You don't have to believe everything Upton Sinclair wrote in The Jungle to know how bad working conditions were.
Unions in the US also have a long and proud history of being anti-communist. I'm old enough to remember how during the Cold War whenever the Soviet Union did something bad, the Longshoremen's union would immediately announce a boycott of Soviet ships. Now that's the type of thing The Redhunter can admire!
This said, I also think that for the most part unions have outlived their usefulness. Not completely, but mostly. Perhaps though you can convince me otherwise.
Posted by: The Redhunter 
at January 27, 2009 7:43 PM
I have a firm grasp of economics, and laissie faire thinking. So let me pose a question. You state you don't support bailouts and an "inefficient businesses closing shop is good". You also state you don't support government backing of financing (Fannie Mae, Freddie Mac, etc.) Are you also opposed to FDIC insurance?
Let's say we continue to have large bank failures, and for the sake of the argument, we don't bail them out. The Us government would have to pick up the tab anyway through FDIC insurance on the lost savings anyway. Should we eliminate FDIC insurance, and if you were unlucky enough to have you money in CitiBank, Bank of America, or Merrill Lynch, then you're sh!t out of luck? I'm not in support of how the Bush administration handed the financial industry bailout handed the dispersion of funds, and Obama will be hard pressed to do better, but this dogmatic approach to our financial crisis doesn't address the current situation.
Should our parents, and millions of other hardworking Americans have their savings disappear overnight because they were unlucky enough to have put their savings in banks run by greedy, and imprudent (i.e. very inefficient) bankers) and these same bankers will still personally enjoy the benefits of a large "golden parachute" in the form of CEO compensation, provided by the 'free market.' Should we really ditch the government protection of FDIC insurance for savings accounts, because with it in place, we will effectively pick up the tab if these financial institutions fail.
The problem with fundamentalist free market thinking is that it is based on faulty assumptions: 1) that companies seek and benefit from an even playfield, and 2) that all market participants base their decisions on (and have access to) the same information as other financial players.
Companies are inherently motivated to eliminate competition, the most desirable market condition is to gain a monopoly, period. Achieving a monopoly is purely rational behavior on the part of a company (think how Microsoft has tried to force their products onto every computer), and anything less would not serve the interests of their shareholders. Enron and the banking industry is a prime example of only a limited number of people having access to accurate information (Enron executives where telling shareholders the company was solvent while dumping shares, because they new the actual value of the company). In my mind, the prevention of monopoly and the requirements of financial disclosure benefit everyone, including the free market, but inherently involve government intervention in how companies operate.
Posted by: jason at January 28, 2009 4:31 PM
Just as businesses can have jerks in charge sometimes, so can Unions. Greed without conscience is a plague to both sides.
Posted by: truth101 at January 28, 2009 5:55 PM
Great comment and questions, jason.
I do not think that "free market economics" and "laissie faire" are really synonymous.
Free market economics means that the government does not control your business decisions. You are able to trade and sell goods and services by mutual consent. Government does not set prices or wages, and does not subsidize any particular industry. It means or implies low tariffs. This does not imply lack of regulation so as to prevent consumer fraud or product safety.
laissie faire as you know means "buyer beware." I do not advocate this taken to the extreme. Government can and should ensure the safety of food and drugs. FDIC insurance is good because in return for it a bank has to meet standards of good banking (a minimum amount in cash reserves, for example). Publicly held businesses must meet accounting requirements. Sellers of bonds and stocks are and should be required to release certain data, all of which must be honest and factual.
So I support a free market, but not laissie faire.
I think you can have laissie faire, then, in both capitalist and command economy systems. Certainly the Soviet model did not provide much protection for consumers, or recourse if they purchased a product that proved dangerous.
"Let's say we continue to have large bank failures, and for the sake of the argument, we don't bail them out."
Oh darn you did have to ask a difficult question, didn't you? The point of honest regulation is that this should not happen. I think we're in this fix mainly because we didn't regulate properly (especially Fannie Mae and Freddie Mac) but that's not at all the same as saying "the free market failed"
But I concede the point; if things do get bad enough the government should step in, on that you are correct. My problem is when bailouts become excuses for spending on other things and an excuse for takeovers.
"The problem with fundamentalist free market thinking is that it is based on faulty assumptions: 1) that companies seek and benefit from an even playfield, and 2) that all market participants base their decisions on (and have access to) the same information as other financial players."
1) Absolutely businesses do not seek an even playing field. That's why we need a government, to set an even playing field through regulation. But again, regulation is not necessarily antithetical to free markets. It all depends on the regulation (see above)
2) Again, I am 100% in favor of regulation when it requires, say, sellers of stocks and bonds to release certain information. I'm against insider trading.
Posted by: Tom the Redhunter at January 28, 2009 7:54 PM
Small, but important correction.
Caveat emptor means buyer beware.
Laissez faire means 'let do´. According to Wikipedia:
¨"Laissez-faire activists support little or no state intervention on economic issues, which implies free markets, minimal taxes, minimal regulations and private ownership of property."
Posted by: jason at February 5, 2009 2:47 PM
Ack! How right you are and how silly I am. I don't know how I got those confused. My apologies to you as I should have known better.
Posted by: The Redhunter at February 5, 2009 4:10 PM
