📖 Book Report: Economics in One Lesson
Nine Fallacies of Modern Economics
Economics in One Lesson: By Henry Hazlitt
This book was intended to be very simple; an amalgamation of the knowledge Hazlett had gleaned over the years. Hazlitt was heavily influenced by three individuals and it shows.
Frederic Bastiat- specifically his essay Ce qu’on voit et ce qu’on viot pas, or Things Seen and Things Not Seen, Philip Wicksteed’s – specifically his book - The Common Sense of Political Economy, and of course anything Von Mises wrote having to do with inflation.
Hazlitt belabors the point that every economic policy often has secondary consequences that achieve the opposite of the intended effect.
At the root of these commonly held fallacies is a tendency to consider only how economic policies affect specific groups of people in the short term while neglecting the long-term effects on other industries and consumers.
“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 trace not merely the immediate result 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.”
We are going to sum this book up by outlining 9 commonly held economic fallacies.
Let’s begin.
1/ Tax Funded Expenses do not Inhibit Private Industry Growth and National Wealth
Central planners would have you believe that public works and other tax-funded projects create jobs and as a byproduct, wealth. In reality, the government is bloated, they use tax dollars to pay for wages and projects that aren’t necessary. It’s a non-profit where 80% of the donations go towards keeping the beast alive, while only 20% is used for the actual charity.
Hazlitt makes the argument that public work projects and other tax-funded projects divert resources and manpower that would have otherwise supported jobs in private industries.
He concedes that some public works projects are necessary, but a lot of government spending comes at the cost of goods and services that individuals would have bought with the money they paid in taxes which means less money for merchants providing those goods to be put towards wages.
TLDR; High taxes cause businesses to slow or stop expanding, it also causes entrepreneurs to avoid starting new companies, they delays upgrades to production facilities, reduces job creation, and limit wage raises.
Think about it from a practical perspective. If citizens are taxed at higher rates to pay for government bloat they simply do not have money for discretionary spending.
2/ Maximizing Employment Levels increases National Wealth
The fed is obsessed with maximum employment, but the metric which should be the focal point is maximum production. Hazlitt argues that max production creates larger profits, enabling businesses to expand and hire more workers, or raise wages (theoretically).
The argument heard most from proponents of max employment over max production is that labor-saving Tech reduces jobs and thus collective wealth.
In reality, tech increases productivity and collective wealth, which often leads to an increase in employment. How?
Any jobs lost to more efficient means are offset by:
The jobs of the people who make and repair the equipment.
Saving in labor costs, which the company could use to expand and create new jobs.
Increased profits due to greater efficiency, meaning company executives and employees have more money to spend on goods and services.
Lower prices for products due to greater efficiency.
Labor-saving machines raise production rates, economic well-being, and the standard of living. They also increase employment generally.
Note: Naval talks about this a lot.
3/ Government Efforts to subsidize industries help the overall economy.
When the gov intervenes in private industry, even in an effort to help, it interferes with the natural equilibrium of supply and demand. This can send destructive waves throughout the economy.
The fallacy here is that government loans enable individuals and businesses to achieve property that they otherwise couldn’t, which contributes to collective productivity and wealth.
In reality, “Government loans serve to divert resources away from businesses and individuals who could create the most productivity and wealth to businesses and individuals who would and should be weeded out by private industry standards.”
In other words, when the government gives a loan to an inefficient business, the capital it buys becomes unavailable to efficient businesses, which could have used it to be more productive and thus make greater contributions to employment and national wealth.
4/ Saving an Industry from dying benefits all industries, thereby supporting employment and creation of wealth.
This one is conceptually simple. Saving one struggling industry prevents other industries from growing. The government diverts resources from needed industries, thereby stifling growth in order to keep old, unneeded industries alive.
As Hazlitt notes, some industries must shrink and die so that capital and resources going to the dying industry can be diverted to industries that are growing and needed.
5/ Price Fixing is Helpful
Price fixing means artificially raising or lowering the price of goods. Simply stated, this government intervention throws off the balance between supply and demand.
The fallacy is that when the farmers get higher prices for their goods, they’ll be able to buy more industrial goods. Which will support full employment.
Parity pricing hurts the consumer and decreases national wealth.
Here’s an example, sometimes parity pricing establishes a price for farm goods that is equal to the cost of the industrial goods a farmer must buy to produce his crop.
In other words, the government tells farmers to hold some crops from the market and then pays them for their obedience. The prices of farmed goods are artificially raised by reducing supply in order to increase demand. What really ends up happening is a smaller supply of farm goods makes it to market, food prices rise, and the poor have a hard time affording food. The nation is now poorer overall, and costss have risen.
“For the loan policy is usually accompanied by, or inevitably leads to, a policy of restricting production – i.e., a policy of scarcity. In nearly every effort to stabilize the price of a commodity, the interests of the producers have been put first. The real object is an immediate boost of prices. To make this possible, a proportional restriction of output is usually placed on each producer subject to the control. This has several immediately bad effects. Assuming that the control can be imposed on an international scale, it means that total world production is cut. World consumers are able to enjoy less of that product than they would have enjoyed without restriction. The world is just that much poorer.”
Note: I remember a few tik toks where farmers were showing tons (the actual measurement) of potatoes and onions the government was forcing them to toss.
Wasteful.
6/ Rent control helps Tenants
It’s believed by politicians that rent control protects tenants from skyrocketing housing prices. But according to Hazlitt, rent control hurt tenants by discouraging building maintenance as well as the construction of new affordable housing.
“Rent control is initially imposed on the argument that supply of housing is not “elastic” i.e., that housing shortages cannot be immediately made up. This argument is defective, it overlooks immediate consequences. If landlords are allowed to raise rents to keep up with inflation and the true condition of supply and demand, individual tenants will economize by taking up less space. This will allow others to share the accommodations that are in short supply. The same amount of housing will shelter more people until the shortage is relieved.” Which is what we are seeing now in 2022.
Rent control not only harms low and middle-income tenants, but also hurts landlords and communities.
Here’s how,
Encourages wasteful use of space by disincentivizing tenants from leaving apartments that may be too big for their needs.
Discourages new housing construction, because rent controls leave landlords and builders with little to no profit to invest in construction.
Discourages maintenance and remodeling in rent-controlled buildings because the lower rents can cut into landlord’s profits so they can’t afford to make necessary improvements, nor are they incentivized to. (I have family members who have dealt with this in NY.)
When rent controls no longer work, legislators are forced to abandon them, but only on luxury housing, arguing that the rich can pay higher rents. This is true. But, again, this only serves to incentivize builders and landlords to fix up high-end housing because it makes fiscal sense. We have seen this in NY, the gap between high-income, and low-income neighborhoods can grow quickly.
“When these consequences are so clear that they become glaring, there is of course no acknowledgment on the part of the imposer of rent control that they have blundered. Instead, they denounce the free market. They contend that private enterprises has “failed” again; that “private enterprises cannot do the job.” Therefore, they argue, the State must step in and itself build low-rent housing.”
7/ Raising minimum wages increases productivity and helps workers.
Minimum wage laws increase unemployment and decrease productivity because it forces companies to do two things.
Companies can raise prices for their products in order to pass the burden to consumers. Higher prices generally cause consumers to either buy less or find cheaper alternative goods, which can lead to companies laying people off.
Companies can absorb the higher cost of labor, without raising prices on their products. In this case, marginal companies will go out of business leading to unemployment and less overall production.
Note: I’ve owned a few small businesses over the years. Most of my friends have as well, I can tell you from experience that when min. wage went up, prices most certainly went up, and the employee was no better off. In most cases, their purchasing power went down due to inflation in the localized economy. Furthermore, a good number of friends had to lay employees off because they could no longer afford the payroll.
If we were to focus on bringing prices down through efficiencies maximization everyone would be better off. But deflation is the name that must not be said in hallowed halls of the fed.
8/ Destruction Stimulates New Business.
Keynesians would have you believe destruction, like storm damage, or war, requires repair, which leads to net economic gain. (Broken window fallacy)
In reality, destruction diverts money from recreational, discretionary spending to obligatory spending to repair the damages.
This fallacy “confused need for demand. The more war destroys, the more it impoverishes, and the greater is the postwar need. Indubitably. But need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. The needs of India today are incomparably greater than the needs of America. But its purchasing power, and therefore the new business that it can stimulate, are smaller.”
“Many of the most frequent fallacies in economic reasoning come from the propensity, especially marked today, to think in terms of an abstraction — the collectivity, the “nation” — and to forget or ignore the individuals who make it up and give it meaning. No one could think that the destruction of war was an economic advantage who began by thinking first of all of the people whose property was destroyed.”
9/ Inflation
Inflation is falsely believed to put more money in the hands of consumers which boosts purchasing power, stimulates the economy, and supports full employment.
This is a fallacy, in reality, inflation reduces consumer’s purchasing power by raising the prices of goods and decreasing the value of each dollar.
Inflation is the result of the government taking on a cost that it can’t pay or doesn’t want to pay with tax dollars, so it simply prints more dollars. Inflation raises one group’s income, which leads to increased demand and higher prices for goods, which raises another group’s income and the cycle continues.
Groups whose income rises later are forced to manage rising prices before their incomes have caught up, and sometimes they don’t. Additionally, since prices rise proportionately to the rise in incomes, collective wealth does not grow and income inequality widens.
“That wealth consists in money, or in gold and silver,” wrote Adam Smith, “Is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measurement of value… To grow rich is to get money, and wealth and money, in short, are, in common language, considered as in every respect synonymous.”
Real wealth of course consists in what is produced, and I’ll take it a step further, real wealth consists of time. The beast of a notion pertaining to inflation is that if you have 3x the money you’re 3x wealthier. So why shouldn’t the government print 3x the money and hand it out to everyone? These are the most naïve of inflationistas.
The problem is that purchasing power is chronically deficient.
I leave you with this,
The reader, depending upon his own beliefs, may or may not accept the aphorism of Bacon that “A little philosophy inclineth men’s minds to atheism, but depth in philosophy bringeth men’s minds about to religion.”
It is certainly true, however, that 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.
I noticed a common theme...government "help" ain't all it's cracked up to be.