A Simple Man

As we enter a new year, the US economy is likely to get worse – much worse many people say.  We’ll  be exposed to pundits telling us what is happening with the economy and why.  If the past is any indication of the future, most of them will be wrong – intentionally so in some cases.  Because of this, every person should be armed with a basic knowledge of economics.  This may sound like a tall order but in reality reading one book will do the trick – the best book ever written on economics in my opinion.

Economics in One Lesson by Henry Hazlitt was originally written just after World War II – after Franklin Roosevelt’s socialist ‘New Deal’ had been in place for several years. Hazlitt was one of the voices raising objections to those policies at the time. Fifty plus years after the first release of this book we have an economic policy that makes the Roosevelt era look down right laissez faire.  Hazlitt’s common sense approach has fallen on deaf ears.

His book is 198 pages but ‘The Lesson’ is only the first five pages and can be summarized thus:

“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” (p. 5)

Ignoring this principle creates 90% of the economic fallacies in the world according to Hazlitt. He calls this primary fallacy the fallacy of ignoring secondary consequences.  It is more rampant today than at the time of the book’s first writing.

The remainder of the book is a series of examples of economic fallacies – all of which can be traced to ignoring ‘the lesson’ and all of which are more or less considered orthodoxy by the economic establishment today.

The first of these is: “War stimulates an economy and is good for business.” Hazlitt calls this the “fallacy of the broken window”  – the idea that because something has been destroyed (by war or whatever) and must be replaced the economy is stimulated.

He illustrates this with a parable:  Suppose someone throws a brick through a shopkeeper’s front widow. Of course this ‘stimulates’ the business of the man who will be hired to replace the window. Unfortunately, this is as far as most economic analysis goes – the glass repair shop gets new business, may need to hire more people because of the extra work, the economy benefits.

We’re forgetting, however that we cannot overlook the impact on more than just one group of people.  True, the glass repair shop gets more business.  However, the shopkeeper must now pay for a new window that he would not otherwise have purchased. This reduces his disposable income.  He now spends less with other merchants than he would have if the window had not been broken.

Though the glass repair shop may hire someone as a result of the broken window, the tailor the shopkeeper uses may have to lay someone off because the shopkeeper cannot now afford to purchase the new suit he was planning to buy.  Net effect to the economy – zero. Though this is a simplistic example (even Hazlitt would admit as much) the underlying principle is true and is violated by virtually every economic policy in place today.

Some of the other examples highlighted in the book which ignore ‘the lesson’ are:

• Government secured loans
• Government price supports for farm products (or other things)
• Rent control
• Minimum wage laws
• Tariffs

In each of these cases, either future consequences of the action are ignored or consequences to other groups are ignored or both. In fact, Hazlitt points out several times that failure to consider other than the immediate consequences of actions often negatively impacts the very people the action was intended to benefit.

For example rent control. The stated goal of this policy is to help lower income people afford housing.  Because of this, rent control often does not apply to luxury housing. The result is people who might otherwise invest in providing affordable housing don’t – for fear of having their investment regulated out of profitability. Instead they build luxury housing that will be exempt from government control.

This reduces the number of housing units available to the very people the government was trying to help. Another long term consequence of rent control: at some point the controlled rents are no longer enough for the property owner to afford to maintain the property – again negatively impacting the people the policy was intended to benefit.

I could go on with example after example.

Economics in One Lesson is nothing like a dry economics textbook – it is very readable and clear. It is, in fact the readability of Hazlitt and the clarity of the principles he discusses that lead me to believe most economic policies are driven, not by economics, but by the political motives of the theorists and those who implement their schemes.

This book should be required reading from the High School level up as well as for anyone even remotely involved in state or federal government. I would suggest that it be required reading for every member of congress but they normally don’t like to be confused with the facts.

However, for those who view economics as a method of maximizing the quality of life for the average citizen rather than as a way to buy votes for themselves, this book will be a breath of fresh air.