Economics In One Lesson
Economics In One Lesson, first published in 1946 and recently reissued by the Ludwig von Mises Institute, explains fallacies (false or mistaken ideas) that are particularly common in the field of economics and public policy.
At the very start of the book Hazlitt explains:
Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.
In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.
At first it seems as though not much has changed since the end of World War II. What has changed, however, is the scope of the dangers Hazlitt identifies. That’s because government is much expanded and more intrusive today than when this book was written. We should take these lessons as even more important today.
It is overlooked consequences that cause harm. They are overlooked sometimes because they are difficult to see, as in the broken window fallacy explained by Frederic Bastiat and also in this book. They are also “overlooked” because, as Hazlitt tells us, one group wants special favors from the government, and because there is no way to grant these favors without harming some other group, the favor-seeking group will seek to hide, obfuscate, muddle, or minimize the bad effects. At the same time they will promote the policy as good for everyone. This is roughly the job lobbyists perform, and billions are spent on it each year. That’s because a powerful government has the ability to bestow valuable favors, but those favors are paid for by someone else, someone often not easily seen.
These two ideas — the special pleading of selfish interests and the overlooking of secondary consequences — are the core ideas of the book. As Walter Block explains in his introduction (This Book is So Me) to the Mises Institute’s new edition of this book:
… the plan of Economics in One Lesson is clear: drill these insights into the reader in the first few chapters, and then apply them, relentlessly, without fear or favor, to a whole host of specific examples. Every widespread economic fallacy embraced by pundits, politicians, editorialists, clergy, academics is given the back of the hand they so richly deserve by this author: that public works promote economic welfare, that unions and union-inspired minimum-wage laws actually raise wages, that free trade creates unemployment, that rent control helps house the poor, that saving hurts the economy, that profits exploit the poverty stricken; the list goes on and on.
An example of overlooked secondary consequences is government spending. When government spends, it must tax or borrow. What government spends is not available for individuals to spend. When we see magnificent public works (say a new downtown arena in Wichita), we don’t see all the things that would have been bought had the government not taxed to build the public work. We see the jobs created by the public work — all the construction workers that built the new arena — but we don’t see the jobs destroyed because people had to reduce their spending elsewhere.
Foreign trade is a case where people often fail to grasp the complete picture. We often see exports as something good for our economy, while imports are seen as bad. Imported things are things that American workers can’t compete with, and so American jobs are lost, it is often said. But as Hazlitt says: “It is exports that pay for imports. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have to funds with which to buy our goods.” So those wanting restrictions on imports are also calling for fewer exports — although they do not say this, either because they do not recognize it or it doesn’t matter to them.
In recent years we have been told that our is a “consumer-driven” economy, fueled by people tapping their home equity that accumulated from increased home values, or spending by going into debt. It is as though if consumers started saving rather then spending on immediate consumption, the American economy would collapse. But Mr. Hazlitt tells us that “saving is only another form of spending.” After all, what is done with money that is saved? Today, few put their savings under the mattress. Instead, it is loaned to a bank or invested. Then it is spent on capital goods, which businesses use to increase their productive capability. The key fact is that businesses spend it. And, they spend it on capital goods that either expand their capacity to produce, or decease their present costs of production. Either way, that is good for everyone. It means more jobs, and better jobs. But this saving is derided as not being “productive.”
As a conclusion Hazlitt tells us:
And this is our lesson in its most generalized form. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than producer, are considered.
To see the problem as a whole, and not in fragments: that is the goal of economic science.
This is a very valuable book which cuts through the fog and haze of economics and public policy and lets us understand the true effects of our government’s policies.
An excerpt of this book can be read at One Lesson.