Review: Economics in One Lesson by Henry Hazlitt

I do not study economics, but find it interesting to read outside of my area of expertise from time to time, and see what I can pick up. What I found in this book was a well-written and highly accessible version of, as best as I can tell, the libertarian and conservative economic playbook. It tries to lay out the reasoning why most government economic policies—most types of taxes, tariffs, subsidies, public works projects, social security, minimum wage, and so on—are detrimental or harmful. The basis of this argument—the “one lesson” from the book’s title—is:

“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.”

In other words, taxes, tariffs, subsidies, and everything else either only benefit one group at the cost of another or may have benefits in the short term, but always cause problems in the long run.

The general idea is a good one: we should consider long-term trends and not favor certain groups over others; and certain economic policies definitely do favor some groups over others or cause harm over the long term. The problem is that Hazlitt generalizes from this simple argument to the broader idea that virtually all governmental economic policies are harmful, and the evidence and reasoning he uses strikes me, at least as a novice to economics, as deeply flawed. The evidence, in particular, is almost entirely lacking: most of the book is based off armchair reasoning rather than actual case studies. And the armchair reasoning doesn’t seem to hold water.

Here are some of the places where the reasoning seems to fall apart:

• The biggest issue is that Hazlitt doesn’t take his “one lesson” into account! In particular, he does not consider all the possible consequences of an economic policy. He typically shows the direct consequences to the group effected (e.g., the farmer that is subsidized by the government); he shows the indirect consequences to a few other groups that are effected (e.g., the tax payer who pays more taxes to subsidize the farmer, and other farmers who are now worse off because they didn’t get the subsidy); but he does not show the countless other possible “side effects.” By “side effects,” I’m referring to the fact that humans are not machines. We aren’t cash registers that behave solely based on cash in vs cash out. We have these inconvenient things called “emotions” and “morals.” This is why, for example, we have regulations in many industries: we are not OK with companies producing dangerous goods that get people killed. Sure, the free market would eventually fix that sort of thing, as, given enough tie, people would probably buy goods from the companies that make safer products, but we’re not willing to have thousands of people die while the market sorts that out.

• There’s another aspect of the “one lesson” that Hazlitt ignores. He assumes that individuals and private corporations always know how to use their money better than the government. So, for example, the government giving loans to small business is always worse than a private bank or investor deciding who to give loans to. In some cases, that may be true. But in many cases, it’s not. For example, for many years in the US—and sadly, it still happens today—banks would not loan money to minorities or women, not because they were “riskier,” but simply due to racism or sexism. The result is that the economic output from more than half of society was suppressed! Of course, this is just one example. Hazlitt, for example, argues strongly against minimum wage policies and makes the laughable claim that most workers eventually earn what they are worth except in rare circumstances, such as monopolies. This assumes a perfect market with no information asymmetries, power imbalances, or discrimination; Hazlitt being a well-off white male may not realize this, but in the real world, minorities and women are often paid less, many companies collude to keep wages down (e.g., see the recent law suit with Google, Apple, etc), and many companies pay extremely low wages to most employees while executives pocket millions. Left to their own devices, our “free market” economy even used to include scrip wages, slavery, and child labor: it turns out that these are not only bad for the economy, but again, we see that whole “side effects” thing again—for some reason, we silly humans aren’t OK with any amount of slavery and child abuse (whereas the free market may tolerate it for a long time).

• Hazlitt seems to assume a zero-sum game when convenient for his argument, but ignore it when it’s not. For example, Hazlitt argues, to put it very roughly, that every dollar the government spends is a dollar taken from the tax payer that would have been better spent elsewhere. That’s true if you assume the pie is a fixed size. But one possible outcome (of the many outcomes we should consider, per Hazlitt’s “one lesson”) is that the way the government spends that money may result in the whole pie getting bigger (the economy growing), whereas the way the individual would’ve spent it would not have had that effect. For example, the government using tax dollars to build bridges and roads reduces the cost of commerce, making business more efficient, and allowing the economy to prosper and grow. Whereas had the individuals kept those tax dollars, they probably would not have invested them in a bridge, and the economy would’ve stagnated. Hazlitt makes allowance for some government programs such as this sort of infrastructure spending, but offers no guidance as to what separates the programs that are OK from the ones that he claims cause only damage.

• For example, would Hazlitt be against the government using tax dollars to fund research? It’s not exactly an “infrastructure” project and it’s clearly something private companies could do themselves. From reading this book, I get the impression Hazlitt would almost always argue in favor of private companies… And yet some of the biggest technological leaps of the last century—for example all the discoveries at Xerox Parc (the GUI, mouse, laser printer, object oriented programming) and the Department of Defense (e.g., the ARPANET, which led to the Internet)—were only possible due to government funding… This research grew the economy by trillions (not a typo) of dollars, which is far, far more than the tax dollars that went in. Another interesting example is NASA. Putting aside all the practical scientific discoveries that led to economic growth, how do we value (a) a better understanding of the universe, (b) the possibility to make humanity a multi-planetary species that can survive certain types of species-ending disasters, and (c) inspiring millions of kids to become scientists and engineers? Is it possible that there are “side effects” we should care about beyond just the pure dollars in and dollars out?

• The way Hazlitt makes his arguments is a bit infuriating. He’ll take on some small, very specific point (e.g., one argument used by certain groups to support minimum wage laws), and make a convincing argument against that specific point, all the while pointing out explicitly that he is ONLY talking about that one specific point, and not the larger economic issue as a whole. However, a few pages or chapters later, he’ll suddenly generalize his stance to being a condemnation of that entire economic issue, reminding you how soundly he tore it down before. He’s relying on the fact that you remember his earlier argument was convincing, but that you’ll forget that it was only convincing about one small portion of the larger debate, and not the whole thing. I’m not a fan of such sneaky tactics.

I want to emphasize again that I’m not arguing the book is completely wrong or not worth reading. There are plenty of government economic policies that are wasting money, but generalizing that concept too far is harmful. That said, I enjoyed reading the book, it made me think through a lot of important points, and I found plenty of interesting insights:

• Full employment is not the goal. You can achieve that easily: throw away all technology and suddenly you have 100% employment (as a very inefficient subsistence farmer).

• Machines and automation may cause job loss in the short term, but they vastly increase production, which throughout history has always greatly increased jobs. If technology really made jobs go away, then from thousands of years of technological progress, we’d expect everyone to be unemployed already.

• We all play three roles: producer, consumer, taxpayer. When a policy comes up, which side you’re on typically depends on how it affects each of these roles. Every person wants the goods they produce to be scarce and expensive, while all the other goods (the goods they consume) to be plentiful and cheap.

• “Wages” are just another term for prices. They are the price that an employee charges to the company.

• Increasing wages without increasing productivity must imply that the costs of goods has increased.

• Money is not the same thing as wealth. The government can’t make us all wealthy by printing out more money. Wealth consists of what’s produced and consumed: houses, clothes, food, cars, etc.

• Saving in the modern world (i.e., putting your money into banks and stocks) is the same as spending. That’s because our financial institutions spend your money on loans and other business ventures.

• In math the formulation of the problem contains the solution. This is inevitable. But inevitable conclusions are not always obvious conclusions, as some math problems are hard to solve!

As always, I’ve saved a few of my favorite quotes:

“Practically all government attempts to redistribute wealth and income tend to smother productive incentives and lead toward general impoverishment. It is the proper sphere of government to create and enforce a framework of law that prohibits force and fraud. But it must refrain from specific economic interventions. Government’s main economic function is to encourage and preserve a free market. When Alexander the Great visited the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: “Yes, stand a little less between me and the sun.” It is what every citizen is entitled to ask of his government.”

“There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing.”

“When personal incomes are taxed 50, 60 or 70 percent. People begin to ask themselves why they should work six, eight or nine months of the entire year for the government, and only six, four or three months for themselves and their families. If they lose the whole dollar when they lose, but can keep only a fraction of it when they win, they decide that it is foolish to take risks with their capital.”

Rating: 3 stars