Economics in one lesson – Henry Hazlitt (A review)

Economics in one lesson – Henry Hazlitt (A review)

This piece is written with the intention of summarizing, reviewing and expounding my thoughts on Henry Hazlitt’s book ‘Economics in one lesson.” My goal is to grasp it’s concepts as deeply and fluently as possible and to personally think through the theoretical ideas propounded in each part and chapter. I will publish this immediately as an invitation for public dialogue, and will add to it as I make my way through the book.

Part 1: The Lesson

Part one is dedicated to exposing the most common and primarily fundamental flaw made by so many who discuss economics. The immediate short term effects of an economic policy on a very specific and targeted group, instead of looking at the broader picture, the effects of that policy on the whole of men and in the long run. He contends that the “bad economist” employs the flawed prior view, whereas the “good economist” employs the former view. This flaw is made so commonly, unintentionally or otherwise, because of the nature of economics as it relates to individuals, specific groups, and politics. A perversion to the study of economics that affects other realms of science such as physics or mathematics in a much less significant way. And it happens for at least 2 primary reasons.

Reason 1:

People want more for themselves or the groups to which they are advocating for and often stop their chain of reasoning there. And even more troublesome, economics effects the personal lives and interest of every constituency, even the masses whom have very little interest in dedicating the years of study and thought that go into actually understanding it. As long as there is financial interests at stake, there will be a never-ending supply of advocates who lobby for policies that benefit themselves or their interest group, even if at an expense to the whole of society.

When a breakthrough truth is discovered in mathematics, physics, or most other fields of study, that contribution uplifts the whole of the scientific field. However, in the field of economics, all policies, whether tax structures, redistribution schemes, subsidizations, or any other agenda – all inherently host obvious incentives or disincentives for various groups, industries or individuals. If an economic truth is revealed, it may very well, and almost always does, upset the financial, political or personal interests some people.

Obviously, politicized industries such as climate research, energy technology, covid, health and education and others have their own problems of incentives, but even those perversions are small when compared to those inherent of broad scale economic policy.

Reason 2:

It is much easier to measure and communicate when discussing the immediate effects of an economic policy on a specific group. It is for obvious reason much more difficult to discuss the long-lasting, effects of a policy across the whole of economic reality. It is difficult to measure and communicate how those policies effect the potential and incentives for production and even culture for all groups, including the specific group in the future. This is why politicians love to engage in things like ‘stimulus checks’, they can be very flamboyant about the short-term pay-offs to their preferred constituents, and because the inflationary effects of the spending are subtle, diffused amongst all groups and take time to manifest, they can be very quiet about the actually cost of these pay-offs, even though the actually cost always outweighs the initial pay off.

The cunning politician, or advocate leaders can exploit the publics economic ignorance to pursue a wide variety of such policies that allow them to benefit from the immediate effects of an economic policy on a specific group, and obfuscate the negative personal and political blame of the nefarious long-term effects of that policy on the whole of society.

Even more nefarious is the social practicality of the rhetoric exposed by advocates bad economic theories that focus on the immediate benefit of a specific group. They are able to claim the title of, and often do, of defenders of the disadvantaged. And from that platform espouse rhetoric that labels the good economist as someone who either doesn’t care about the specific group which stands to benefit from bad economic policy, or worse, as an active aggressor towards the disadvantaged group. Whatever the term of abuse, racist, elitist, capitalist apologetic, the intention is the same. To imply that those who defend the best economic interest of the whole, instead of catering to the immediate benefit to a specific group, is in some way an immoral antagonist to the specific group.

How Henry summed up the lesson: “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.”

Part 2: The Lesson applied

The Broken Window

One of the simplest illustrations we can utilize to understand this lesson is the “broken window fallacy.”

If a vandal throws a rock through a window, there are those that would suggest that in a way the vandal stimulated the economy by providing a glass repairman with work. Whoever needs to have the window replaced would need to pay the glass repairman, who would in turn go out into the world and spend that money into other areas of the economy. In this way, the vandal has benefitted the public by creating a series of jobs downstream from his act of shattering the window. But this is a fallacy that anyone could understand by simply applying to their own lives. The money the owner of the window paid to the glass repair could have directly gone out and spent into other areas of the economy. The work for the window repair man has artificially detracted from the productive work that that same money could have generated without the lost value of the broken window. If the man who owned the window had not needed to replace it, he could have still instead simply spent that money into the economy, but he would still have a window, and the value of that window would still exist. If you had $250 you could go to the drum shop and have a custom suit made. Or you could shatter your own window, pay that $250 to a glass repairman who would then go purchase a custom suit. You would not have created more than a single suit, but you would have still lost the window. The destruction and replacement of the window transfers money, but does not generate any wealth, it only replaces the wealth that already existed. The wealth of a society, is made up by the wealth of it’s individuals. The wealth of the individual is generated by the accumulated products created by the production and exchange process. In the case of the broken window, the individual who’s window was broken has lost $250 while maintaining only 1 window. Instead of accumulating the wealth of 1 window and 1 new suit. If we think of society of a collection of individuals, we can therefore determine that society has lost the value of 1 window, regardless of how the glass repair man might have spent the money he made replacing it.

This is why the mere measurement of job creation or in many cases GDP is not always an accurate measurement of productivity or wealth production. A government could easily employ men to dig holes, and fill them up again and then brag about the jobs created for those men. At first glance, it would seem that the government merely spent money to produce no value or maintain the exact value that had already existed prior to employing the men. But it is actually even worse than that because it goes without saying that the political administrators of that unproductive project got payed themselves. This kind of publicly funded “jobs” project merely took money from the broader society, and transferred away from otherwise productive uses and instead to the politicians, project administrators and few employed men while also generating no new wealth. And if we think in terms of what could have been, we discover yet another regress. The money taken from individuals to pay for this scheme, if it had not been taken, would have been spent by individuals into solving real productive needs and desires. Because this money was instead taken, those needs and desires will have gone unrealized.

Wealth production can never be accomplished by digging holes and filling them up again, in the same way that it cannot be accomplished by shattering windows and replacing them again. Wealth is generated by construction of value, not by the destruction of value. Yet the broken window fallacy permeates throughout society through the political and economic rhetoric we hear every day.

The Blessing of Destruction

When in our own lives it’s easy see how absurd the notions such as breaking a window, or throwing trash on the ground are somehow stimulating the economy, or benefitting society. In our own lives we see how ridiculous engaging in unproductive work and/or expenditures are, and rarely set out to do these. But somehow as this fallacy is scaled up into mind-boggling proportions people again seem to forget it. We may sometimes hear suggestions such as, the destruction from war or natural disasters create jobs, stimulate efforts, or create the conditions to express a pent up demand, and thus they must increase opportunity, productivity, or advantage a society. This is simply an exaggeration of the broken window fallacy.

Once one concedes that a nation in a collection of individuals, and a nations wealth is simply they collect capital and productive potential of that of its individual constituents, one must logically realize that the destruction of the wealth and capital of the individual is therefore a diminishment of a nations wealth. Being that that is the case, the mass destruction of individual wealth and capital can’t possibly be a boon for their greater society.

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