Notes for: Economics in One Lesson

title: Economics in One Lesson author: Henry Hazlit published: 1988 edition: 2 ISBN: 978-1984878281

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.

But after reading the entire book, I think this book is better titled “why most government interventions are bad”, as most examples in this book are government interventions, which distorts the market and causes the society to be less well off in the long run, but benefit special interest groups in the short run.

Most government intervention can work, in very specific scenarios when the stars align, to fix some market failure or inefficiencies. However, most of the time, these are populist policies which makes the society worst off instead.

How Price System Works

• money act as a store of value, used to compare value across goods, and facilitate trade
• therefore prices of goods are determined by demand and supply of those goods, and is compared across the entire market, and it will achieve equilibrium in a free market
• bureaucrats who do not understand the quasi-automatic system of the market will attempt to “fix” it to protect special interest groups.

The Function of Profit

• profit incentivizes superior quality and innovation

The Lesson Applied

• The Broken Window is typical argument that if a window in a shop was maliciously broken, it is not that bad, since it stimulates the economy and gives business to the glazier. But there are opportunity costs often forgotten. The fund could have been used for other purposes. So the glazier’s gain is at the expense of other potential businesses.
• The Blessings of Destruction is therefore, an extension of the broken window, used by those who says that war and destruction stimulates the economy, forgetting about opportunity cost.
• Public Works Means Taxes similarly, means that public works that are not meant to solve market failures, but used to protect special interest groups or create employment, is simply using taxes which could potentially be used for better projects.
• Taxes Discourage Production and to fund more public works, high taxes distorts the cost and disincentivize business from making decisions that expands production as higher production means higher taxes, even when the market has demand for the goods.
• Credit Diverts Production because credit from government is as good as using tax payer money to subsidize special interest groups. Those groups are in trouble or could not secure loans simply because they are not competitive or too risky for market standards, and subsidizing them will definitely leads to less than ideal outcome as compared to a free market.
• The Curse of Machinery is an argument usually used by labor parties or unions to discourage the adoption of machineries that displaces workers. Indeed benefit to overall society is not equitable. Workers with outdated skills will be eliminated by competition, but if productivity improves with machineries then society will produce more value and benefit as a whole.
• Spread-The-Work Schemes is another labour biased policy that requires specific work to only be done by specific profession. e.g. the electrician cannot access the wirings in the wall, unless a carpenter is first engaged to hack through the wall. The fallacy is that there is a fixed amount of work to be done, so it must be spread across all labours. But if each worker is more productive, then society can deliver more value.
• Disbanding Troops and Bureaucrats is similar to the curse of machinery argument, where policies are made to create employment for war veterans. The bureaucrats did not take into account that disbanding troops means lower military expenses, and these troops can participate in other parts of the economy, and the saved taxes can be used for other means. By protecting employment of troops as a special interest group, there is no net benefit since it is a zero sum.
• The Fetish of Full Employment the congress should be pushing for full production bills, instead of full employment bills, but the latter is more popular politically. Which results in public funds diverted to create employment, which based on free market those who were unemployed were either not competitive, or there are other macro factors that are causing unemployment in the first place. This merely distorts the market and creates more uncompetitiveness in the long run.
• Protected by Tariffs special interest groups are always lobby for protection against more competitive imports. But the tariffs makes domestic consumers worst off, as they were denied from enjoying cheaper imports, and if they consume less imports, to maintain trade balance, the other countries will also produce less exports and in turn consume less imports, causing everyone in the global trade to be worst off. Again, international trade benefits all countries, but it is not equitable to all industry. Domestic industries which are less competitive will be eliminated by the global competition.
• The Drive for Exports since global trade must always balance, if country A loans to another country B with the intention for B to import more from A, but B does not have the financial capability to pay off the loan, then A is not better off. It is as good as giving the goods away for free at a loss.
• Parity Prices is usually used to set a price above the market for certain industry so that the industry can remain profitable. This uses tax money, and is unfair to the society of tax payers.
• Saving X Industry is similar to a lot of examples above, where public funds are diverted to save certain special interest group, that are not even critical to national security. For free market to properly function, uncompetitive companies must be allowed to die.
• Stabilising Commodities fixing the price of commodities will usually only benefit the uncompetitive producers in an industry, while the competitive ones and the wider society suffers with less output and value.
• Government Price-Fixing same as the above.
• What Rent Control Does distorts the market and simply transfer value from landlords to consumers, but over time it leads to poorly maintained housing as there is no incentive for the landlords to maintain those housing.
• Minimum Wage Laws will only work for monopolistic market, but in most cases, it only distorts the market and makes consumer worst off with increased cost, and if cost of goods increases as a result then real wage does not increase at all. The sustainable way to increase wages is to increase the marginal productivity of labour.
• Do Unions Really Raise Wages nope, because it is the same as minimum wage law.
• Enough to Buy Back The Product is another argument to raise wages, but it again is distorting the demand and supply equilibrium of the labour market.
• The Mirage of Inflation some may argue that inflation will stimulate the economy, which is true, for a mild inflation. And it will benefit certain groups more than others e.g. if inflation is caused by fiscal spending on public infrastructure, then construction industry will benefit first, with temporary improvement in real income before inflation propagates to the entire economy. However, in the long run, the real income will fall due to inflation.
• The Assault on Savings is another fallacy that consumption will simulate the economy and therefore households need to save less. But saving is employed by the banks to facilitate loans to businesses for capital expenditures, which are investments to improve productivity in the longer term.