Economics in One Lesson Part 1

 I actually read another book since finishing the Bitcoin Standard. I didn't feel like writing about it here, since it was a different kind of non-fiction. It is by my friend Ben Schilaty and it's called A Walk in My Shoes, about his experiences as a gay Latter-Day Saint. Some of it I'd already read from his blog, and some of the things I "learned" were spiritual and personal, meaningful to me because my testimony needed his testimony to buoy it up. Not exactly what this blog is for. But if anyone actually ever reads this, I do recommend Ben's book. I offered it up on my local Buy Nothing FB page when I was done and there are several going to pass the book around, so that was fun. 

So now I'm onto Economics in One Lesson by Henry Hazlitt. The Mises Institute was shipping them to people for free, so I said, "Why not?" 

The "one lesson" is taught right at the beginning, all other chapters offering different ways this lesson is forgotten or lacking. The lesson is this, are you ready? 

"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 the Bitcoin Standard, it was mentioned that, when asked about the long term consequences of his economic policies, Keynes responded that, "In the long term, we are all dead." Apparently, Keynes never learned, or never cared about, this one lesson. 

In order to understand the long term consequences of any economic policy, one must be able to shelve the immediate benefits, or indeed negative consequences, and take time to ponder possibilities, alternatives and hypotheticals. Most people can't be bothered. This is not an indictment of their character, as I've never bothered much about it before, rather it's merely an observation of why bad economic policies are so easy to implement. A little immediate gratification for the masses that don't analyze macro economics, and those in charge can do what they want with little push back. I loved this line from Hazlitt, " The bad economists rationalize this intellectual debility and laziness by assuring the audience that it need not even attempt to follow the reasoning of judge it on its merits because it is only "classicism" or "laissez faire" or "capitalist apologetics" or whatever other term of abuse may happen to strike them as effective." It reminded me of the section of the Bitcoin Standard where most non-Keynesian economists serve only as controlled opposition, a caricature of the evils of a free market. 

Chapter II: The Broken Window

In this story, a shop keeper has his widow broken by some hooligan. A pain, for sure, but hey! It created a job for the glazier! (Did you know that's what a glass working person is called? I didn't.) Huzzah, through this minor trouble, we have stimulated the economy! Now, if you are thinking to yourself that this is a stupid take on the shopkeeper's misfortune, they you weren't paying very close attention to the riots last year. I definitely heard people excuse away all the destruction in this way. But let's look at the economic stimulation from the broken window. The shopkeeper was ready to buy a new suit, but now his money will go to a new window. Had the window never been broken, he could have had the window and the suit. He still would have stimulated the economy by providing work to the tailor instead of the glazier, but now he has stimulated the economy but is left only with the window he already had, he is no better off. 

Chapter III: The Blessings of Destruction

The broken window fallacy sounds obvious enough after that example, but it is prevalent. This chapter discusses a lot of this fallacy going around after World War II. I'm sure we've all heard that war is good for the economy, right? "In Europe, after World War II, they joyously counted the houses, the whole cities that had been leveled to the ground and that "had to be replaced." Of course, this was no great boon to the economy. They most clearly would have been better off had nothing been destroyed in the first place, then they could have expanded or improved instead of just working to regain their baseline. Some argued that the Germans and Japanese had a post war advantage over the Americans because their factories had been destroyed. They could now rebuild with the latest technology, making them more efficient and more profitable than American factories.  The only problem with this argument is that there was nothing stopping Americans from destroying their own factories if it was truly in their own interest. "The wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on the net balance, a boon or a blessing." It reminds me of Biden bragging about the "fastest job growth in the nation's history" or some such. Yes, Biden, because first we destroyed a bunch of jobs. a quick drop off of unemployment is not really that impressive when you see that we're still far about the baseline. 

Another note from this chapter before I move on, Hazlitt argues that supply and demand are merely two sides of the same coin. That a farmer's supply of wheat merely represents his demand for other goods. He doesn't want the wheat, he wants to sell it so he can have other things. I had never considered it in this way before and thought it was interesting. I'm not sure how that will apply in looking at specific supply and demand issues, just....interesting. 

Chapter IV: Public Works Mean Taxes

This chapter starts with the line, "There is no more persistent and influential faith in the world today than the faith in government spending." Now, this book was written in 1946. So with today's government spending being what it is (insert panicked screaming) I'm not sure if I should say this is even truer today, or if some people are finally starting to lose this faith. We shall see. 

The point of this chapter is that the government gives you nothing for "free." It's sure trying to right now, with the endless debt and money printing, but "such pleasant dreams in the past have always been shattered by national insolvency or a runaway inflation." The example the author gives in this chapter is a bridge being built. Before it is built, people might say that another bridge in this area isn't really necessary, but it will provide so many jobs! It will stimulate the economy! But the bridge costs $10 million dollars. If that money is obtained with tax dollars, that's $10 million dollars that the constituents could have spent on things they valued more than another bridge. They could have stimulated the economy in ways they saw as most beneficial to them. Some of them could have perhaps started or expanded a business, which would have also provided jobs, but in another sector. If that $10 million is obtained through debt and money printing, it will devalue the savings of the constituents, essentially taxing them of the value. But we see the men at work on the bridge. It is much more difficult to see the jobs that could have been created elsewhere, it's difficult to measure the opportunity cost. Then after the bridge is built, people like it. it looks nice and is convenient. They see it and they like it. Three cheers for government! But they again fail to see what could have been instead. This is not to say that bridges are bad and the government should never build them, it is only to say that everything the government does comes at a cost, a monetary cost to constituents and an opportunity cost of what else the government could be working on, and it is important to put in the effort to look at the parts of the equation that can't be seen. 

Chapter V: Taxes Discourage Production

Basically, too much taxing discourages employers from hiring new people. It keeps their profits down so it keeps them from expanding. Some are kept from starting a business at all. "The larger the percentage of the national income taken by taxes the greater the deterrent to private production and employment. When the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble." 

Chapter VI: Credit Diverts Production

This chapter deals with something I don't really know much about, I wasn't really aware the government was involved in this, although it sort of makes sense now. I guess the government gives loans? I suppose this is just subsidizing things with an expectation of repayment. The problem here is the same problem with all government spending, illustrated here in this table based off Milton Friedman's writings. 

When a private lender selects a farmer (the example used heavily in this chapter) to receive a loan, they have a vested personal interest in choosing the hardest working, one who will be most likely to see success and provide a return on investment. When the government gives out a loan (with money they took from you and which they can just get back from you), there is less incentive to vet the potential recipient. And, as was discussed previously, government spending on one farm/farmer means that another potential farm/farmer goes without said funding. In this way, production is reduced, because we have removed the free market forces that select for the most productive farmers. "When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business." This plays into the main idea from the last chapter. 

Chapter VII: The Curse of Machinery

This chapter deals with the idea that improvements in technology and machinery lead to unemployment and are therefore bad. Of course there is no shortage of examples of this thinking throughout history, including revolts where workers destroyed the machinery that was poised to make them obsolete. Hazlitt goes through several examples, showing that, in the long run, these machines actually allowed for *more* people to be employed, not fewer. He does acknowledge that, in the short term, some will experience unemployment and be worse off. It cannot be argued, however, that mankind as a whole had been wildly enriched by technological progress. In reading this chapter I was reminded of a section of a book by Bastiat that I started reading last year and never finished, "Sophisms of the Protectionists". Both books deal with the false idea that labor=wealth. That being employed is a measure of wealth. But wouldn't you consider yourself far more wealthy if you had everything you need and wanted and didn't have to work for it? Of course Bastiat explains that in a much more eloquent way, but you get the gist, the labor theory of value is bollocks. 

Hazlitt illustrates the problem with having the preservation of jobs as the highest ideal with examples of how trade unions have gone out of their way to preserve certain jobs. One ridiculous example, "In Houston, Texas, master plumbers and the plumbing union agreed that piping prefabricated for installation would be installed by the union only if the thread were cut off one end of the pipe and new thread were cut at the job site." Plumbers aren't allowed to do any tile work, so now you need to hire a plumber and a tile mason. Preserving these jobs increases costs which, as we learned with the shop keeper and the glazier, could have been spent on a separate job and would have lead to greater actualized wealth. Making work for work's sake impoverishes. I enjoyed this phrase "The technophobes, if they were logical and consistent, would have to dismiss all this progress and ingenuity as not only useless but vicious. Why should freight be carried from Chicago to New York by railroad when we could employ enormously more men, for example, to carry it all on their backs?" But clearly easy freight makes stuff cheaper, so you can buy more stuff, creating jobs in different sectors, so this way we have both more jobs and more stuff. 

Chapter VIII: Spread-the-Work Schemes

In addition to the ridiculous spread the work schemes addressed in chapter VII, there is the idea of shortening the work week. If the employees only work four days instead of five, the company will have to hire additional people to keep up productivity (yay, less unemployment!), and who doesn't want a three-day weekend? This can work out in only one of two ways. If the payroll is kept even, that means those who could have been working five days a week are earning less so that others can earn some. They are subsidizing those who would otherwise be unemployed. They have less to spend, which will stifle jobs in other sectors. If the payroll is increased so that everyone earns in four days what they would have earned in five, then this raises the cost of production. And although Jen Psaki might think it ridiculous and unfair, it is inevitable that this will lead to an increase in prices passed on to the consumer. So you work less while earning the same, but everything is more expensive, so you're still subsidizing, just less overtly, much in the same way that inflation is a less overt taxation. 

Chapter IX: Disbanding Troops and Bureaucrats 

This book was originally written around the end of World War II, and there was some concern over the high unemployment that would arise from so many soldiers no longer being employed by the government. While this concern was valid in the short term, in wasn't in the long run. The government no longer supported the soldiers, but the taxpayers could then retain the funds they used to give the government to support them. They had more money to spend which spurred job growth in other sectors. Either way the taxpayers are supporting the soldiers, only what they receive in return changes from defense to goods and services in the private sector. Hazlitt compares these post war concerns to the downsizing of bureaucrats who no longer provide necessary services. Some would rather they keep their jobs than to lose their purchasing power. "This 'purchasing power' argument is, when one considers it seriously, fantastic. It could just as well apply to a racketeer or a thief who robs you. After he takes your money he has more purchasing power. He supports with it bars, restaurants, night clubs, tailors, perhaps automobile workers. But for every job his spending provides, your own spending must provide one less, because  you have that much less to spend. Just so the taxpayers provide one less job for every job supplied by the spending of officeholders. When your money is taken by a thief, you get nothing in return. When your money is taken through taxes to support needless bureaucrats, precisely the same situation exists."