Economics in One Lesson Part 2

 Chapter X: The Fetish of Full Employment

I find this book so much more fun to read than to write about, but I read a quote today on twitter about how reading only gives you the materials of knowledge, it is the act of thinking about it that makes that knowledge your own. I committed to this blog as a means of forcing myself to think about what I was reading in order to make it my own, so onward. My saving grace is that the chapters are short, so I'll try to to feel too bad if my explanations are even shorter. 

Obviously, high unemployment is a bad thing. But the inverse isn't necessarily true, high employment isn't necessarily a great goal in and of itself. If it were, slave labor would be a good thing. 

"It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs." That's a lot fewer people employed, which is good, and we're better of for it, not in spite of it. 

Chapter XI: Who's "Protected" by Tariffs?

I have frequently read jokes about crafters that goes something like this, "Why would I buy that blanket for $70 when I can make it myself with $100 of yarn?" And it's true, I've done that myself as a crafter. But from an economic standpoint, which is of course our topic here, that is unwise. I could have had the $70 blanket, a $30 pair of pants, and a whole lot more free time for some other endeavor. When we place tariffs on foreign goods, we pay more to "make it at home" and thus have less money for other goods. Without tariffs, we receive higher quality goods for the same or lower price, and each country is incentivized to make more of what they can produce well or efficiently, because they can sell them at a good price without having to compete with (effectively) subsidized manufacturers. 

"Labor in each country is more fully employed in doing just those things that it does best, instead of being forced to do things that it does inefficiently or badly." 

Tariffs also encourage other countries to place tariffs on us, so as a tariff might benefit producers in one business, albeit at the expense of consumers forced to pay higher prices than strictly necessary, it can hurt producers in other areas who now are under tariffs from other countries. 

Chapter XII: The Drive for Exports

Ugh. I made no notes in this chapter. Basically, the preceding chapter illustrated a certain fear of imports, that American dollars are spent enriching other nations. The flip side of the coin is the similarly erroneous idea that exports enrich us so we should subsidize them. It talks of governments giving other countries loans to enable them to buy our stuff, which is so stupid on it's face that I can hardly believe it has ever happened. Oh wait, yes I can. The government is stupid and terrible with money because they didn't work for it and can always just print more. 

Chapter XIII: Parity Prices

Parity prices is the idea of the free market erroneously setting the price for a good below what is "fair" in light of the cost to produce. The idea is most commonly applied to produce, because food is the most important commodity, we must protect the farmer at all costs, so that he will continue to produce necessary food. During the Great Depression, food prices fell further than other industrial prices. The idea was that they should have fallen to the same degree to make it fair on farmers and preserve their essential profession. Hazlitt argues that there is a clear lack of logic in this argument, or we would take it further. why shouldn't all prices maintain the same relationships one to another at all times? But never mind logic, let's look at consequences. For one, with artificially raised prices, consumers have lower purchasing power. They may buy less of what isn't strictly necessary. If the farmer gets a higher price per bushel but sells fewer bushels, it might be a wash for him while his customers are left will less product, a net loss. 

"It also frequently means a forced cut in the production of farm commodities to bring up the price. This means a destruction of wealth....It may mean the actual physical destruction of what has already been produced, as in the burning of coffee in Brazil. It may mean a forced restriction of acreage, as in the American AAA plan, or its revival." 

Chapter XIV: Saving the X Industry

Two examples of the government acting to save an industry are silver and coal. The US treasury was forced to acquire silver at above-market prices. "Congress and the country would never have approved a naked steal of this sort unaccompanied by the ideological flim-flam regarding 'silver's essential role in the national currency." When the government tried to set "the" price for coal to save the coal industry, they ended up setting 350,000 separate prices "because of different sizes, thousands of mines, and shipments to thousands of different destinations by rail, truck, ship and barge." And the end result (can you imagine how many bureaucrats it took to decide on all those prices and how much they were paid to do so?) was that people turned to other forms of energy, so much so that at the time the book was written "we find the government trying to force conversion from oil consumption back to coal." As happens all too often, the government tries to fix something and makes it worse instead. 

And if the coal (or X) industry dies, so what? Yes, it will involve initial hardship for those out of a job, but it frees up resources and labor for things that people want more, that will benefit them more, that will be produced more efficiently. 

Chapter XV: How the Price System Works

Anti-capitalists or politicians trying to excuse the ill-effects of their ill-thought out policies will sometimes vilify the price system. Psaki did it recently when she claimed that high prices were due to corporate greed. (I think she was specifically talking about meat prices, as though meat producers, as though it only just now occurred to them that they could get more money by raising prices.) 

"Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it. It is true that supply is in part determined by costs of production. What a commodity has cost to produce in the past cannot determine its value. That will depend on the present relationship of supply and demand. But the expectations of businessmen concerning what a commodity will cost to produce in the future, and what its future price will be, will determine how much of it will be made. This will affect future supply. There is therefore a constant tendency for the price of a commodity and its marginal cost of production to equal each other, but not because that marginal cost of production directly determines the price." 

Sound complicated? It is. There are so many moving parts of this system, and if one changes, they all change, striving for a sort of supply/demand homeostasis. And supply of one thing will affect the supply of another. I can't remember if I read this in Hayek's Road to Serfdom or in The Bitcoin Standard, but the price system is how we communicate supply and demand for different goods. When you interrupt the price system, you interrupt that communication, which leads to shortages of some things, and overproduction of other things. It makes the economy less efficient and everyone less well-off. This is why socialism doesn't work. 

"It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other." Anyone who thinks human beings can better manage that than a simple price system is either astoundingly ignorant of the complexities and ever changing nature of such a system, or has a truly shocking level of hubris. 

Chapter XVI: "Stabilizing" Commodities

This chapter sort of rehashes things that I've just typed about. Parity prices, saving x industry. Basically it's people trying to "stabilize" prices because the supply and demand homeostasis is changing too rapidly, which is hurting some producers. But in sticking their nose in, they steal wealth from taxpayers to subsidize producers, there's less purchasing power, so they buy less anyway, other industries suffer, etc. ect. Same story different name. 

Chapter XVII Government Price-Fixing

Isn't that what I just said? 

"It is the wartime inflation that mainly causes the pressure for price-fixing. At the time of writing [1946], when practically every country is inflating [Bretton Woods occurred in 1944]......By implication [price controls] put the blame for higher prices on the greed and rapacity of businessmen, instead of on the inflationary monetary policies of the officeholders themselves."

So similar to above, vilifying the price system, only here the problem is an excess of money supply instead of a lack of goods. 

When the government artificially holds prices below market value, there are several consequences. 1) increase demand which leads to 2) decreased supply and 3) production is disincentivized, which exacerbates 2, and can lead to marginal producers being pushed out of the market, creating unemployment. So the end result is a shortage, which is exactly what the government was trying to avoid. They inadvertently "discourage the production of the price-controlled necessities while they relatively stimulate the production of less essential goods." 

Sometimes they will then turn to rationing to combat the shortages they have created, which is essentially a double price system; you have to have both the money and the "points" to buy it. So, ironically, "the government tries to do through rationing part of the job that a free market would have done through prices." Shortages of one good put pressures on other goods, so they step in with more price controls and more rationing. This leads to black markets, which produce inferior goods and "a premium is put on dishonesty." 

Chapter XVIII What Rent Control Does

It puts undue pressure on landlords that struggle to keep a profit margin to pay the bills. It disincentivizes keeping the property nice, because the artificially low rents are incentive enough for renters to stay, leading to run down, terrible conditions. There is no incentive to build more affordable housing because there is no profit in it, so all the building projects go to luxury living. There is no rent control there so they can make a profit and are incentivized to keep things nice and updated. It leads to an increased divide between rich and poor living conditions. In extreme cases it leads to slums and abandoned buildings. So then the state steps in to fix the problem that it created (are you beginning to see a pattern with that?) and builds its own low-income housing. "The possibilities of this favoritism are too clear to need stressing."

Chapter XIX Minimum Wage Laws

Again several consequences. 1) Employers cannot afford it so they are force out of business or forced to lay off employees. "For a low wage you substitute unemployment." 2) In order to be able to afford it, companies raise prices. So now you earn more, but everything costs more, too. So that's a wash--but wait, there's more! People won't want to pay more for stuff so they will turn to foreign goods that are cheaper or buy less of it. 

"By a minimum wage of, say, $2.65 an hour, we have forbidden anyone to work for forty hours in a a week for less than $106. Suppose, now, we offer only $70 a week on relief. This means that we have forbidden a man to be usefully employed at, say, $90 a week, in order that we may support him at $70 a week in idleness." We have made that man poorer by not allowing him to work. So then, you say, give them more for unemployment benefits. Yeah, let's tax working people so that not working people can have the same amount of money as them. That'll lead to a productive economy. 

"The question is not whether we wish to see everybody as well off as possible. Among men of good will such an aim can be taken for granted. The real question concerns the proper means of achieving it."

"The apparently easy method of raising [wages] by government fiat is the wrong way and the worst way."