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Henry Hazlitt Economics in One Lesson (1996).

Economics has "more fallacies than any other study known to man." Why all these fallacies? Self interests and Tendency to look at short-term effects and ignore long term effects, overlooking secondary consequences.

"In the Long Run, we’re all dead," (JMKeynes), but "Today is already the tomorrow which the bad economist yesterday urged us to ignore."

The Art of Economics consists in looking not merely at the immediate, but also at the longer effects of any act or policy; it consists in tracing consequences of that policy not merely for one group but for all groups. 9/10 of fallacies result from ignoring this effect.

The "Broken Window" fallacy is the most persistent in the history of economics. Is war more beneficial than peace? WW2 was good news for Europe, because whole cities were replaced, miracles of production were achieved, prosperity from pent-up demand. In America, during the war, no nylons, no refrigerators.

This fallacy results from a confusion between need and demand. Destruction > poverty> need. But effective economic demand requires not just need but a corresponding purchasing power. Most of the "good" economic results from WW2 were really from inflation. It was really a diversion of demand. Europe – new houses were built to replace old ones. Less manpower, production was available for everything else. Increasing business in one direction leads to reduction in business in other areas. The war changed the postwar direction of effort; the balance of industries changed, structure of industry changed.

Most fallacies come from the tendency to think in abstractions; we forget or ignore individuals. HOMES were still destroyed; PEOPLE were left homeless.

Supply and Demand are 2 sides of the same coin. Supply creates Demand because at bottom it IS Demand. The farmer’s supply of wheat constitutes their Demand for cars, etc. All this is inherent in the modern division of labor in an exchange economy.

Mere inflation may look like the creation of new Demand, but in terms of actual production and exchange of real things it is not.

For the Germans and Japanese after WW2, there was an "advantage" in rebuilding the old plants destroyed in the war, while the Americans had half-obsolete plants and equipment. If this is true, why not just tear down all old plants? There is an optimum time for replacement, and the existence of the new speeds up the obsolescence of the old, BUT, also need capital to replace plants and equipment! This diverts capital from other uses, like research and development.

Public works mean taxes. But TANSTAAFL. You can’t fix everything with government spending. Free gifts of nature, everything else you have to pay for (Dire Straits…)

All government expenditures must be paid for from proceeds of taxation. Inflation is "particularly vicious" form of taxation. Certain amount of government spending is necessary to maintain infrastructure. But it should not be just to "provide employment." For every job created by a government project, a private job has been destroyed somewhere else.

Public housing creates jobs, but does it create wealth? Taxation for public housing destroys as many jobs in other lines as it creates, and other projects are not done because time/money is spent on this one.

Taxes discourage production. The great burden of income taxes is imposed on a minor % of the nation’s income. It effects actions, incentives of payers. When corporations have to pay taxes, their policies change. No expansion, no new enterprises.

Credit diverts production. For example, consider the effect of giving credit to farmers. All loans must be repaid; all credit is debt! Farmer gets loan to buy new tractor to be more productive, but is this credit>debt self-liquidating (i.e., does it pay itself back?).

Think Through Situations!
One example: WW2 was over, soldiers returned home, filling the labor market. Where were they employed? (private sector). No more payments by government to soldiers, so less government outlay, thus taxes lowered. Lower taxes mean people keep more of their money, can buy more goods. Demand increased, more employment available to new workers. Former soldiers now self-supporting. Total production (GDP) now higher.

Two examples of the difficulty in TTS:

1. Some have said we should simplify the tax regulations and get rid of the "extra" employees of the IRS. But what happens if all of these people become unemployed? What will be the effect on the tax rates?

Would the country be better off without all these "superfluous" office holders? They would seek private sector jobs, supplying equivalent services to customers. They would not be parasites, but now would be productive.

 

2. The argument has often been made that other countries are "stealing" our production and that we should add tariffs to imports to restrict them. Look at the effect in one area: sweaters. Sweaters are selling in the US for $30 and in GB for $25. US manufacturers say they need a $5 tariff to keep in production, keep things "equal." If no tariff, US manufacturers might go out business, BUT…

Sweaters would now be $25. Consumers can now buy the sweaters anywhere for $25, which helps England’s sweater manufacturers, whose employees now have more money to buy (fairly priced) American goods. With the extra $5, Americans can now buy something from another industry in the US, helping that industry. Because we have allowed the British to sell to us, they are now able to BUY from us. So as a result of letting in more British goods, we are now exporting more American goods. And although fewer people are employed in the American sweater industry, more people are employed in other, more productive, American industries. Production has gone up in both industries. Consumers in both countries are better off, because they can buy what they want at the cheapest price.

A tariff does benefit some (special interests), but it does so at the expense of everyone else. Serving special interests does not produce the greatest UTILITY for society as a whole.

 

 

The whole economic progress of mankind has consisted in getting more production with less labor. Each country tries to maximize production. Full employment is a necessary byproduct. Can’t continuously have the fullest production without full employment. But can very easily have full employment without full production.

Can always get full employment, but the progress of civilization has meant the REDUCTION of employment, not its increase.

The whole argument of the book may be summed up in the statement that in studying the effects of any given economic proposal we must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group, but the effects on everyone.