economics in one lesson chapters

The shopkeeper runs out furious, but the boy is gone. His is one of the personal tragedies that, as we shall see, are incident to nearly all industrial and economic progress. Moreover, whatever the sum we offer for relief, we create a situation in which everyone is working only for the difference between his wages and the amount of the relief. Government estimates show that in the fifteen-year period from 1929 to 1943, inclusive, wages and salaries in the United States averaged 69 per cent of the national income. Bad loans and export subsidies are additional examples of the error of looking only at the immediate effect of a policy on special groups, and of not having the patience or intelligence to trace the long-run effects of the policy on everyone. By nominally keeping the price ceilings, however, the politicians in power tried to show that their hearts, if not their enforcement squads, were in the right place. The kind of vulgar display and reckless spending that Alvin indulges in, he thinks, not only helps to breed dissatisfaction and envy in those who find it hard to make a decent living, but actually increases their difficulties. Their modern counterparts are certainly no less striking. 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. But my indebtedness to at least three writers is of so specific a nature that I cannot allow it to pass unmentioned. The price goes up. John Stuart Mill, Principles of Political Economy (Book 3, Chap. But such a change would mean that the dollar profit margin, representing the income of investors, managers and the self-employed, would then have, say, only 84 per cent as much purchasing power as it had before. This is what happened to the British rubber restriction and the American cotton restriction programs. Could things be blacker? The whole economy, in total war, is necessarily dominated by the State, and the complications that would have to be considered would carry us too far beyond the main question with which this book is concerned. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. Suppose we make our tariff wall so high that it becomes absolutely prohibitive, and no imports come in from the outside world at all. The scientists, the efficiency experts, the engineers, the technicians, have solved it. With over a million copies sold, Economics in One Lesson is an essential guide to the basics of economic theory.A fundamental influence on modern libertarianism, Hazlitt defends capitalism and the free market from economic myths that persist to this day. We have not taken an argument for the imposition of a new tariff in order to bring a new industry into existence, but an argument for the retention of a tariff that has already brought an industry into existence, and cannot be repealed without hurting somebody. Before we consider what the consequences of inflation are in specific cases, we should consider what its consequences are in general. Then, of course, the thing is endless. If new capital and new labor are forcibly kept out of the X industry, however, either by monopolies, cartels, union policy or legislation, it deprives this capital and labor of liberty of choice. Disbanding Troops and Bureaucrats10. They will never see the extra suit, precisely because it will never be made. It would probably have been better all around if the government in the first place had frankly subsidized their wages on the private work they were already doing. They will get more money; they will be able to buy more of everything else. There is no general tariff on all “industrial” products or on all non-farm products. This means, in less technical language, that “a 1 per cent reduction in the real rate of wage is likely to expand the aggregate demand for labor by not less than 3 per cent.”[1] Or, to put the matter the other way, “If wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates”[2] so that the total income of the workers would be reduced correspondingly. If the engine goes too slowly, on the other hand, the balls drop, widen the throttle valve, and increase the engine’s speed. When a Petrillo threatens to put a radio station out of business unless it employs twice as many musicians as it needs, he is supported by part of the public because he is after all merely trying to create jobs. We cannot assume that it will provide sufficient additional jobs, however, to maintain the same payrolls and the same number of man-hours as before, unless we make the unlikely assumptions that in each industry there has been exactly the same percentage of unemployment and that the new men and women employed are no less efficient at their special tasks on the average than those who had already been employed. They lead merely to a sort of backed-up inflation that reduces or conceals some of the earlier consequences at the expense of aggravating the later ones.). The government must act. The cheap-money proponents believe that saving goes on automatically, regardless of the interest rate, because the sated rich have nothing else that they can do with their money. But suppose this were not so? The apparent bargains that the consumers are now getting will cost them dear in the end. In all these cases the unions, by demanding decent standards, often increased the health and broader welfare of their members at the same time as they increased their real wages. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings. It is the beliefs which politically influential groups hold and which governments act upon that we are interested in here, not the historical origins of those beliefs. The interest rate is merely the special name for the price of loaned capital. But when they limit the wages and the profits of those who make these commodities, without also limiting the wages and profits of those who make luxuries or semi-luxuries, they discourage the production of the price-controlled necessities while they relatively stimulate the production of less essential goods. It is for this reason that men used their ingenuity to develop a hundred thousand labor-saving inventions. In the five-year period 1939 to 1943 an average of 260 pounds of cotton was raised per acre in the United States as compared with an average of 188 pounds in the five-year period 1909 to 1913. The labor union leaders who demand shorter weeks to “spread the work” usually recognize this, and therefore they put the proposal forward in a form in which everyone is supposed to eat his cake and have it too. So the nation as a whole will be just that much poorer. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. The best way to raise wages, therefore, is to raise labor productivity. (This resounding error, as we shall see, is also the starting point of most currency cranks and share-the-wealth charlatans.) It is perhaps the worst possible form, which usually bears hardest on those least able to pay. �6�������2*��CD2�9��nX�\eK��3�/0"qT#VĪ��>�r/��t��b�w�u��YN7�:�$�wsS�(#�0�]�*��:��٠T��*5/9�b�mY�? If one industry alone could get protection, while its owners and workers enjoyed the benefits of free trade in everything else they bought, that industry would benefit, even on net balance. It is true that this refusal to buy may intensify and prolong a depression once begun. More readable and entertaining, though the reader may have to search for them in second-hand channels, are some of the older books, like Edwin Canaan’s little manual on Wealth (274 pages). It is like getting people up an hour earlier only by making them believe that it is eight o’clock when it is really seven. Some of them argue that this result will improve the position of poor debtors as compared with rich creditors. And this in time will also have its consequences. There is a second group, less naive, who see that if the whole thing were as easy as that the government could solve all our problems merely by printing money. Exactly. This “purchasing power” argument is, when one considers it seriously, fantastic. The most obvious and yet the oldest and most stubborn error on which the appeal of inflation rests is that of confusing “money” with wealth. These writers paint a portentous picture. He must attend immediately to the most pressing need. It will never compensate for its losses during the period when its income and prices had not risen at all, though it had to pay 30 per cent more for the goods and services it bought from the other producing groups in the community, A, B and C. So inflation turns out to be merely one more example of our central lesson. They are solved by this system incomparably better than any group of bureaucrats could solve them. Suppose they are paid for by deficit financing—that is, from the proceeds of government borrowing or from resort to the printing press? Prices of goods have probably fallen, and they fear a further fall. This is to talk as if the country were the same sort of unit of pooled resources as a huge corporation, and as if all that were involved were a mere bookkeeping transaction. Perhaps the shortest and surest way to an understanding of economics is through a dissection of such errors, and particularly of the central error from which they stem. It tears apart the whole fabric of stable economic relationships. They are, in fact, eventually forced to buy more from us if their dollar balances are not to remain perpetually unused. Total national production, the wealth of everybody, is higher. Even if half (or all) the loans we make to foreign countries turn sour and are not repaid, this nation will still be better off for having made them, because they will give an enormous impetus to our exports. They are sometimes surprised to find themselves in accord with seventeenth-century mercantilism. Whenever any of these items rises above its previous level the consumer becomes indignant, and feels that he is being rooked. There is first of all a misunderstanding of what it is that has been causing prices to rise. I hope she comes back soon. 896 0 obj <>/Filter/FlateDecode/ID[<5B948376C1FCF441BDA1910FDC2F8A2A>]/Index[887 82]/Info 886 0 R/Length 76/Prev 1407797/Root 888 0 R/Size 969/Type/XRef/W[1 3 1]>>stream This is the error often made by the classical economists. Preachers would have less to complain about; reformers would lose their causes: the demand for their services and contributions for their support would decline. The unworkable relationships between prices and key wage rates, if the insistence of the powerful unions prevails, will remain. The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. In Europe they joyously count the houses, the whole cities that have been leveled to the ground and that “will have to be replaced.” In America they count the houses that could not be built during the war, the nylon stockings that could not be supplied, the worn-out automobiles and tires, the obsolescent radios and refrigerators. [2] The less he withdraws from the existing stock of wealth for his own use, the more he leaves for others. (This is precisely, however, as we shall later see, what we already do in the case of “non-recourse” government loans to farmers.). The most important change it is designed to bring about is to raise commodity prices in relation to wage rates, and so to restore business profits, and encourage a resumption of output at the points where idle resources exist, by restoring a workable relationship between prices and costs of production. All the money in a nation, as these theorists picture the matter, will be offered against all the goods. This leads us to the heart of the question. Agriculture is the most basic and important of all industries. But the government can give no financial help to business that it does not first or finally take from business. A nation cannot grow rich by giving goods away. I come to the same conclusions. It would not occur to anyone unacquainted with the prevailing economic half-literacy that it is good to have windows broken and cities destroyed; that it is anything but waste to create needless public projects; that it is dangerous to let idle hordes of men return to work; that machines which increase the production of wealth and economize human effort are to be dreaded; that obstructions to free production and free consumption increase wealth; that a nation grows richer by forcing other nations to take its goods for less than they cost to produce; that saving is stupid or wicked and that dissipation brings prosperity. Its first effect on net balance would be to force shifts in employment and temporarily to decrease employment by its effect on the capital goods industries. chapter one: the lesson . Suppose we take an industry like that of the railroads, for example, which cannot always pass increased wages along to the public in the form of higher rates, because government regulation will not permit it. In addition, the capital available for risk-taking itself shrinks enormously. I hope, finally, that I shall be forgiven for making such rare reference to statistics in the following pages. The plan that started out so gravely to “stabilize” prices and conditions brings incomparably greater instability than the free forces of the market could possibly have brought. The usual difference is that the money is turned over to someone else to spend on means to increase production. They do this, for example, whenever they seek to fix the wages of their members above their real market worth. They declare that their intention is to “hold the line.” Soon, however, under the guise of “correcting inequities” or “social injustices,” they begin a discriminatory price-fixing which gives most to those groups that are politically powerful and least to other groups. It overlooks, first of all, that consumers will suffer the loss of that product. Consumers in both countries are better off. The government lenders, on the other hand, are either those who have passed civil service examinations, and know how to answer hypothetical questions hypothetically, or they are those who can give the most plausible reasons for making loans and the most plausible explanations of why it wasn’t their fault that the loans failed. One might pile up mountains of figures to show how wrong were the technophobes of the past. But it is just as true that everyone’s income—the grocer’s, the landlord’s, the employer’s—is his purchasing power for buying what others have to sell. Why should they be guided by the market? Cf. . Some of it was based on the belief that longer hours were harmful to efficiency. Inflation, as we shall later see, while it complicates the analysis, does not at bottom change the consequences of the policies discussed. It is not even possible to halt an inflation, once embarked upon, at some preconceived point, or when prices have achieved a previously-agreed-upon level; for both political and economic forces will have got out of hand. Yet the ardor for inflation never dies. On the contrary, it is precisely why they want the inflation. But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. A growth of male chastity would ruin the oldest profession in the world. Most of us must have noticed the automatic “governor” on a steam engine. Every dollar of the amount he has saved in direct wages to former coat makers, he now has to pay out in indirect wages to the makers of the new machine, or to the workers in another capital industry, or to the makers of a new house or motor car for himself, or of jewelry and furs for his wife. We are lucky, indeed, if the needless bureaucrats are mere easy-going loafers. labor. Economics in One Lesson by Henry Hazlitt (1978 revised edition) is a short introduction to basic economics for the layperson. They would have been unproductive. Government loans will waste far more capital and resources than private loans. They begin to talk of paper money, like the more naive inflationists, as if it were itself a form of wealth that could be created at will on the printing press. These are the consequences of what might be described as “perfect,” long-continued, and “non-political” price control. 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