Book Review: Economics In One Lesson

I was pretty excited to read this as it comes recommended by a lot of proponents of the Austrian school of economics. Despite knowing about Henry Hazlitt’s Economics In One Lesson, I didn’t know much of the content. I believe the title is misleading, because the lesson is actually just one sentence long. Hazlitt humorously divides the book into two parts: Part One is the lesson, which is a short chapter; Part Two is the application, which demonstrates the machinations of the state when it inserts itself in an otherwise free market economy.

In fact, Part One can be distilled into one sentence, which is Hazlitt’s lesson. I went through the trouble of typing it out for you — you can read it in amazon.com’s preview of the book, and also on the free online version:

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.

That’s it, in all its deceptive simplicity. It’s easy to understand though it’s in a politician’s best interests to ignore this fact. Its implications don’t involve them “doing things”, they don’t flower their public image during campaign season and they don’t fill voters’ conditioned desire to see politicians “solve problems”. I will explain this using an example of Hazlitt’s, which is kind of an extension of Bastiat’s Broken Window fallacy, to which Hazlitt gave mention.

Let’s say that, for one reason or another, there is a shortage of jobs in a city. The government decides to build a bridge that won’t be particularly useful nor demanded otherwise, but the idea is sold on the pretense that it will create jobs, which it definitely will. Voters assent to it and the construction starts on the bridge. People that were otherwise unemployed are working and businesses, probably local ones, are profiting from the purchased supplies. The bridge is finally built and the politicians that supported the projects and workers that benefited marvel at their product.

Those involved with this bridge project enjoy two distinct psychological advantages. One is that everyone can see the project providing jobs because they can see the people working, the other is that the product is clearly visible at the end of production. Motorists may even be seen using the bridge because it is there and it is new, though it may be completely unnecessary. Those who opposed the building of the bridge are easily labeled as a kind of obstructionist who don’t want the “working class” from benefiting from new jobs, or other such spurious accusations.

But those who know basic economics can see past the immediate because, as Hazlitt demonstrates, for every public job created, a private job is destroyed — or taxed individuals suffer from having less income. The city must fund the bridge from tax revenue from businesses or individuals. If a business is taxed, it has less resources to expand production or make current production more efficient — two actions businesses are almost always likely to perform as they make their product more valuable and more profitable. Loss of expansion results in less jobs being created, stagnant efficiency results in a product which isn’t less costly to produce. An individual who is taxed for the bridge is forced to pay for something undesired and has less buying power to purchase the products he or she desires. These unintended consequences are not seen, but the bridge is.

In subsequent chapters, Hazlitt applies this simplistic example on a larger scale, to things like rent control, inflation, minimum wage laws, “spread the work” schemes, and tariff protectionism. The situations are different but the effect is the same: government tinkering with economies always results in unintended, negative consequences on the disturbed economy. Money has to come from somewhere, either from taxpayers, the printing press, or credit, and the laws of mathematics that govern economies cannot be changed.

This review is actually timely for me for two reasons. As I started to write this, a woman came to my house door and asked me to sign a petition to acquire federal stimulus money for our district, to retain potentially outsourced jobs. I declined to sign as I didn’t support redistributive schemes to begin with, even before reading Hazlitt. I wanted to tell her that outsourced jobs are probably caused by policies that result in more costly production and forces a business to seek more favorable production environments to keep costs down, and that stimulus money is just another method of the government covering up a problem they caused in the first place. I doubt she would have cared or even understood.

The other timely event is a blog post by Steve Bland, the CEO of my local public transit service, the Port Authority of Pittsburgh. They received federal stimulus money to reorganize the public transit system to make it more efficient, which took place a few months ago (stimulus money, as Hazlitt demonstrated, that killed jobs in the private sector). However, some of the funding that was expected and the situations surrounding it have changed, so that they Port Authority is running at a loss and they will have to redo their budget. Bland says that services will have to be cut drastically, resulting in layoffs and higher prices for riders. I believe him, but I also predict an uprising of politicians and citizens who will lobby for more federal stimulus money to maintain what we have now. If this lobbying is successful we will see Hazlitt’s theory in action: we can see bus routes and the people riding them (I, unfortunately, am one of them), but we cannot see the private jobs that are destroyed from taxation to pay for all of it.

Economics is referred to as the “dismal science” because of its reliance on numbers and percentages. It is a boring study of something everyone wants and for which everyone works. Hazlitt simplifies the discipline by using solid verbal logic and grade school-level mathematics to expose the machinations of the well-intentioned state to improve economies — machinations that have grave consequences for those that can see past the immediate and visible. The Ockam-like simplicity speaks to its veracity, because when we are bombarded with hordes of statistics and mathematical proofs by some economists and politicians in favor of some complex interventionist policy, they are trying to convince voters to to accept a bill of goods that we would ultimately reject.