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ECONOMICS IN ONE LESSON
by Henry Hazlitt
Nobel Laureate in Economics, F.A. Hayek said in 1974 about Hazlitt‟s book: “It is a brilliant performance. It says precisely the things which need most saying and says them with rare courage and integrity. I know of no other modern book from which the intelligent layman can learn so much about the basic truths of economics in so short a time.” (Back cover)
“This book is an analysis of economic fallacies that are at last so prevalent that they have almost become a new orthodoxy....its effort is to show that many of the ideas which now pass for brilliant innovations and advances are in fact mere revivals of ancient errors, and a further proof of the dictum that those who are ignorant of the past are condemned to repeat it.” (pp. 9-10)
“As Morris R. Cohen has remarked: „The notion that we can dismiss the views of all previous thinkers surely leaves no basis for the hope that our own work will prove of any value to others.‟” (interior quote: Reason and Nature (1931), p.x.; Hazlitt, p.10)
“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....Fallacies, when they have reached the popular stage, become anonymous anyway.” (p.11)
The Lesson:
“Economics is haunted by more fallacies than any other study known to man. This is no accident.” (p. 15)
“While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case.” (p. 15)
“[There] is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences. In this lies the whole difference between good economics and bad.” (pp. 15-16)
“Doesn‟t everybody know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end?....Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way to economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: „In the long run we are
all dead.‟ And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.... Today is already the tomorrow which the bad economist yesterday urged us to ignore.” (pp. 16-17)
“[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. 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. ” (p.17)
“[Bad economists] overlook the woods in their precise and minute examination of particular trees. Their methods and conclusions are often profoundly reactionary.” (p. 18)
“[B]ad economists present their errors to the public better than the good economists present their truths....The reason is that the demagogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups. The answer consists in supplementing and correcting the half-truth with the other half. But to consider all the chief effects of a proposed course on everybody often requires a long, complicated, and dull chain of reasoning. Most of the audience finds this chain of reasoning difficult to follow and soon becomes bored and inattentive. The bad economists rationalize this intellectual debility and laziness by assuring the audience that it need not even attempt to follow the reasoning or judge it on its merits because it is only „classicism‟ of „laissez faire‟ or „capitalist apologetics‟ or whatever other term of abuse may happen to strike them as effective.” (pp. 18-19)
The Broken Window:
“A young hoodlum...heaves a brick through the window of a baker‟s shop....A crowd gathers....After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind...the baker that, after all, the misfortune has its bright side. It will make business for some glazier....After all, if windows were never broken, what would happen to the glass business? Then of course, the thing is endless. The glazier will have $ more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor....But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury)....The glazier‟s gain of business, in short, is merely the tailor‟s loss of business. No new „employment‟ has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the
“If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most. Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else....at best there has been a diversion of jobs....More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers....What has happened is merely that one thing has been created instead of others.” (pp. 33-34)
[But public works have great visibility which makes people not question their propriety -- after all they can drive over the bridge themselves. By contrast, people can‟t see the items sacrificed in the process because first, they are not visible having never come into existence and second, they are too indirect and it is hard to follow all of their myriad paths. In response to this Hazlitt says:] “As a character in Bernard Shaw‟s Saint Joan replies when told of the theory of Pythagoras that the earth is round and revolves around the sun: „What an utter fool! Couldn‟t he use his eyes?‟” (p. 35) [So who really was the fool?]
[Due to the inefficiencies involved] “it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.” (p. 36)
Taxes Discourage Production:
“The government spenders create the very problem of unemployment that they profess to solve....the larger the percentage of the national income taken by taxes the greater the deterrent to private production and employment.” (pp. 38-39)
“Government „encouragement‟ to business is sometimes as much to be feared as government hostility.” (p. 40)
Credit Diverts Production:
“All credit is debt. Proposals for an increased volume of credit, therefore, are merely another name for proposals for an increased burden of debt. They would seem considerably less inviting if they were habitually referred to by the second name instead of by the first.” (p. 41)
Government lending:
“When people risk their own funds they are usually careful in their investigations to determine the adequacy of the assets pledged and the business acumen and honesty of the borrower. If the government operated by the same strict standards, there would be no good argument for its entering the field at all....The whole argument for its entering the lending business, in fact, is that it will make loans to people who could not get them from private lenders. This is only another way of saying that the government lenders will take risks with other people‟s money (the
taxpayers‟) that private lenders will not take with their own money.” (p. 42)
“[W]hat is really being lent is not money, which is merely the medium of exchange, but capital....What is really being lent, say, is the farm or the tractor itself....The farm or tractor that is lent to A cannot be lent to B. The real question is, therefore, whether A or B shall get the farm. This brings us to the respective merits of A and B....There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing. He feels assured of repayment. He is merely exchanging a more liquid form of asset or credit for a less liquid form....But the government goes into the lending business in a charitable frame of mind because, as we say, it is worried about B. B cannot get a mortgage or other loans from private lenders because he does not have credit with them....Perhaps in an individual case it may work out all right. But it is obvious that in general the people selected by these government standards will be poorer risks than the people selected by private standards....There will be a much higher percentage of failures among them. They will be less efficient. More resources will be wasted by them. Yet the recipients of government credit will get their farms and tractors at the expense of those who otherwise would have been the recipients of private credit. Because B has a farm, A will be deprived of a farm. A may be squeezed out either because interest rates have gone up as a result of the government operations, or because farm prices have been forced up as a result of them, or because there is no other farm to be had in his neighborhood. In any case, the net result of government credit has not been to increase the amount of wealth produced by the community but to reduce it, because the available real capital (consisting of actual farms, tractors, etc.) has been placed in the hands of the less efficient borrowers rather than in the hands of the more efficient and trustworthy.” (pp. 43-44)
“The proposal is frequently made that the government ought to assume the risks that are „too great for private industry.‟ This means that bureaucrats should be permitted to take risks with the taxpayers‟ money that no one is willing to take with his own. Such a policy....would increase the demand for socialism; for, it would properly be asked, if the government is going to bear the risks, why should it not also get the profits?” (p. 45)
“[T]he amount of real capital at any moment (as distinguished from monetary tokens run off on a printing press) is limited.” (p. 45) “The private lenders, moreover, are selected by a cruel market test....a process of survival of the fittest. The government lender, 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. But the net result remains; private loans will utilize existing resources and capital far better than government loans....Government loans, in short, as compared with private loans, will reduce production, not increase it.” (p. 46)
“The government never lends or gives anything to business that it does not take away from business. One often hears New Dealers and other statists boast about the way government
now afford to work fewer hours, while children and the overaged no longer need to work.” (pp. 54, 58). [In short, the fallacious fear about technology would logically lead us back to the grass hut era -- who really wants to do that? So his argument meshes with common sense.]
[He gives a detailed example of how the installation of a time-saving machine on net, is better for everyone in the long run -- of course there will be some uncomfortable dislocations in the process.]
“In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.” (pp. 55-57)
[How do machines on net benefit all of us in the long run? --] “by making goods cheaper for consumers [and] by increasing wages because they increase the productivity of the workers....in any case, machines, inventions and discoveries increase real wages.” (pp. 58-9)
[He constantly cautions us to be mindful of the stress caused by the displaced workers and criticizes classical economists for appearing callused regarding them. He describes the plight of the displaced worker as follows: “he has devoted many years of his life to acquiring and improving a special skill for which the market no longer has any use. He has lost this investment in himself, in his old skill, just as his former employer, perhaps, has lost his investment in old machines or processes suddenly rendered obsolete. He was a skilled workman, and paid as a skilled workman. Now he has become overnight an unskilled workman again, and can hope, for the present, only for the wages of an unskilled workman, because the one skill he had is no longer needed.” (p. 60) This underscores the need today for people to constantly upgrade their education and skills and to constantly forecast the future and prepare for it rather than just sitting back and mistakenly thinking that good times will always roll and that things can never change for the worse.]
“Allied to this fallacy [that a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates them] is the belief that there is just a fixed amount of work to be done in the world....This error lies behind the minute subdivisions of labor upon which unions insist.” (p. 61) [Then he gives a lot of egregious examples of such subdivisions.]
“There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other.” (p. 66)
[An analogy that occurs to me is the military. Would anyone seriously argue that it would be unwise to constantly be expanding the envelope of technology and weaponry in order to give our soldiers the best chances of winning a war? Each side would naturally want the superior machinery and weaponry in order to make their soldiers the most productive and most secure. The same principles apply to free market competition. The worker with the best set of machinery and technology behind him is the most productive, the highest paid and the most secure. Besides, who would want to take a full-employment approach to war?]
Disbanding Troops and Bureaucrats:
[After every great war people have feared unemployment when the troops were disbanded.] “They see soldiers being turned loose on the labor market. Where is the „purchasing power‟ going to come from to employ them? If we assume that the public budget is being balanced, the answer is simple. The government will cease to support the soldiers. But the taxpayers will be allowed to retain the funds that were previously taken from them in order to support the soldiers. And the taxpayers will then have additional funds to buy additional goods.” (p. 67) Thus more civil demand will prompt economic expansion and more jobs which will be filled by the returning soldiers. Even if we assumed deficit financing, it “is irrelevant to the point that has just been made; for if we assume that there is any advantage in a budget deficit [which he takes issue with later in his book], then precisely the same budget deficit could be maintained as before by simply reducing taxes by the amount previously spent in supporting the wartime army.” (p. 68)
“If we assume that the men who would otherwise have been retained in the armed forces are no longer needed for defense, then their retention would have been sheer waste. They would have been unproductive. The taxpayers, in return for supporting them, would have got nothing. But now [after discharge] the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services. Total national production, the wealth of everybody, is higher. The same reasoning applies to civilian government officials whenever they are retained in excessive numbers and do not perform services for the community reasonably equivalent to the remuneration they receive.” (p. 68) [Turning them back into the civilian community like the soldiers would not be „deflationary‟ for the same reasons discussed above.]
“I must insist again that in all this I am not talking of public officeholders whose services are really needed....But their justification consists in the utility of their services. It does not consist in the „purchasing power‟ they possess by virtue of being on the public payroll. 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....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. We are lucky, indeed, if the needless bureaucrats are mere easygoing loafers. They are more likely today to be energetic reformers busily discouraging and disrupting production [and thus employment]. When we can find no better argument for the retention of any group of officeholders than that of retaining their purchasing power, it is a sign that the time has come to get rid of them.” (pp. 69-70)
The Fetish of Full Employment:
“The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor....All this is so elementary that one would blush to state it if it were not being constantly forgotten by those who coin and circulate the new slogans. Translated into national terms, this first principle means that our real objective is to maximize production. In doing this,
“In the long run it [a tariff] always reduces real wages, because it reduces efficiency, production and wealth.” (p. 82)
“But we should not deny, as enthusiastic free traders have so often done, the possibility of these tariff benefits to special groups. We should not pretend, for example, that a reduction of the tariff would help everybody and hurt nobody. It is true that its reduction would help the country on net balance. But somebody [the ones previously protected] would be hurt. That in fact is one reason why it is not good to bring such protected interests into existence in the first place.” (p. 83)
“As a postscript to this chapter, I should add that its argument is not directed against all tariffs, including duties collected mainly for revenue, or to keep alive industries needed for war; nor is it directed against all arguments for tariffs. It is merely directed against the fallacy that a tariff on net balance „provides employment,‟ „raises wages,‟ or „protects the American standard of living.‟ It does none of these things; and so far as wages and the standard of living are concerned, it does the precise opposite.” (p. 84)
“It is exports that pay for imports, and vice versa. The greater exports we have, the greater imports we must have, if we ever expect to get paid....When we decide to cut down our imports, we are in effect deciding also to cut down our exports. When we decide to increase our exports, we are in effect deciding also to increase our imports.” (p. 85)
“Foreign exchange, in short, is a clearing transaction in which, in America, the dollar debts of foreigners are canceled against their dollar credits.” (p. 86)
[A common fallacy when it comes to foreign lending] “runs like this. 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. It should be immediately obvious that if the loans we make to foreign countries to enable them to buy our goods are not repaid, then we are giving the goods away. A nation cannot grow rich by giving goods away. It can only make itself poorer....In the long run business and employment in American would be hurt, not helped, by foreign loans that were not repaid. For every extra dollar that foreign buyers had with which to buy American goods, domestic buyers would ultimately have one dollar less. Businesses that depend on domestic trade would therefore be hurt in the long run as much as export business would be helped.” (pp.87-8)
“[I]t is stupid to give a false stimulation to export trade through export subsidies. An export subsidy is a clear case of giving the foreigner something for nothing, by selling him goods for less than it costs us to make them. It is another case of trying to get rich by giving things away.” (pp. 88-9)
“[T]he real gain of foreign trade to any country lies not in its exports but in its imports. Its consumers are either able to get from abroad commodities at a lower price than they could obtain them for at home, or commodities that they could not get from domestic producers at all.” (p. 89)
Parity Prices:
“Special interests, as the history of tariffs reminds us, can think of the most ingenious reasons why they should be the objects of special solicitude. Their spokesmen present a plan in their favor; and it seems at first so absurd that disinterested writers do not trouble to expose it. But the special interests keep on insisting on the scheme. Its enactment would make so much difference to their own immediate welfare that they can afford to hire trained economists and public relations experts to propagate it in their behalf. The public hears the argument so often repeated, and accompanied by such a wealth of imposing statistics, charts, curves and pie-slices, that it is soon taken in. When at last disinterested writers recognize that the danger of the scheme‟s enactment is real, they are usually too late.” (p. 90)
[He talks about the plight of farmers and the supposed need to support their agricultural prices to keep them profitable by imposing artificial price supports to match some prior year of prosperity. The common thinking was that if we could cut back on supply, then prices would rise so we started paying farmers to take acreage out of production. It ended up creating more production since the farmers took their least productive acreage out of production and left the most productive acreage in production. The costs saved in the process were spent on more fertilizer for the remaining fields thus upping their yield. But even if we succeeded, what good would it do? None. On net, it would only hurt us. First, if we did succeed in helping the farmer artificially, the consumers would have to pay higher prices so that it would come out of their collective hides.
[Second, it makes no sense to produce less consumable food because that is the same thing as producing less wealth. You don‟t increase our overall standard of living by artificially constricting the production of new wealth.
[Third, if we did manage to increase the price of a bushel of wheat, for example, while it is true the farmer will get more per bushel, but he will have fewer bushels to sell so have we really helped him much at all? After all, both price and volume factor into the equation of the farmer‟s income.
[Fourth, if we succeeded in helping the farmers by hurting the consumers, the consumers will start asking for the government to bail them out of their economic plight but then the farmers would have to chip in for that bail out thus hurting them.] “But suppose we could solve this fantastic problem? What would be the point? Who gains when everyone equally subsidizes everyone else? What is the profit when everyone loses in added taxes precisely what he gains by his subsidy or his protection? We should merely have added an army of needless bureaucrats to carry out the program, with all of them lost to production.” (p. 96)
Saving the X Industry:
[On the theory that the sick industry is sick because it is overcrowded, one approach to a bailout would be to artificially prevent other firms or workers from getting in.] “Now if the X industry is really overcrowded as compared with other industries it will not need any coercive legislation to keep out new capital or new workers. New capital does not rush into industries that are
Family Robinson may be able through the division of labor to take care of their needs more quickly, but they still have the same problem facing them. If one kid has the assignment of gathering firewood and another the assignment of fishing for the family‟s dinner, the wood gatherer might complain that he would be able to gather twice as much firewood if only his fisherman brother would help him but to do so would prevent him from fishing. Thus] “one occupation can expand only at the expense of all other occupations.” (p. 105) [Pricing serves the useful purpose of prioritizing the needs and wants of society so that things are done in the maximizing proportions and order.]
“These questions and conclusions stem from the fallacy of looking at one industry in isolation, of looking at the tree and ignoring the forest. Up to a certain point it is necessary to produce shoes. But it is also necessary to produce coats, shirts, trousers, homes, plows, shovels, factories, bridges, milk and bread. It would be idiotic to go on piling up mountains of surplus shoes, simply because we could do it, while hundreds of more urgent needs went unfilled. “ Now in an economy in equilibrium, a given industry can expand only at the expense of other industries. For at any moment the factors of production are limited. One industry can be expanded only by diverting to it labor, land and capital that would otherwise be employed in other industries. And when a given industry shrinks, or stops expanding its output, it does not necessarily mean that there has been any net decline in aggregate production. The shrinkage at that point may have merely released labor and capital to permit the expansion of other industries. It is erroneous to conclude, therefore, that a shrinkage of production in one line necessarily means a shrinkage in total production. “ Everything, in short, is produced at the expense of forgoing something else. Costs of production themselves, in fact, might be defined as the things that are given up (the leisure and pleasures, the raw materials with alternative potential uses) in order to create the thing that is made. “ It follows that it is just as essential for the health of a dynamic economy that dying industries should be allowed to die as that growing industries should be allowed to grow. For the dying industries absorb labor and capital that should be released for the growing industries. 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. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits and costs. They are solved by this system incomparably better than any group of bureaucrats could solve them. For they are solved by a system under which each consumer makes his own demand and casts a fresh vote, or a dozen fresh votes, every day; whereas bureaucrats would try to solve it by having made for the consumers, not what the consumers themselves wanted, but what the bureaucrats decided was good for them.” (pp. 108-9) [Consider Russia‟s experience.]
“Stabilizing” Prices Above Their Natural Market Levels:
“Attempts to lift the prices of particular commodities permanently above their natural market levels have failed so often, so disastrously and so notoriously that sophisticated pressure groups, and the bureaucrats upon whom they apply the pressure, seldom openly avow that aim. Their stated aims, particularly when they are first proposing that the government intervene, are usually more modest, and more plausible.
“ They have no wish, they declare, to raise the price of commodity X permanently above its natural level. That, they concede, would be unfair to consumers. But it is now obviously selling far below its natural level. The producers cannot make a living. Unless we act promptly, they will be thrown out of business. Then there will be a real scarcity, and consumers will have to pay exorbitant prices for the commodity. The apparent bargains that the consumers are now getting will cost them dear in the end. For the present „temporary‟ low price cannot last. But we cannot afford to wait for so-called natural market forces, or for the „blind‟ law of supply and demand, to correct the situation. For by that time the producers will be ruined and a great scarcity will be upon us. The government must act. All that we really want to do is to correct these violent, senseless fluctuations in price. We are not trying to boost the price, we are only trying to stabilize it.” (p.110)
“One of the most frequent [methods] is government loans to farmers to enable them to hold their crops off the market....The effect of this is to secure a higher price temporarily than would otherwise exist, but to do so only by bringing about later on a much lower price than would otherwise have existed. For the artificial shortage built up this year by withholding part of a crop from the market means as artificial surplus the next year....the loan policy is usually accompanied by, or inevitably leads to, a policy of restricting production -- i.e., a policy of scarcity.” (pp. 111-113) [He uses the cotton program of the 1950s to illustrate. Because of such government programs, in 1956 the cotton carryover amounted to a full year‟s normal production.] “To cope with this, the government changed its program. It decided to buy most of the crop from the growers and immediately offer it for resale at a discount. In order to sell American cotton again in the world market, it made a subsidy payment on cotton exports....This policy did succeed in reducing the raw-cotton carryover. But in addition to the losses it imposed on the taxpayers, it put American textiles at a serious competitive disadvantage with foreign textiles subsidizing the foreign industry at the expense of the American industry. It is typical of government price-fixing schemes that they escape one undesired consequence only by plunging into another and usually worse one.” (p. 113)
“The restrictionists usually reply that this drop in output is what happens anyway under a market economy. But there is a fundamental difference....In a competitive market economy it is the high-cost producers, the inefficient producers, that are driven out by a fall in price. In the case of an agricultural commodity it is the least competent farmers, or those with the poorest equipment, or those working the poorest land, that are driven out. The most capable farmers on the best land do not have to restrict their production. On the contrary, if the fall in price has been through an increased supply, then the driving out of the marginal farmers on the marginal land enables the good farmers on the good land to expand their production. So there may be, in the long run, no reduction whatever in the output of that commodity. And the product is then produced and sold at a permanently lower price. “ If that is the outcome, then the consumers of that commodity will be as well supplied with it as they were before. But, as a result of the lower price, they will have money left over, which they did not have before, to spend on other things. The consumers, therefore, will obviously be better off. But their increased spending in other directions will give increased employment in other lines, which will then absorb the former marginal farmers in occupations in which their efforts will be more lucrative and more efficient.” (p. 114)
very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply.” (p. 119)
“Some of these consequences in time become apparent to the regulators, who then adopt various other devices and controls in an attempt to avert them. Among these devices are rationing, cost-control, subsidies, and universal price-fixing....When it becomes obvious that a shortage of some commodity is developing as a result of a price fixed below the market, rich consumers are accused of taking „more than their fair share‟....If a rationing system is adopted, in brief, it means that the government adopts a double price system, or a dual currency system, in which each consumer must have a certain number of coupons or „points‟ in addition to a given amount of ordinary money. In other words, the government tries to do through rationing part of the job that a free market would have done through prices. I say only part of the job, because rationing merely limits the demand without also stimulating the supply, as a higher price would have done. “ The government may try to assure supply through extending its control over the costs of production of a commodity....But as the government extends this price-fixing backwards, it extends at the same time the consequences that originally drove it to this course....Thus the government is driven to controls in ever-widening circles, and the final consequence will be the same as that of universal price-fixing [i.e. after all of the efforts, nobody is better off as a result]. “ The government may try to meet this difficulty through subsidies....[but] unless the subsidized commodity is also rationed, it is those with the most purchasing power that can buy most of it....It becomes a little difficult to trace in this maze precisely who is subsidizing whom. What is forgotten is that subsidies are paid for by someone, and that no method has been discovered by which the community gets something for nothing.” (pp. 120-22)
“When prices are arbitrarily held down by government compulsion, demand is chronically in excess of supply....If we ration one commodity, and the public cannot get enough of it, though it still has excess purchasing power, it will turn to some substitute. The rationing of each commodity as it grows scarce, in other words, must put more and more pressure on the unrationed commodities that remain. If we assume that the government is successful in its efforts to prevent black markets...continued price control must drive it to the rationing of more and more commodities....The natural consequence of a thoroughgoing over-all price control which seeks to perpetuate a given historic price level, in brief, must ultimately be a completely regimented economy. Wages would have to be held down as rigidly as prices. Labor would have to be rationed as ruthlessly as raw materials....The result would be petrified totalitarian economy, with every business firm and every worker at the mercy of the government, and with a final abandonment of all the traditional liberties we have known.” (pp. 122-23)
[Hazlitt believes the inevitable response to government attempts to artificially keep prices down is black markets. Such black markets would exact a moral toll by putting a premium on dishonesty and an economic toll by reducing production and overall living standards.]
“What lies at the base of the whole effort to fix maximum prices? There is first of all a misunderstanding of what it is that has been causing prices to rise. The real cause is either a scarcity of goods or a surplus of money. Legal price ceilings cannot cure either....they merely intensify the shortage.” (pp.124-25)
What Rent Control Does:
“Rent control is initially imposed on the argument that the supply of housing is not „elastic‟ -- i.e., that a housing shortage cannot be immediately made up, no matter how high rents are allowed to rise. Therefore, it is contended, the government, by forbidding increases in rents, protects tenants from extortion and exploitation without doing any real harm to landlords and without discouraging new construction. “ This argument is defective even on the assumption that the rent control will not long remain in effect. It overlooks immediate consequences. If landlords are allowed to raise rents to reflect a monetary inflation and the true conditions of supply and demand, individual tenants will economize by taking less space. This will allow others to share the accommodations that are in short supply. The same amount of housing will shelter more people, until the shortage is relieved. “ Rent control, however, encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space....The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it....landlords will not trouble to remodel apartments or make other improvements in them....[It will] create ill feeling between landlords who are forced to take minimum returns or even losses, and tenants who resent the landlord‟s failure to make adequate repairs....The accommodation for low-income groups, therefore, will deteriorate in quality, and there will be no increase in quantity. Where the population is increasing, the deterioration and shortage in low-income housing will grow worse and worse. It may reach a point where many landlords not only cease to make any profit but are faced with mounting and compulsory losses. They may find that they cannot even give their property away. They may actually abandon their property and disappear, so they cannot be held liable for taxes. When owners cease supplying heat and other basic services, the tenants are compelled to abandon their apartments. Wider and wider neighborhoods are reduced to slums. In recent years, in New York City, it has become a common sight to see whole blocks of abandoned apartments, with windows broken, or boarded up to prevent further havoc by vandals. Arson becomes more frequent, and the owners are suspected. A further effect is the erosion of city revenues [as the tax base continues to shrink].... When these consequences are so clear that they become glaring, there is of course no acknowledgment on the part of the imposers of rent control that they have blundered. Instead, they denounce the capitalist system. They contend that private enterprise has „failed‟ again; that „private enterprise cannot do the job.‟ Therefore, they argue, the State must step in and itself build low-rent housing. ...So the government launches on a gigantic housing program -- at the taxpayers‟ expense. The houses are rented at a rate that does not pay back costs of construction and operation....The political possibilities of this favoritism are too clear to need stressing. A pressure group is built up that believes that the taxpayers owe it these subsidies as a matter of right. Another all but irreversible step is taken toward the total Welfare State. “ A final irony of rent control is that the more unrealistic, Draconian, and unjust it is, the more fervid the political arguments for its continuance....Even the opponents of rent control are...disposed to concede that the removal of controls must be a very cautious, gradual, and prolonged process. Few of the opponents of rent control, indeed, have the political courage and
be had without working) approached the minimum wage amount.
[Certainly he, a fortiori , would conclude a total absence of incentive to work if the safety net amount ever exceeded the minimum wage amount. Of course the liberal solution would probably be just to increase the minimum wage amount to again exceed the safety net amount, but then the merry-go-round just continues at a faster speed and does more ultimate damage.
[He consistently asks the question throughout the book “How can we increase our overall net wealth and standard of living if we pay people to be unproductive?” [Second, he considers government make-work projects. Such work, he says,] “is necessarily inefficient and of questionable utility. The government has to invent projects that will employ the least skilled. It cannot start teaching people carpentry, masonry, and the like, for fear of competing with established skills and arousing the antagonism of existing unions.” (p. 137)
[He says that past minimum wage laws did not cause an increase in the prevailing market wage rates but just followed that rise caused by economic growth.] “Though the legislation follows the rise of the prevailing market wage rate, the myth continues to be built up that it is the minimum wage legislation that has raised the market wage.” (p. 138)
“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. And in trying to answer this we must never lose sight of a few elementary truisms. We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces. The best way to raise wages, therefore, is to raise marginal labor productivity....Real wages come out of production, not out of government decrees. So government policy should be directed, not to imposing more burdensome requirements on employers, but to following policies that encourage profits, that encourage employers to expand, to invest in newer and better machines to increase the productivity of workers -- in brief, to encourage capital accumulation, instead of discouraging it -- and to increase both employment and wage rates.” (p.139)
Do Unions Really Raise Wages?
“The belief that labor unions can substantially raise real wages over the long run and for the whole working population is one of the great delusions of the present age. This delusion is mainly the result of failure to recognize that wages are basically determined by labor productivity.” (p. 140)
[Although Hazlitt says that union strikes are legitimate tools used by labor to force employers to raise wages that are really below their true market value, he says] “the moment workers have to use intimidation or violence to enforce their demands -- the moment they use mass picketing to prevent any of the old workers from continuing at their jobs, or to prevent the employer from hiring new permanent workers to take their places -- their case becomes suspect. For the pickets are really being used, not primarily against the employer, but against other workers. These other workers are willing to take the jobs that the old employees have refused. If, therefore, the old employees succeed by force in preventing new workers from taking their place, they prevent
these new workers from choosing the best alternative open to them, and force them to take something worse. The strikers are therefore insisting on a position of privilege, and are using force to maintain this privileged position against other workers....if they [the workers who would like to cross the picket lines and work] are in fact merely men and women who are looking for permanent jobs and willing to accept them at the old rate, then they are workers who would be shoved into worse jobs than these in order to enable the striking workers to enjoy better ones. And this superior position for the old employees could continue to be maintained, in fact, only by the ever-present threat of force.” (pp. 142-43)
“Emotional economics has given birth to theories that calm examination cannot justify. One of these is the idea that labor is being „underpaid‟ generally. This would be analogous to the notion that in a free market prices in general are chronically too low. Another curious but persistent notion is that the interests of a nation‟s workers are identical with each other, and that an increase in wages for one union in some obscure way helps all other workers.” (p. 143)
“When strong labor unions in the past made it their function to provide for their own unemployed members, they thought twice before demanding a wage that would cause heavy unemployment. But where there is a relief system under which the general taxpayer is forced to provide for the unemployment caused by excessive wage rates, this restraint on excessive union demands is removed.” (p. 145) [One can only imagine what Hazlitt would have said about the current state of affairs under New York law where strikers are entitled to unemployment compensation which is funded by employer premiums. Isn‟t that an odd state of affairs and a tremendous advantage given to the striking workers by the government? -- not only must the employer withstand the normal economic dislocations of a strike, but in New York, it must also indirectly continue paying the strikers during the strike. In other words, the law makes the employer fund the very strike being waged against it! I remember a few years back Congress was even considering legislation prohibiting employers from replacing striking employees -- what lunacy! Look what we are trying to turn our “free market” system into while still calling us a free people with a straight face.]
[What if we were able to achieve universal unionism? -- would that guarantee good wages for all? No. First unions would differ in relative strength because of the differing things they would make. Those in the more strategic areas would always fare better -- e.g. those making Cadillacs would probably get higher wages than those making beanies. Second,] “suppose, in spite of the self-contradictoriness of the assumption, that all workers by coercive methods could raise their money wages by an equal percentage? Nobody would be any better off, in the long run, than if wages had not been raised at all.” (p. 146) [This would be because the resulting inflation would cause the real purchasing power to remain the same collectively.]
[Even assuming labor could effectively demand higher wages well in excess of their true market worth, it would not last long term. For example lets assume the railroad unions were able to do this and the market was such that the railroad could not raise ticket prices because they would lose more in lost volume of passengers than would be gained by raising the ticket prices on the remaining passengers. Would this be union nirvana? Hardly.] “If the money that they [the owners] have invested in railroads now yields less than money they can invest in other lines, the
