Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

by Henry Hazlitt

The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.

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.

THERE IS NO more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills.

Everything we get, outside of the free gifts of nature, must in some way be paid for.

Here we shall have to say simply that all government expenditures must eventually be paid out of the proceeds of taxation; that inflation itself is merely a form, and a particularly vicious form, of taxation.

we shall take it for granted throughout the present chapter that either immediately or ultimately every dollar of government spending must be raised through a dollar of taxation.

Reasonable taxes for this purpose need not hurt production much.

O que são reasonable taxes? O que hurt a economia? Muito subjetivo... muito pouco palpável...

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.

When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business.

and “give more jobs” was one of the main reasons behind the inclusion of the penalty-overtime provision in the existing Federal Wage-Hour Law. The previous legislation in the states, forbidding the employment of women or minors for more, say, than forty-eight hours a week, was based on the conviction that longer hours were injurious to health and morale. Some of it was based on the belief that longer hours were harmful to efficiency. But the provision in the federal law, that an employer must pay a worker a 50 percent premium above his regular hourly rate of wages for all hours worked in any week above forty, was not based primarily on the belief that forty-five hours a week, say, was injurious either to health or efficiency. It was inserted partly in the hope of boosting the worker’s weekly income, and partly in the hope that, by discouraging the employer from taking on anyone regularly for more than forty hours a week, it would force him to employ additional workers instead. At the time of writing this, there are many schemes for “averting unemployment” by enacting a thirty-hour week or a four-day week.

Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. World War II provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment.

The problem of distribution, on which all the stress is being put today, is after all more easily solved the more there is to distribute.

There is no general tariff on all “industrial” products or on all nonfarm products. There are scores of domestic industries or of exporting industries that have no tariff protection. If the city worker has to pay a higher price for woolen blankets or overcoats because of a tariff, is he “compensated” by having to pay a higher price also for cotton clothing and for foodstuffs? Or is he merely being robbed twice?

prices are determined by costs of production. The doctrine, stated in this form, is not true. 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.

But schemes for maximum price-fixing usually begin as efforts to “keep the cost of living from rising.” And so their sponsors unconsciously assume that there is something peculiarly “normal” or sacrosanct about the market price at the moment from which their control starts. That starting or previous price is regarded as “reasonable,” and any price above that as “unreasonable,” regardless of changes in the conditions of production or demand since that starting price was first established.

For as Alexander Hamilton pointed out in the Federalist Papers nearly two centuries ago, “A power over a man’s subsistence amounts to a power over his will.”

A premium is put on dishonesty. The new firms owe their very existence or growth to the fact that they are willing to violate the law; their customers conspire with them; and as a natural consequence demoralization spreads into all business practices.

Each one of us, in brief, has a multiple economic personality. Each one of us is producer, taxpayer, consumer. The policies he advocates depend upon the particular aspect under which he thinks of himself at the moment. For he is sometimes Dr. Jekyll and sometimes Mr. Hyde. As a producer he wants inflation (thinking chiefly of his own services or product); as a consumer he wants price ceilings (thinking chiefly of what he has to pay for the products of others). As a consumer he may advocate or acquiesce in subsidies; as a taxpayer he will resent paying them. Each person is likely to think that he can so manage the political forces that he can benefit from a rise for his own product (while his raw material costs are legally held down) and at the same time benefit as a consumer from price control. But the overwhelming majority will be deceiving themselves. For not only must there be at least as much loss as gain from this political manipulation of prices; there must be a great deal more loss than gain, because price-fixing discourages and disrupts employment and production.

The housing situation will deteriorate in other ways. Most important, unless the appropriate rent increases are allowed, landlords will not trouble to remodel apartments or make other improvements in them. In fact, where rent control is particularly unrealistic or oppressive, landlords will not even keep rented houses or apartments in tolerable repair. Not only will they have no economic incentive to do so; they may not even have the funds. The rent-control laws, among their other effects, 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.

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. A typical arrangement is for the government to pay annual subsidies, either directly to the tenants in lower rents or to the builders or managers of the State housing. Whatever the nominal arrangement, the tenants in the buildings are being subsidized by the rest of the population. They are having part of their rent paid for them. They are being selected for favored treatment. 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.

Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. 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.

When such consequences are pointed out, there are those who reply: “Very well; if it is true that the X industry cannot exist except by paying starvation wages, then it will be just as well if the minimum wage puts it out of existence altogether.” But this brave pronouncement overlooks the realities. It overlooks, first of all, that consumers will suffer the loss of that product. It forgets, in the second place, that it is merely condemning the people who worked in that industry to unemployment. And it ignores, finally, that bad as were the wages paid in the X industry, they were the best among all the alternatives that seemed open to the workers in that industry; otherwise the workers would have gone into another. If, therefore, the X industry is driven out of existence by a minimum wage law, then the workers previously employed in that industry will be forced to turn to alternative courses that seemed less attractive to them in the first place. Their competition for jobs will drive down the pay offered even in these alternative occupations. There is no escape from the conclusion that the minimum wage will increase unemployment.

It remains to be pointed out that government make-work 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. I am not recommending it, but it probably would be less harmful all around if the government in the first place frankly subsidized the wages of submarginal workers at the work they were already doing. Yet this would create political headaches of its own.

Real wages come out of production, not out of government decrees.

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. It is for this reason, for example, that wages in the United States were incomparably higher than wages in England and Germany all during the decades when the “labor movement” in the latter two countries was far more advanced.

All this does not mean that unions can serve no useful or legitimate function. The central function they can serve is to improve local working conditions and to assure that all of their members get the true market value of their services.

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 vacated, and at the wages that the old employees now reject. The fact proves that the other alternatives open to the new workers are not as good as those 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.

And sometimes ignorant or shortsighted employers might even reduce their own profits by overworking their employees. 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.

They have opposed payment on the basis of output or efficiency, and insisted on the same hourly rates for all their members regardless of differences in productivity. They have insisted on promotion for seniority rather than for merit.

The subject is clouded by all sorts of factual misconceptions. The total profits of General Motors, the greatest industrial corporation in the world, are taken as if they were typical rather than exceptional. Few people are acquainted with the mortality rates for business concerns. They do not know (to quote from the TNEC studies) that “should conditions of business averaging the experience of the last fifty years prevail, about seven of each ten grocery stores opening today will survive into their Second year; only four of the ten may expect to celebrate their fourth birthday.” They do not know that in every year from 1930 to 1938, in the income tax statistics, the number of corporations that showed a loss exceeded the number that showed a profit.

He is of course not blind to the rise in the cost of living. But neither is he as fully aware of his real position as he would have been if his cost of living had not changed and if his money salary had been reduced to give him the same reduced purchasing power that he now has, in spite of his salary increase, because of higher prices. Inflation is the autosuggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him. Inflation is the opium of the people.

The fact that 20 percent of the national income goes each year for saving does not upset the consumers’ goods industries in the least. If they sold only the 80 units they produced in the first year (and there were no rise in prices caused by unsatisfied demand) they would certainly not be foolish enough to build their production plans on the assumption that they were going to sell 100 units in the second year. The consumers’ goods industries, in other words, are already geared to the assumption that the past situation in regard to the rate of savings will continue. Only an unexpected sudden and substantial increase in savings would unsettle them and leave them with unsold goods.

Now few people recognize the necessary implications of the economic statements they are constantly making. When they say that the way to economic salvation is to increase credit, it is just as if they said that the way to economic salvation is to increase debt: these are different names for the same thing seen from opposite sides. When they say that the way to prosperity is to increase farm prices, it is like saying that the way to prosperity is to make food dearer for the city worker. When they say that the way to national wealth is to pay out governmental subsidies, they are in effect saying that the way to national wealth is to increase taxes. When they make it a main objective to increase exports, most of them do not realize that they necessarily make it a main objective ultimately to increase imports. When they say, under nearly all conditions, that the way to recovery is to increase wage rates, they have found only another way of saying that the way to recovery

is to increase costs of production.

It does not necessarily follow, because each of these propositions, like a coin, has its reverse side, or because the equivalent proposition, or the other name for the remedy, sounds much less attractive, that the original proposal is under all conditions unsound. There may be times when an increase in debt is a minor consideration as against the gains achieved with the borrowed funds; when a government subsidy is unavoidable to achieve a certain military purpose; when a given industry can afford an increase in production costs, and so on. But we ought to make sure...

when we study the effects of various proposals, not merely on special groups in the short run, but on all groups in the long run, the conclusions we arrive at usually correspond with those of unsophisticated common sense.

As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X…. What I want to do is to look up C….I call him the Forgotten Man…. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.

Just as there is no technical improvement that would not hurt someone, so there is no change in public taste or morals, even for the better, that would not hurt someone. An increase in sobriety would put thousands of bartenders out of business. A decline in gambling would force croupiers and racing touts to seek more productive occupations. A growth of male chastity would ruin the oldest profession in the world.

To see the problem as a whole, and not in fragments: that is the goal of economic science.

An even greater irony is that, not satisfied with following such disastrous policies at home, our officials have been scolding other countries, notably Germany and Japan, for not following these “expansionary” policies themselves. This reminds one of nothing so much as Aesop’s fox, who, when he had lost his tail, urged all his fellow foxes to cut off theirs.

When we get to Latin America, the Brazilian cruzeiro had lost 89 percent of its value, and the Uruguayan, Chilean, and Argentine pesos more than 99 percent.

As for Latin American experience, the Brazilian currency unit in 1977 was depreciating at an annual rate of 30.8 percent, the Uruguayan of 35.5, the Chilean of 53.9, and the Argentinian of 65.7.

As I have pointed out, these inflations, themselves the cause of so much human misery, were in turn in large part the consequence of other policies of government economic intervention. Practically all these interventions unintentionally illustrate and underline the basic lesson of this book. All were enacted on the assumption that they would confer some immediate benefit on some special group. Those who enacted them failed to take heed of their secondary consequences—failed to consider what their effect would be in the long run on all groups.

The anticapitalistic mentality seems more deeply embedded than ever. Whenever there is any slowdown in business, the politicians now see the main cause as “insufficient consumer spending.”

Yet Social Security today is still sacrosanct. It is considered political suicide for any congressman to suggest cutting down or cutting back not only present but promised future benefits. The American Social Security system must stand today as a frightening symbol of the almost inevitable tendency of any national relief, redistribution, or “insurance” scheme, once established, to run completely out of control.