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

by Henry Hazlitt

The present essay itself is, I suppose, unblushingly “classical,” “traditional” and “orthodox”; at least these are the epithets with which those whose sophisms are here subjected to analysis will no doubt attempt to dismiss it. But the student whose aim is to attain as much truth as possible will not be frightened by such adjectives. He will not be forever seeking a revolution, a “fresh start,” in economic thought.

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.”

In this lies the whole difference between good economics and bad. 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.

From this aspect, therefore, the 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.

It is true, of course, that the opposite error is possible. In considering a policy we ought not to concentrate only on its long-run results to the community as a whole. This is the error often made by the classical economists. It resulted in a certain callousness toward the fate of groups that were immediately hurt by policies or developments which proved to be beneficial on net balance and in the long run.

Many of the most frequent fallacies in economic reasoning come from the propensity, especially marked today, to think in terms of an abstraction—the collectivity, the “nation”—and to forget or ignore the individuals who make it up and give it meaning. No one could think that the destruction of war was an economic advantage who began by thinking first of all of the people whose property was destroyed.

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 a greater cash value than the loan for which he is asking.

Automation was discussed as if it were something entirely new in the world. It was in fact merely a new name for continued technological advance and further progress in labor-saving equipment.

His book opposed the introduction of labor-saving machines in the underdeveloped countries on the ground that they “decrease the demand for labor”!1 The logical conclusion from this would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible.

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.

But as a result of the artificial barrier erected against foreign goods, American labor, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall, the average productivity of American labor and capital is reduced.

The tariff has been described as a means of benefiting the producer at the expense of the consumer. In a sense this is correct. Those who favor it think only of the interests of the producers immediately benefited by the particular duties involved. They forget the interests of the consumers who are immediately injured by being forced to pay these duties.

Collectively considered, the real reason a country needs exports is to pay for its imports.

The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error.

In order that new industries may grow fast enough it is usually necessary that some old industries should be allowed to shrink or die. In doing this they help to release the necessary capital and labor for the new industires.

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.

“Saving” in short, in the modern world, is only another form of spending. The usual difference is that the money is turned over to someone else to spend on means to increase production. So far as giving employment is concerned, Benjamin’s “saving” and spending combined give as much as Alvin’s spending alone, and put as much money in circulation.

ECONOMICS, as we have now seen again and again, is a science of recognizing secondary consequences. It is also a science of seeing general consequences. It is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run.

What is true of this elementary equation is true of the most complicated and abstruse equations encountered in mathematics. The answer already lies in the statement of the problem.

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.