The
Philosophy Hammer
Philosophy, Economics, Politics & Psychology Tested with a Hammer

Economics in One Lesson
By: Henry Hazlitt
Major Topic: Economics
Minor Topic: Politics

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         Chapter Six: Credit Diverts Production

         Government credit is a diversion of production resources from the best uses to less than the best uses.

         It is often claimed that there is not enough credit to go around and therefore the government should step in and fill the gap. Such an argument can be made to sound good and right if they only look at the parties that benefit and only at the actual transactions that occur: the government should help people who cannot get a loan from the free market, by doing so they will set up a business or run a better business. This will be a benefit for the recipients of the loan and for society.

         This is actually what happens when a loan is taken out in the free market. But when a government loans out the money (capital) it is lending to a recipient that could not qualify for a free market bank loan. In such a case the bank did not believe it made good business sense to lend out the money because the chances of default were much greater. Government loans would be useless if they had the same requirements as private lenders so necessarily the government lends to people that are a greater credit risk.

         The problems arise when we consider that capital is limited: there is only a finite amount of goods that money can buy. If government credit allows a sub-prime credit risk to compete with a person of good credit then the nominal cost is going to go up for both. Every time a sub-prime credit risk gets capital, that capital will be unavailable for a good credit business to use. Since the chance of default is higher for a sub-prime credit risk any defaults in excess of the natural rate of default are a net loss for the society. In other words: the diversion of production capital, caused by government credit, from prime credit people to sub-prime credit people squanders the taxes paid by the people in a nation – thereby making on average everyone poorer (although it may make the sub-prime recipient richer).

         [This assumes that banks are free to lead to whomever they please and do not have their funds guaranteed by the government. In the modern world all of the big banks have all of their deposits (and by extension their loans) guaranteed by the government. Thus, banks can profit from both good and bad loans.]

         Without the market to guide the government in deciding how to divest its loans, the government lender becomes susceptible to certain vices such as favoritism and corruption. These vices can spread and will later become very costly to stamp out.

         Professionals investors who invest their own capital are less likely to make mistakes than non-professionals and bureaucrats whose specialty is not investing because of knowledge specialization and because the free market will bankrupt those professional investors who cannot make a go of it.

         Almost every time that government redirects capital from the natural free market distribution to a different distribution regime it increases inefficiency and makes the society on average worse off. In some emergencies it may be necessary and beneficial [such as in a war of self-defense or perhaps the 2007-2008 financial crisis] but outside emergencies it is never a good economic idea for government to get involved in the credit market.

        

         Chapter Seven: The Curse of Machinery

         If we were to take seriously the idea that labor saving machines truly put more people out of work then unemployment started with civilization's development of simple machines and can best be cured by getting rid of all labor saving machines. In such a situation everyone will be working and working very hard just to survive. A more common and believable suggestion is to find ways to make the work as inefficient as possible so as to create employment. This suggestion may help some people but it will hurt others and limit the growth of economy thereby reducing the wealth of the whole society.

         Of course a particular machine may put some workers out of a job and will cause some unemployment in a particular industry. But we must consider why the machine was introduced and then what happens to all groups in society and not just the obviously affected group.

         First we need to consider the increase in employment from the creation of the machine: there are the designers, builders, suppliers and technicians who have jobs that they would not have had had the machine never been thought up.

         Second we need to consider the reasons why some one would purchase and use the machine. The end user would use it for one or both of two reasons: 1) the machine made a better product or 2) the machine made the product cheaper to produce. In both cases the end user believes himself to be better off and the consumers of his product will have a better product and/or a cheaper product and/or more of the product.

         Third, if the company that uses the machine makes money it must spend that money in one of three ways: 1) to expand the company's operation – thereby increasing employment; 2) invest in another industry – thereby increasing employment in the other industry; and/or 3) increase the payouts to the shareholders – thereby increasing the consumption of the shareholders and indirectly other industries.

         The conclusion is that labor saving devises do not on net put people out of work, they actually put more people to work and enrich the whole society.

         As a further argument supporting the idea that machines create jobs, consider that the world's population has increased in tandem with the development of machines. However it should be noted that the purpose of machines is not to create jobs rather it is to increase production, raise the standard of living and increase economic welfare. They do this by producing consumption commodities at greater and cheaper prices for consumers and by increasing worker's wages due to increases in productivity. Modern developed countries have much less hard physical work and more consumer things than poor countries.

         Although it is true that machines bring about great improvements in the lives all people some (those displaced by the machines) may suffer more than they benefit. Something that we should also never forget.

        

         Chapter Eight: Spread-the-Work Schemes

         The central fallacy in all spread-the-work schemes is that mistaken belief that there is a fixed amount of work to be done in the world or at any given time. If it were true then there might be some case for supporting these schemes. However the fact is that creativity in the search for ever more wealth necessitates the creation of new things to do.

         Although some people can benefit from this kind of program, the net effect of this fallacy is to reduce the total work done and therefore the amount of wealth generated. When ever two men are employed where only one is needed, money and resources that would have gone to some other productive person are consumed by the superfluous man. Unemployment has at best stayed the same (most likely it has gone up). Real wealth has not been created but it has been paid for and therefore society is that much poorer.

         The same is true for reduction in work time without reductions in pay. If people are ordered to work less and still paid the same as when they worked more, then money and resources are being used to pay more people greater amounts for the same amount of work (or wealth created). Essentially we as a society pay more for less.

        

         Chapter Nine: Disbanding Troops and Bureaucrats

         Large influxes of labor such as during the disbanding of armies can be easily absorbed by an economy if and only if the corresponding taxation that went to support the soldiers is not collected and is left in the hands of private individuals and firms. If this happens the private sector will take over the role of the government in the support of these men. They in turn will become productive (since the army is a non-profit enterprise) helping to grow the country's economy.

         We must remember that by taxing the people, the government is taking away some of their ability to spend and invest on what the people want. The government then does the spending on what they want (which is not what the people want – for if it were then there would be no need to collect taxes in the first place). If the government spends money and resources on the army (people supported by taxes from other people) then the private sector cannot spend that money or those resources on consumption or investment. Return that money to the private sector and it will spend it more productively (because business will die if they cannot provide a needed or wanted product or service)– thereby increasing the number of self-supporting people and making the country better off economically.

         This is true for the disbanding of troops and bureaucrats that are superfluous. Essential government services must be paid for by taxes (which creates a theoretical reduction in production) just so that the conditions for production can exist.

        

Added on: 2010-10-05 07:50:02
Text Crawl by: James Jeff McLaren
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