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 Ten: The Fetish of Full Employment

         In most cases the economic desire of most people and countries is to get the greatest payoff with the least effort. In such cases where this is true, the goal is to maximize production [or more precisely, the author should have said: to maximize the production to effort ratio].

         With full production, full employment may come but full employment rarely means full production. Consider for example that the poorer a country the more and the harder the people in it have to work. With wealth comes the option to disengage from labor note that in rich countries a huge amount of people can live non-productive lives that would be impossible in a primitive society (for example: students, the elderly and the idle rich).

         Therefore full employment schemes are the wrong goal to focus on. Production, should be the goal. Specifically the maximum production to effort ratio.


         Chapter Eleven: Who's “Protected” by Tariffs

         The question of free trade: all serious economists agree that free trade increases production and wealth and is therefore an economic good. So why does not everyone accept this truth. Because of the fundamental mistake of bad economics: not looking at all parties involved and not considering all time frames.

         Considering that some climates and terrains favor some forms of industry and others favor other types of industry, the wise steward of a nation should seek to secure that maximum production [to effort ratio] by not hindering the industry that a particular nation has a competitive advantage in and by not artificially supporting and industry in which a competitive advantage does not exist.

         If a foreign country can make a product at a lower cost than ones own, it would hurt all consumers and all industries to put up barriers to the entrance of that product. Yes, the competing industry in the home country will suffer. This is the reason that tariffs are usually erected: to save the home industry or to create the home industry.

         However such a policy will hurt the home country on net far more than it benefits the country. First, all consumers will have less money left over when they buy the product. This reduces the purchasing power of consumers and hurts other industries. Second, foreigners who cannot sell us things will not be able to buy things from us either. International trade is determined by the average value of imports versus the average value of exports. In order for a country to buy products from another country it must provide products of an equal average value.

         Therefore by limiting imports a country is limiting its exports. By increasing the cost of production (by supporting an industry that is not competitive) a nation is reducing the average value of its exports and therefore of the wealth created in its country and all over the world. This means that the nation is poorer (in terms of wages and real wealth) and less productive (in terms what the people are actually doing) than it would have been if the tariff had not been created.

         The author concedes that one tariff in a perfectly free trade arraignment may be a net gain but after the first tariff and for each tariff after that there are increasing marginal detriments for the nation and the world. Therefore they should never come into existence.

         The author also concedes that not all tariffs are bad. There may be legitimate reasons for limiting the wealth and growth of a country (for example, national defense and the removal of negative externalities such as pollution) but tariffs are never an economic good.


         Chapter Twelve: The Drive for Exports

         Because exports pay for imports, over time exports must equal imports. Favoring one over the other is nonsensical and can lead to lower economic growth.

         When ever the money of one country is exchanged for goods or services across an international border (imports) that money cannot be spent in any foreign country (I cannot use Korean Won in Canada). The owners of foreign money must do one of three possible things: (1) spend the money in the country of origin or (2) buy something from the country of origin or (3) trade the money with someone who will use it for use 1 or use 2. Additionally the money could travel to a third country to more easily find someone who will use it for purposes 1 and 2.

         International trade is analogous to the individual trade between people in a country. Each one of us can only spend as much as we produce. Even though at times we may be in debt (that is spent more than we have produced) or we may have an amount of money unspent (that is saved), we must over the long term spend as much as we produce.

         Foreign aid may be justified for political, humanitarian or military reasons but there is never a legitimate or justifiable economic benefit. Foreign aid is always a drain on the economic well being of a nation – just as surely as individual charity is always an economic drain on an individual. If one nation gives away its product without getting compensated then the resources used in building, transporting and training were wasted. From an economic point of view effort has been spent and wealth has not been created: the net value of all the wealth in the country is lower than it would have been otherwise.

         The same holds true for foreign loans made by governments: Some people will benefit: those who can directly get access but the nation will on net be less well off.

         Private banks need to make a profit therefore if they invest in a foreign country they believe that can make money: this is a legitimate economic reason. However the government that makes foreign loans is working on different criteria which are not likely to be economic in nature (if the government's criterion were economic then the banks would already be lending). Such loans are more likely to fail and therefore the nation as a whole will be poorer than it otherwise would have been.


         Chapter Thirteen: “Parity” Prices

         The parity prices argument claims that a particular industry is important and must not be allowed to fail. This may be true for non-economic reasons but never for economic reasons. Any claim that raising the prices or wages of a particular product or industry above the market rate benefits the whole nation is totally fallacious.

         There are two ways to achieve parity prices: (1) by subsidizing the price or the wage; or (2) by reducing supply. In the first case money is transferred from one citizen to another which in the best case scenario will not change the net wealth but in actuality there will be transfer costs that reduce the wealth of the nation. In the second case a product's price can be raised by destroying some of the product so as to cause a shortage and thereby drive prices up. This has the effect of reducing the overall wealth of the nation and miss-allocating resources to nonproductive uses.


         Chapter Fourteen: Saving the X Industry

         Just like with subsidies, there may be just political, military or humanitarian reasons for saving any particular industry but there is never any economic reason. The effects of any attempt are always to distort prices, and miss-allocate resources to less productive uses which in turn lower the over all wealth of a society. This may be a net benefit to some members of the society but it is equally a net loss for the other groups who would have had the resources instead; and since the new group is in actuality less efficient and/or productive it is also a net loss for the whole society.

         If the X industry really “needs” to be saved it is an indication that resource allocation is not allocated in the most efficient nor the most productive enterprises (as the next chapter will make clear).


         Chapter Fifteen: How the Price System Works

         It is sometimes lamented that business men will only produce products or offer services that make money. This is viewed as bad if there is still a demand for the unprofitable items or services. It is therefore proposed that production should be 'for use' and not 'for profit.'

         This view fails to understand the price system's role in the problem of distribution of resources and the nature of reality.

         Reality is such that there is a limit to the amount of time that we have in a day and there is no limit to the number of needs we have. Therefore we cannot satisfy all our unlimited needs in a limited time frame. This fact requires us to prioritize our time and the amount of the good or service needed for satisfaction.

         In our large and complex industrial society the price system tells producers the relative importance that consumers put on a particular product and/or service. As the demand (or need) for a product or service increases the price also increases. This increase in price is a signal to producers to expand production or enter into the market. As more supply of the product or service is provided the price goes back to normal.

         The reverse happens when the demand decreases.

         In both cases the price is the mechanism used to determine the relative importance of the good or service so that the most desirable goods and services are the ones that are most supplied to the greatest number of people.

         If we were to run a society on the produce for use model we would soon have many over supplies of some goods and services and a huge shortage of other goods and services.

         Our current model, in which all products and services are produced in the best quantities and prices relative to all others, requires that old and generally unwanted industries die out so that resource can be freed up and placed in new or expanding industries.


Added on: 2010-10-05 07:53:30
Text Crawl by: James Jeff McLaren
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