Economics in One LessonBy: Henry Hazlitt
Major Topic: Economics
Minor Topic: Politics
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Chapter Twenty-five: The Lesson Restated
It is by studying the secondary and general consequences of policy, over the short term and the long term, for special interests and for the general interest that economics becomes a complete science. This is the central lesson of the whole book.
If one remembers this lesson when framing problems then, very often, the answer is easily found in the statement of the problem. In this way one can see and then avoid the inevitable implications that would be missed by other people who do not think through their economic suggestions.
The author believes that if one were to practice this lesson one would intelligently arrive at the same answer as unsophisticated common sense. The author quotes Adam Smith: “What is prudence in the conduct of every private family, can scare be folly in that of a great kingdom.”
In other words, the lesson can be practiced by looking at the plight of the forgotten man. The forgotten man is not the one with a publicized problem, rather the one that no one ever considers and who is asked to sacrifice for the sake of a solution to the publicized problems.
The biggest most destructive problem in economic thinking is: thinking only of the effects of a policy on one particular group. This can be very easy to fall into because we are all always concerned with our own welfare. But just because a policy is good for one group and that group supports the policy it does not mean that the policy is good for the whole society. In fact it is most likely the case that the policy is not good for the whole society. This is one of the pitfalls of the division of labor: a short sightedness of economic reality.
Chapter Twenty-Six: The Lesson After Thirty Years
Basically the author believes that as of 1977 the lesson has not been learned in the first thirty years since the book was originally published in 1946. The most important example of this failure is in the continued presence of inflation.
The claim is made that in those thirty years the money supply has increased three fold and prices by more than three times. This failure of the lesson is the result of adopting Keynesian myths that suggest the general benefits of an inflationary growth model and deficit spending.
The Keynesian economic model hides the true cause of many of the economic problems facing America (and the world) in 1977. Where Keynesian theory suggests the need for government intervention to fix problems in the economy, the author suggests that it is this government intervention that has created the majority of problems.
The result of the Keynesian ideas have been government programs that the author believes are the causes of most of the problems. Some of these government programs are: Social Security, Medicare and Medicaid, unemployment insurance, food stamps, veterans' benefits, farm subsidies etc.
While it is hard to imagine a world without these programs, the author maintains that we are all economically worse off due to these programs. As evidence of their unsustainable nature, the author give the statistic that in the last five years the public expenditure on these programs has risen at a rate of 2.5 times the growth of the economy as a whole.
Another example of having failed to learn the lesson is the high tax rate. When one over taxes employers they do not create jobs and hence there is a high level of unemployment. With a large pool of unemployed wages stay low.
All of the economic mistakes of the last thirty years have come about due to policy makers legitimate desire to fix a perceived evil on one group. The failure of policy makers to consider all groups affected over the long run is the reason most interventions have had disastrous effects.
In effect the problems faced are not so much economic but rather political. Most economists can agree on the consequences of almost all policy issues that involve redistribution will result in slower growth. What is in debate is how much to slow growth and for whose benefit.
The author proposes that policy makers should remember that the proper role of government is to create and enforce laws that prevent and punish the initiation of force and fraud. The government should stay out of the economy in all other concerns and let the free market take care of the rest.
Added on: 2010-10-05 08:03:13
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