Economics in One LessonBy: Henry Hazlitt
Major Topic: Economics
Minor Topic: Politics
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Chapter Two: The Broken Window
Consider an act of vandalism that forces a victim to spend money on repairs or replacement of property. If we only look at the the people who benefit from the act of the vandal we could conclude that the vandal was a public benefactor because he caused money to be spent on the repairs or replacement of property that would not have been thus spent. However there are other people that did not enter the picture: those who would have benefited had the repair money been spent on something else. We have two groups of people: one group benefits from the vandalism and the other group would benefit from the lack of vandalism. How should we determine the best course of action? Consider the wealth of society as a whole: in the vandalized case, society is poorer by the exact amount of the repair or replacement costs of the property vandalized. A good economist should never advocate the destruction of property that has value.
Chapter Three: The Blessings of Destruction
The author claims that the Broken Window fallacy is the most long-lived fallacy in economics. It is most egregious when it takes the form that war is an economic good. Advocates of this fallacy point to amazing feats of production that are achieved, to huge demand that is created and to great wealth and development that are generated.
There are several smaller fallacies that pop up with this one:
1) The equivocation of 'need' and 'demand.' What is needed is not the same as what is demanded. War will always increase the needs of the affected population but it will also always impoverish them. This increase need is not an increase in demand because demand is a measure of what people are willing and able to purchase. Demand, not need, is what stimulates economic growth.
2) Purchasing power is measured in money. An increase in the money supply necessitates an increase in the cost of goods therefore printing money will not make the people richer. People are not better off if they have more money and things cost more too. Purchasing power is better measured in production (or service) power.
3) War builds up demand. The fact is that war diverts demand into non-profit directions such as weapons. Since people will still need large items and would not be able to get them during the war it does appear that demand increase after the war. The diversion of production to non-profit sectors essential made society poor by the amount spent on destruction.
Some of the mistakes that are made include:
1) Thinking of the nation to much and not enough of the individual – it would then be clear that the destruction of private property is never something an individual would want or benefit from.
2) Not seeing demand and supply as the same thing – Supply is demand alerts us to the fact that we must supply something in order to have a demand for it. It is the supply that we create that determines our demand; both at the individual and at the national level.
3) Destruction means faster replacement of capital goods – true but there is an optimal rate of replacement. The only time destruction makes sense is when the particular good has become valueless.
Chapter Four: Public Works Mean Taxes
Government can spend its way to prosperity. This is a common fallacy in economic thinking. While it is true that government must spend some money on necessary government tasks (such as roads, ports, national defense, public safety etc.) it is not true that all or any government spending is good for the country. The fact that nothing is free is as certain as the requirement of effort to get anything. Therefore it is impossible to get something for nothing – everything has a cost.
Government projects that are necessary for the betterment and improvement of society are not a problem if the benefits to the tax payers are greater than the benefits of having kept their tax portion. Government projects that have some other goal are a problem. Some of the more common secondary goals are to: increase employment, stimulate the economy and add wealth to a community.
When the secondary goals become the reason for the project then decision making focus shifts from 'what must be done' to 'what can be done'. Then after some faulty economic reasoning the argument goes fallaciously back to 'what must be done'.
In cases where the reason for a project is to 1) increase employment, 2) stimulate the economy and 3) add wealth to the community the implication is that the employment, stimulation, and wealth would not come into existence if it were not for the project. It is true that some people will find jobs who would not have found jobs; that some industries will be stimulated that would not have been stimulated; and some communities will grow in wealth that would not have grown in wealth.
Good economic thinking will lead us to consider the jobs that would not be created; the industries that would not be stimulated; and the wealth that would be transferred due to the redirection of funds. This redirection of funds can at most only be a redirection – more likely the redirection itself will not be perfectly efficient and therefore it will be a net loss on society.
There may be real value in a government project but increases in employment, economic stimulation and wealth creation are never real virtues or benefits of government projects. Arguments that claim these benefits are economically fallacious but politically effective.
Chapter Five: Taxes Discourage Production
It is certain that some government functions are absolutely necessary but that does not mean that all government programs are necessary or economically wise. Taxes discourage growth and production by 1) reducing the amount of money available for investment; 2) waste in the transfer process; and 3) in the natural human tendency to avoid risk when the playing field is unbalanced between losses and gains.
Government programs do benefit some people but always at the expense of others; the net effect on society is in some cases positive but in most cases negative.
Added on: 2010-10-05 07:46:03
Text Crawl by: James McLaren
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