Economics in One LessonBy: Henry Hazlitt
Major Topic: Economics
Minor Topic: Politics
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Chapter Sixteen: “Stabilizing” Commodities
The argument to stabilize commodity prices is an attempt to subvert the laws of supply and demand. Any attempt to raise prices above the market rate will cause an abundance of the commodity to be produced and not sold because the higher price will reduce demand. This will result in large amounts of wasted commodities or in the case of storeable commodities gluts in production at a later date.
Policies in favor of price stabilizing often vilify speculators as the source of the 'unjust' price or as the source of the wild fluctuations but this is short sighted. In fact speculators help bring the price to the market price and reduce price shocks to the degree that they are successful. In other words: a calm and stable market is one in which speculators have been successful. The author claims that speculators have actually but unintentionally, on net subsidized the markets in which they most participate.
On a more global picture, subverting the laws of supply and demand misdirects resources and creates waste which reduces the net wealth of a society.
Chapter Seventeen: Government Price-Fixing
Government price fixing is always an economically bad idea and in some cases it is an economic catastrophe. The author believes that there could not be any legitimate political or humanitarian benefit for price fixing, although there may be a legitimate military reason (when the very survival of society and civilization are at stake).
The selling of price fixes to the population often claims good an noble intentions such as making sure that all people can afford their basic needs. However the devil is in the details.
By fixing a price below the market price two forces are created. First, demand for the product or service increases – as more people can afford more of the item; second, supply of the product is reduced – as producers, not wanting to operate at a loss or at reduced profits, find other profitable uses for their capital. Therefore the result of fixing a price below the market price is to create a shortage of the product or service.
At this point, policy makers can engage in some more nefarious policies with the hope of preventing the shortages. First, they can try to ration the product or service. This has high enforcement costs as well as the moral hazard associated with the injustice of treating unequals equally. At the very least the basic freedoms of a free society are corrupted; more likely the society creates a black market and at worst the society will rebel – all of this is in addition to the economic penalties of loss of wealth and standard of living in the society. Rationing only reduces demand it does nothing for the supply.
Second, policy makers can try to control the costs of production so that the producers produce the price-fixed commodity. This policy necessitates the price fixing of commodities up the manufacturing chain. This will cause a shortage in the goods and services that are associated with the manufacturing process – thereby necessitating more and more price controls over a wider and wider sector of the economy until the whole economy is price fixed. This includes the labor market and the rent market as well as the land market and commodities markets. The cost is a total loss of freedom for the individual plus huge new non-profit expenses (in terms of policy enforcement) – that reduce the net wealth in the society.
Third a government may try to subsidize a price fixed industry. This has the effect of reducing the effective use of capital and thus reducing the overall wealth of a society. Subsidies must also be placed on all effected industries else the unsubsidized industries will cause shortages and production bottlenecks that reduce the efficiency and wealth of a society. There is also the problem that you cannot get something for nothing – the subsidy must come from productive workers but if the government subsidizes everything it is trying to get something for nothing.
In addition to these problems we have the creation of a black market. A black market is the necessary result of people wanting to live and improve their situation but not being allowed. Unlike a free and legal market a black market does not have objective and universal enforcement of norms and standards. This fact makes shady operations the norm – shady operations in terms of quality and trust.
Why do people support this? Because it sounds like they can get a direct (albeit temporary) benefit – that is until the current stock of price fixed products is exhausted. The problem is that people rarely look at the whole picture and the effects of this policy on the whole economy.
Chapter Eighteen: What Rent Control Does
Rent control is a type of government price fixing and all the evils associated with that are true for rent control policies and then some.
Rent control is often invoked when supply is low to temporarily ease the burden of tenants. However, higher rent makes people use use space more efficiently and lower rent makes people more wasteful of space thereby aggravating the problem rather than mitigating it.
Furthermore high rents are the incentive that builders use to gauge demand. By imposing a rent control policy the builders no longer know what the market is really like and they are also inclined to build housing units in an unknown market.
Landlords who cannot make a reasonable profit will also not maintain their buildings and so the become rundown and unkempt. Such a situation encourages crime, uglifies a city and reduces land values which in turn reduce a city's revenue making it harder to run a city: in effect rent control reduces the standard of living of everyone in the vicinity of the policy.
Landlords suffer more than others under price control because their commodity is durable and the policy will extract from the landlord and he cannot stop it. Other producers can at least stop making their commodities.
Chapter Nineteen: Minimum Wage Laws
In order to more easily comprehend the economic nature of wages it is better to think not in terms of wages but of price of labor. Wages are nothing more, economically speaking, than the price of a labor service and consequently can be analyzed in terms of supply and demand.
Thought of as an artificial increase in price, one can see that minimum wage laws are identical with trying to fix the price of a commodity. All the evils of government price fixing apply to minimum wage laws.
Just because minimum wage laws cause more harm than good does not mean that wages cannot be raised. To raise wages policy should be directed at increasing the productivity of the labor. That means encouraging capital accumulation.
Chapter Twenty: Do Unions Really Raise Wages?
It has been a common belief that unions raise wages. The author claims that the belief comes from seeing a correlation over a long time in which living standards rose at the same time as the number and strength of unions did. The author says that there is no cause and effect relationship between unions and living standards. Labor's living standards rise because labor's productivity rises.
Unions have a legitimate and necessary function: (1) to improve working conditions and (2) to ensure that all union members get the market value of their labor. The first is necessary for the health, safety and convenience of the workers; the second is important because often conditions are such that works are in a disadvantageous bargaining position.
The author believes that anytime a union tries to raise wages above the market rate it is doing a disservice to all the people of the nation and often to the long term viability of their own members jobs too. One hint that the union is doing this is when they have to use violence against their own people and/or replacement workers. Such violence and intimidation are signs that normal people are not being allowed to bid for the jobs which the union thinks should be paying more. This suggests that the union has gone beyond its legitimate mandate.
When the union forces employers to pay wages in excess of the workers productivity everyone loses because more capital is spent for the same products or services: thereby reducing the net wealth of the people. Additionally, if investors are forced to get less than a fair return on their investment, they will not invest in an industry. But all industries need continued investment to replace capital. If a fair rate of return is not permitted then the business will grow sick and die just as the laws of supply and demand suggest.
Added on: 2010-10-05 07:57:10
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