Economics in One LessonBy: Henry Hazlitt
Major Topic: Economics
Minor Topic: Politics
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Chapter Twenty-one: “Enough to Buy Back the Product”
An argument to raise prices to a level that is “enough to buy back the product” are versions of a medieval notion of a “just” price and a “just” wage. However, there is a certain economic arbitrariness in having a “just” anything so economists develop the idea of functional prices and wages. A functional price is the price that develops the largest volume of production and sales. A functional wage is one that brings about the highest levels of employment and payrolls. In economic terms functionality is not arbitrary in the same way that justice is.
The problem with justice as a criterion (or any other non-economic criterion) is that there are economic costs involved that often create more injustice.
In the case where one industry's prices or wages are raised above the functional mark, production, and employment and demand will go down. Demand will go down due to the higher costs of production leading to higher prices. Less demand will result in lower production and therefore lower employment.
Additionally if we increase credit so that production people can afford to pay more for the product then there will be general inflation and no one is actually better off. (although nominally everyone will look better off).
The author then hints that the only possible just wage, price and profit are identical with the functional wage, price and profit because in all functional wages, prices and profits the greatest number of people benefit the greatest amount.
Chapter Twenty-two: The Function of Profits
Profit is often portrayed as an economic evil especially when there seem to be excessive profits. The author claims that profits are in fact the lowest portion of the three orders of income (wages, rents and profits) in the total of the economy.
Profit, in a free economy, signals where resources should be committed or not committed. If a profit seems very likely then more resources will be put into that product or service which generates a profit. If not enough profit is made in an industry then resources will leave the industry in search of higher returns. Profits chase demand and therefore are actually the best indicators of what the greatest number of people want to have.
Within a business profits are life of the business. Without profit the business fails. In this function profit functions as a drive by businesspeople to find and implement more and more efficiencies and economies so as to increase profit, keep ahead of their competitors and build up a savings protection against hard times.
The pressure to increase profits by introducing efficiencies is what leads business to continually offer better and better products and services at ultimately lower prices.
Chapter Twenty-Three: The Mirage of Inflation
The first error in failing to recognize the hurtful effects of inflation is the mistake of thinking of money and wealth as one and the same. They are not. Having a large bank account is useless and valueless if there is nothing to buy. Today money is also valueless outside the political area in which it was created.
Due to the laws of supply and demand, an increase in the money supply without an comparable increase in the goods and services available will reduce the value of each monetary unit. That is, in general, prices will go up. But no one is better off since there is no greater amount of goods to buy.
If the government decides to print money in excess of increased availability of goods all goods will rise in price. But there is a further injustice in that the people who first get access to the new money will not pay the higher price at first. They will be the catalyst for the increase in demand. The last people to get access to the new money or people who never do get access will suffer the most because prices have gone up but their income has not.
The people who first get access to the money will be winners for a short time before prices rise. But even after that they will likely be losers too. Because when hyper-inflation begins no amount of new money will ever be enough to receive a benefit first before the increase in prices.
The economic effect of inflation is to alter the relationship between prices and costs. In a normal economy prices are the determiner of whether it is wise or not to pay the costs of production. With prices running out of control, the cost of production calculations are much more difficult and hence there are far more business bankruptcies. When a net number of businesses go out of business there are fewer goods produced which further extends the difference between money supply and products available. In effect: worsening the situation.
Inflation creates a positive feed back loop: inflation increases the demand for products so prices rise and inflation lowers production so prices rise.
The author believes that the confusion sown by inflation and its intellectual supporters has a political benefit: people cannot easily or clearly blame the ruling government.
Inflation can also be thought of as a blanket tax on everything. In addition to all the economic detriments that a tax imposes, a blanket tax is especially problematic for the poor who spend a larger amount of their income and therefore suffer relatively more than the rich.
Chapter Twenty-Four: The Assault on Savings
It is commonly believed that spending helps the economy more than saving. This belief is still common because the visible effects of spending are much more obvious than the benefits of savings. The author claims that savings are actually spent on capital accumulation (which allow us to build more and thus have more to buy later) and therefore savings is more productive than spending because it adds to the productive capacity of the country.
It is sometimes argued that hording is a type of savings that is not helpful to the nation. This may be true but it is a symptom of greater problems. Hording is not the problem itself. Hording is the result of economic insecurity in the world. When people suspect that prices will go down they naturally reduce their spending to only essentials. When people suspect that banks may fail they take their money out. The issue that should be dealt with is the underlying problem not the symptom.
The fact is that under normal circumstances savings encourages the development of more and more industry which enriches all the world. Savings is where investments come from and investments are expenditures designed to make more money.
Ideally savings and investment should be brought together through the market forces of supply and demand. When the demand for investment increase then the interest rate on savings should increase so as to encourage the proper amount of money to be saved in order to lend it out. Conversely when the demand for investment drops so should the interest rate because money should not be saved in excess of what is demanded.
When interest rates are kept artificially low all the evils of price fixing take effect with the money supply with one exception: no shortage in money develops due to the fact that governments can create money out of nothing. However shortages in other things will develop and consequently inflation.
Added on: 2010-10-05 08:00:34
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