Henry Hazlitt: Economics in One Lesson
By Andy Duncan
In the classic novel King Solomon’s Mines, the witch Gagool leads a group of Englishmen, including the legendary Allan Quatermain, into an ancient treasure room deep inside a mountain carved within solid rock and chock full of gold, diamonds, and other splendid jewels.
To feel like Quatermain yourself, to discover an almost endless stream of flawless intellectual gems, and to experience writing of the highest classical quality, there’s little need to find a time-and-space machine to travel back to nineteenth century Africa. All you need do is get hold of a copy of Henry Hazlitt’s Economics in One Lesson, still the main hidden doorway into the secret treasure room of Austrian economics.
It is a particularly useful first book for anyone who has spent the last few years in a foggy miasma of Keynesian or Monetarist economics, which together form the state-sponsored mainstream of most economics schools, mainly because they award the state a sacred role in controlling all of the major levers of economic power.
But something has gone very badly wrong with the mainstream economics schools, who seem incapable of understanding just what happened in 2008, and whose only policy solutions seem to consist of doing more of the same, to solve the seemingly unknowable problems of economic collapse.
Fortunately, the Austrian School does have a clear idea of what happened in 2008, and does have a consistent framework of ideas of how to get back to a functioning and steadily expanding economy, based upon reality and truth, rather than fictitious state smoke and lying political mirrors.
But to reach that framework, it may first be necessary to clean out any economic shibboleths that may have infected your mind, pumped in through the mainstream education system, media system, and government system, which is the main ‘ground clearance’ task of Economics in One Lesson.
My own first impression of reading this book, was one of having infective giants ripped out of my mind. But done in a precise way, rather than a violent way, in the manner of a wizardly eye surgeon, rather than in the manner of a devilish chainsaw merchant.
This is because Hazlitt is arguably the finest technical writer in the Austrian School, with perhaps only Rothbard as a serious contending rival, with Hazlitt as Johann Sebastian Bach and Rothbard as Wolfgang Amadeus Mozart.
If you’ve ever read the famous book on writing by Strunk and White, you’ll know that its motto is “omit needless words”. Throughout his own work, it is as if Hazlitt has swallowed a copy of Strunk and White, because he follows their motto religiously, without even a single comma being superfluous.
Economics in One Lesson is unusual, however, in that it is not explicitly about Austrian economics. Instead, Hazlitt draws inspiration from Frédéric Bastiat, the nineteenth century French classical liberal, who via his inspirational essay, What is Seen and What is Unseen, explained the lesson of opportunity costs, or, to put that in simpler terms, explained why having your windows broken may be good for your local glazier, in the short term, but worse for the general economy, in the long term.
With politicians and their paid apologists in the Keynesian/Monetarist economic industrial complex only capable of seeing in the short term, almost always in their own immoral narrow-minded selfish interest, we are always pointed at the benefits of the single group which benefits from any whimsical political policy.
What we’re never allowed to think about are the personal effects of having your windows broken and the things you now cannot purchase because you are spending all of your available money on paying your local glazier to repair your broken window, to get you back to square one.
After having your window broken, you now cannot visit your tailor to buy a new suit with that money you had to spend on the glazier, so you are out one suit and your local tailor is that much worse off without your planned trip to his emporium, which vaporised along with your broken window.
The glazier may cheer, of course, when your window is smashed, and vote for the politician that cheered the breaking of your window too, but all that has happened is that earned wealth has disappeared just to get society back to where it was before the window was smashed.
If the window remains unsmashed, society is up one suit, plus you are happier and your tailor is happier, though admittedly your glazier may be less happy. But who earned the money in the first place, anyway? You or the glazier? Did you earn it to make yourself happy or to make your glazier happy?
However, the politicians and the policy framework analysts never look at you and your tailor, says Hazlitt, they only examine the glazier’s situation. Therefore politicians keep getting away with their crazy policies of stealing from Peter, to pay Paul, and keeping a healthy slice of the proceeds for their own nefarious uses, all to the overall detriment of society.
It has got so bad that Keynesians, such as Paul Krugman, can even suggest that destructive war is good for an economy, as if Hiroshima and Nagasaki were beneficial for the Japanese economy.
(If you found yourself unconsciously nodding along to that last sentence, then you really do need to read Hazlitt’s book, as the virus of state worship has deeply infected your brain.)
Hazlitt makes us answer the question that if war is that good for us, why don’t we just burn down all of our own houses now and shred all of our own clothes, to save on the cost of munitions, to really get rich? That would really ‘stimulate’ the housing and clothing industries. However, to ask the question, is to begin to understand the answer that Hazlitt is driving at. To wit, that we must always look beyond the immediate beneficiaries of any economic policy before we sign ourselves up to their consequences. And as we saw in England in 2011, with the city centre riots, where various towns were ripped up by hoodlums, even the crassest of politicians had to think twice before saying that these events had ‘boosted’ local economies.
As you progress through Hazlitt’s book, these kinds of ‘in extremis’ questions start enabling us to see through the fog of statist fallacies surrounding and supporting the warfare/welfare state beloved of the Keynesian/Monetarist nexus, virtually all of whose members suck at the teat of the state, in one form or another, for example via grants from the Federal Reserve, tenured posts at universities subsidised by government-administered student loans, or by luxuriating in lucrative positions inside state-subsidised banks.
At this point, I would say that you should now just download Hazlitt’s book for free from Mises.org, and start reading, but if you need more persuasion, and if you’ve ever been puzzled by any of the following economic questions, then you’ll now know what to do to satisfy your curiosity.
I’ll use the first couple of examples of Hazlitt’s wave of incisive question-and-answer sessions, to show how he demolishes all of his target economic shibboleths.
For instance, doesn’t government spending on something like a bridge provide extra employment? Yes, but only at the expense of other jobs lost (or never created) elsewhere, where that money taken in taxation to pay for the bridge is now never spent. We see the bridge, or the Olympic stadium, or the dam, and we are impressed. We never see all the work that would have otherwise been created. And if the bridge is a ‘bridge to nowhere’, then it becomes nothing other than a white elephant. Bridges are only ever built voluntarily with private money if they fulfil a genuine need. Government bridges are often built merely to win the next election.
My own perversely favourite boondoggle bridge is the Humber Bridge here in the UK, built by the horrific Labourite socialist government of the 1970s. Not only is this a typically governmental bridge to ‘nowhere’, it is also a bridge from nowhere to nowhere, and for sixteen years, the longest single-span bridge in the world.
Although not the most gigantic waste of money indulged in by British governments, which is a prize either earned by Gordon Brown and his bailing out of the British banking system in 2008 or by his selling of half of the British government’s gold reserves at the bottom of the market in 1999-2002, the Humber Bridge is still perhaps the finest physical embodiment in Britain of the uselessness of allowing politicians to make and take financial decisions.
But surely it’s okay for governments to take taxes to generate employment in this way? Notwithstanding the points raised above, another problem with taxes is that they discourage production and thus reduce private employment. If government takes 40% corporate taxes on profits, then the motivation to generate profits in the first place is reduced. As taxes increase, then the total amount of wealth generated in a particular society is reduced (though government income may unfortunately rise, to waste on bureaucrats and other parasites).
And this leads us to a secondary beauty of Hazlitt. Not only does he shatter the socialist economic nostrums of his own time, he enables you to take apart the socialist economic nostrums of our time.
For instance, his explanation above of ratcheting government destruction of the motivation to create initial wealth takes us straight towards the infamous Laffer curve. What this curve implies is that if the general taxation rate is 0%, then the government will receive no income, no matter how much private wealth is generated. But if the government taxes us at 100%, then it also receives no income, because nobody gets out of bed in the morning, because all wealth-generating motivation has been obviously destroyed, outside the portals of a dystopian science fiction novel peopled by drugged or cloned human ants.
There is therefore some percentage of taxation, says Laffer, where the government extracts the maximum amount of revenue. (For the sake of argument, and so we can save a hundred thousand words in this book review, let’s make this rate 50%.) This actually makes sense, as far as it goes, and we can all agree that increasing taxation rates gradually diminish the will to generate initial wealth. However, Laffer only looks at things in terms of how the government benefits (the glazier). Just as Hazlitt taught us, decades ago, Laffer fails to look beyond the initial situation, as is usual with all similar government worshippers. His curve, and all of its apologists, fail to take into account the total level of societal wealth production (you and the tailor), with most such economists being incapable of thinking beyond the needs of the state.
For instance, let’s assume that government spending is equally as productive and efficient as private spending (which is a very big ‘if’) and introduce a subsequent simple rule to examine Laffer’s curve in the way Hazlitt encourages us to think. This rule will take into account Laffer’s idea that increasing tax rates diminish the incentive to generate wealth, so let’s assume that every incremental percentage of tax decreases the motivation to earn private wealth by a single percentage point. (This seems reasonable to me, though you may like to insert your own figures.)
At very low tax rates, such as one or two percent, perhaps extracted by a local mafia running a protection racket, this effect is negligible, but it soon ratchets up, as we head upwards towards the protection racket taxation rates of western democracies.
Even Laffer admits that a 100% taxation rate destroys all wealth production motivation, so let’s extend that basic insight to examine what Laffer has left unseen in his curve above.
At a corporate tax rate of 0%, let’s postulate that $100 million dollars of wealth, in total, is the maximum that might be earned by private companies in a simple model economy, based upon an entirely taxless version of somewhere like Hong Kong, Singapore, or Liechtenstein, with totally voluntary economies. In this wonderful Lafferesque universe, the government will receive none of this entirely private money.
At a 1% tax rate, $99 million is generated by the private sector and the government receives $990,000 dollars. The government worshippers rejoice at this newfound ‘free money’, and so keep increasing the corporate tax rate until they hit their Laffer curve maximum.
Proceeding onwards and missing out a few periods in-between, at a tax rate of 49%, $51 million of total wealth is generated, with the government receiving $24,990,000 dollars.
Going one step further, at a tax rate of 50%, $50 million dollars is now generated by private industry, with the government receiving $25 million dollars. And at a tax rate of 51%, $49 million dollars is generated, with the government receiving $24,990,000 dollars. From here on in, if tax rates continue to increase, the government tax receipts diminish to zero.
However, as far as Laffer is concerned (in this simplified experiment), the government should set the tax rate to 50%, as this maximises its revenue (to $25 million dollars). And this is all that any politicians, with a few Ron Paulian exceptions, are capable of seeing, too.
What Laffer and all the other non-Hazlitt-reading government worshippers fail to see, despite it being plainly in their face, is that the overall wealth in society generated is now half of what it otherwise would have been, even according to their own insights.
Even if we assume that government spending is as efficient as private spending, and even if we assume that the government’s own costs in this taxation transfer operation are nil (two spectacularly generous assumptions), even if the government spends its entire $25 million dollar ‘take’ wisely on lasting job creation, it has denuded society of half the wealth (to spend on job creation) that society otherwise would have possessed.
And this is just one application of what Hazlitt makes possible, if you start to think with his methodology. His method is timeless and his illumination is stunning.
Fortunately, Hazlitt explains his way of thinking much better than any humble book reviewer ever could, and covers many other examples of economic fallacy. If my attempt to explain his thinking above left you feeling a little confused, then I must apologise. Read the real thing and it will become much clearer.
Hazlitt’s book covers all of the following major economic insights, all informed by an Austrian framework and by Bastiat’s idea that we should always look beyond the obvious if we want to find the truth:
- The Broken Window
- The Blessings of Destruction
- Public Works Mean Taxes
- Taxes Discourage Production
- Credit Diverts Production
- The Curse of Machinery
- Spread-the-Work Schemes
- Disbanding Troops and Bureaucrats
- The Fetish of Full Employment
- Who’s “Protected” by Tariffs?
- The Drive for Exports
- “Parity” Prices
- Saving the X Industry
- How the Price System Works
- “Stabilizing” Commodities
- Government Price-Fixing
- Minimum Wage Laws
- Do Unions Really Raise Wages?
- “Enough to Buy Back the Product”
- The Function of Profits
- The Mirage of Inflation
- The Assault on Saving
If any of these conundrums have ever puzzled you, then simply download the book and start reading.
Andy Duncan is an Honorary Vice-President of Mises UK and also the Chief Technology Officer of FinLingo.Com