Economics In One Lesson
Book Review:
Economics in One Lesson, by Henry
Hazlitt, 2nd Edition, Laissez
Faire Books, 2012
In 1850, Frederic
Bastiat wrote about the broken window theory
in a book called, That Which is Seen, and
That Which is Not Seen. The whole idea
is that when a shopkeeper has his window
broken, we of course see the broken window
and then we see the glazier come to fix the
window. The immediate reaction might be,
though painful to the storekeeper, the
glazier has made money that he would not
have if the window had not been broken.
That is what we see. We think that the
broken window has kept the glazier
employed.
What we don’t see is
what the shopkeeper would have done had the
window not been broken. He might have
spent the money on a new suit thereby
keeping the tailor busy. Even worse, the
shopkeeper has nothing more than before the
window was broken; in fact, he has less,
namely the cost to fix the broken window.
He still has a window but he does NOT have a
new suit. So the tailor has lost work, the
glazier has gained work and the shopkeeper
is less wealthy than before. For otherwise,
he would have a new suit.
Hazlitt starts with
this realization of the problem and extends
that to all walks of life, and in particular
to politics. When we give money to the
poor, we see that they have more money than
they had before but we don’t see what
productive things might have been done with
that money. And oftentimes, when we give
money to the poor, the poor decide not to
work and do their share for the economy.
Hazlitt says,
In brief, the main problem we face today is
not economic, but political. Sound
economists are in substantial agreement
concerning what ought to be done.
Practically all government attempts to
redistribute wealth and income tend to
smother productive incentives and lead
toward general impoverishment. It is the
proper sphere of government to create and
enforce a framework of law that prohibits
force and fraud. But it must refrain from
specific economic interventions.
Government’s main economic function is to
encourage and preserve a free market. When
Alexander the Great visited the philosopher
Diogenes and asked whether he could do
anything for him, Diogenes is said to have
replied: ‘Yes, stand a little less between
me and the sun.” It is what every citizen is
entitled to ask of his government.
The same principles apply to money. We
think that if the Fed or the government puts
more money into the economy, we should all
benefit as what we see is more money: More
money spread among our citizens. But what
we don’t see is what that money could have
done for the economy had it not passed
through government hands. It is likely
that the money would have been placed into
more investment that made products cheaper
or made new products that people wanted or
needed. But once the money is handed out
for whatever obscure purpose, it is no
longer available for investment. The money
comes from tax payments, or loans that have
to be paid with future tax payments What we
don’t see is what productive things might
have been done with those tax payments.
When the government prints more money, we
again see more money in circulation and that
seems like goodness. But what necessarily
happens is that prices go up to accommodate
the new money. In the end, even with more
money, people are not better off. Their
money now buys less because of higher
prices. He says,
The effect of this increase in money has
been a dramatic increase in prices. The
consumer price index in 1946 stood at 58.5.
In September 1978 it was 199.3. Prices, in
short, more than tripled.
The policy of inflation, as I have said, is
partly imposed for its own sake. More than
forty years after the publication of John
Maynard Keynes’ General Theory, and
more than twenty years after that book has
been thoroughly discredited by analysis and
experience, a great number of our
politicians are still unceasingly
recommending more deficit spending in order
to cure or reduce existing unemployment. An
appalling irony is that they are making
these recommendations when the federal
government has already been running a
deficit for forty-one out of the last
forty-eight years and when that deficit has
been reaching dimensions of $50 billion a
year.
(Hazlitt first wrote this book in 1946. Oh,
would we be so lucky to have a deficit of
$50 billion but of course the money has been
inflated many times over.)
Again, what we see is more money floating
around, what we don’t see if how little it
is worth.
For those who want to understand economics
and life, this is an important book that
should be studied. It illustrates all the
seemingly good things that go on but then
asks about the circumstances that don’t we
see. Most of the time, this is the
important question.
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