Key ideas: Published in 1946. "Henry Hazlitt wrote this book following his stint at the New York Times as an editorialist. His hope was to reduce the whole teaching of economics to a few principles and explain them in ways that people would never forget. It worked. He relied on some stories by Bastiat and his own impeccable capacity for logical thinking and crystal-clear prose."
"Economics is haunted by more fallacies than any other study known to man" (H. Hazlitt)
- Bad economics only see the direct consequences of a proposed course.
- Good economics looks at longer indirect consequences.
- Bad economics only sees effects on one group.
- Good economics see sees effects on all groups
The art of economics consists in looking not only at the immediate but at the long effects of any act or polity; it consists in tracing the consequences of that polity not merely for one group but for all groups.
This is a great little illustration! Imagine a boy through a rock through the window of a baker's shop. The baker runs out but the boy is gone. A crowd formed and start philosophizing:
Yes, it's bad that the window is broken and glass is all over the bread and pies but it least there is going to be work for the glass replacement guy. How much will it cost to replace the glass, we wonder? It will probably cost the baker $50. This glass replacement guy will have to spend the $50 that he receives from the baker to pay other merchants to get supplies needed to replace the glass. And the other merchants will have to spend that $50 to get the stuff they need to supply the glass replacement guy and so on and so on... employing more and more people as the $50 gets spend.
From this logic, the crowd could conclude that the boy who broke the glass was not a public menace but a benefactor.
Now lets take another look:
At first sight, a broken window looks means business for glazier and the glazier will undoubtably be happy to learn about it. But, the baker will be out of $50. The baker was planning on buying a new suit for $50 but now will have to go without it. So before the broken window, the baker had a window and $50 or a window and a suit, but now he only has a window. The tailer, as a result, lost $50 in business The community as a whole last a suit and got that much poorer.
The glaziers gain of business is tailors lost of business. No new employment has been added.
The crowd made an error: they only saw 2 parties involved: the baker and the glazier. They forgot a potential third party involved. They will see the new window in a day or two but they will never see the new suit because it will never be made. The crowd only see what is immediately visible to the eye.
The broken window fallacy confuses the need with demand: The more war destroys and impoverish, the greater the postwar need.
But need is not demand.
Effective economic demand requires not merely need but corresponding purchasing power.
The need of Afghanistan is much greater than the need of the US but the corresponding purchasing power - and the new business that it can stimulate - is significantly lower in Afghanistan than in the US.
The "fallacy makers" think of "Purchasing Power" merely in terms of money: just print more money and you'll get your "purchasing power"
- The more money you print, the more value they lose.
- As money lose value, prices increase.
People tend to think that if they get more money, they get richer. However, the total purchasing power might actually go down and as a result, they get poorer.
Just like in broken window fallacy, the distraction of war will make some more business: building new houses, cars, radio, etc. for example. Most people will see it as increase in demand and it may be in dollars of lower value.
But what really happens is diversion of demand of these particular problems from others. The people of Europe will build more house than others because they must. But while doing that, they will have less manpower and capacity for other projecta. When they buy those houses they will have less purchasing power for everything else. Wherever business increases in one direction, they will be correspondingly decrease in another.
So post-war Europe will see a change in direction of effort. Some business will grow at the expense of others.
Supply and demand are two sides of the same coin. They are the same thing looked from different directions.
Supplies creates demand because at bottom it is demand.
For example, farmers' supply wheat constitutes their demand for cars and other goods. The supply of cars constitutes car manufacturers demand for wheat and other goods.
Tennessee Valley Authority is one of these huge illusions. Why is it considered a miracle when enormous amount of taxes taken from people and corporations and put into one particular section of the country to see that particular section get reacher? Other sections at the same time got comparatively poorer.
It is an illusion to think that such great projects cold not be built with private money, that it is only public money that is capable of creating such things. In fact, it was private money taken out as taxes. Or by new money printed by the government which will eventually have to be paid by expropriation in taxes.
One could argue that government public projects compensate for the loss of private jobs that would have been created had the public projects not been undertaken.
It is never the same amount of taxes levied on everybody. Usually minority pays the greater amount.
- Government taxes corporations X%
- That X% is the money that doesn't go into expanding production
- Government taxes people X%
- That X% is the money that doesn't go into purchasing goods
- These two loses causes rise in unemployment.
One of the biggest economic delusions is that machines create unemployment.
Stocking industry:
The invention of the stocking machines caused big riots. The stocking knitters were afraid that their jobs would be displaced by the machines. On the contrary, by the end of 19th century, "the machine industry was employing at least 100 men for every man employed in the beginning of the century".
Cotton-spinning machine:
- Arkwright invented Cotton-spinning machine in 1760.
- There were 5200 spinners using spinning wheels.
- There were 2700 weavers.
- Total people involved in cotton textiles: 7900
Introduction of the spinning machine caused huge opposition. Again, people were afraid that the machines would displace their jobs.
However, in 1787 - 27 years after invention of the cotton-spinning machine:
- the number of people involved in spinning and weaving of cotton increased to 320000
- that's 4400% increase.
In 1932 the game of blaming machines for unemployment start again by the group called Technocrats.
Technophobes say that it might have worked then but now the conditions are different, so introduction of new technology will in fact cause unemployment.
Mrs Eleanor Roosevelt wrote an article on September 19, 1945:
We have reached a point today where labor-saving devices are good only when they do not throw the worker out of his job.
By Roosevelt's logic, we should regard not only all future technology "as a calamity" but the past one as well.
Every day each of us in his own capacity is engaged in trying to reduce the effort it requires to accomplish a given result. Each of us is trying to save his own labor, to economize the means required to achieve his ends
By technophobes logic then:
Why should freight be carried from New York to Chicago by railroads when we could employ enormously more men, for example, to carry it all on their backs?
Let's say a clothing manufacturer buys a machine that make a coat for half as much labor as previously.
- He buys a machine - He lays off half his labor
At first sight this looks like a loss of employment. But
- the machine itself requires labor to make it
- so as one offset, the jobs that created the machine would not exist if the machine was not bought (in demand)
The manufacturer would only buy the machine if it made better coats for half as much labor or made the same coats at a smaller cost. Let's take the latter example: same coats at smaller cost.
Let's express manufacturers savings in this case as X (it might take years to recoup the investment into new machine). This means the amount of labor to make the machine in terms of payroll was at least X or greater.
X is the amount the manufacturer of coats hopes to save in the long run and amount the machine manufacturer spends on payroll to make the machine.
After the machine is paid off, only then the coat manufacturer makes more profit than before. At this point it seems that there was a net loss of emplpyment only the manufacturer (the capitalist) who has profited. But it is from this very profits that the next social gain must come. The manufacturers has 3 ways to use this extra profits:
1. He can expand his operation and buy more machinesb
2. he can invest his profits in some other industry
3. He can spend extra profits on his own consumption.
Every dollar the manufacturer saved in not paying his former employees, he will now pay in indirect wages to the makers of the machine, or workers in some other industry, or to makers of h is new house, or of makers if jewelry for his wife.
In other words, he gives indirectly as many jobs as he ceased to give directly.
But that's not it. If the investment in new machines was very successful, then either the manufacturer will expand at the expense of his competitors or the competitors will start buying the same machines to stay competitive. The competition and production of more coats bring the price of coats down. The profits of those who adopted the new machinery will also drop. The manufacturers who have not adopted the machines might not make profit at all. The savings will be passed to buyers of coats - to the consumer.
As the price for coats falls, more people can afford to buy them, more oats could be made for more people. As more people spend more money on coats, more people (than before) could be employed to make those coats. We have seen these examples in stockings and cotton-wheel indutsries above.
Imagine a price of coat fell from $50 to $30. Let's say not a single job was added by the coat manufacturer. The customer still saves $20 on a new coat. That $20 would net be in customer's pocket if the machine was not bought by coat manufacturer. The customer now spend that $20 for something else and so provide increased employment in other industry.
On net balance, machines, technological improvements, economies and efficiency do not throw men out of work...
It is a Fundamental fallacy to think that a more efficient way of doing things destroys jobs. For this conclusion also means that a less efficient way of doing things creates jobs.
The economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own
The first that happens when a minimum wage, say X, is passed is that employees who are not worth X get laid off. Minimum wage increases unemployment.
The best way to raise wages is to increase labor productivity.
Everybody's income is somebody else's cost. If workers want 30% increase in wages, the employer will have to raise the price of final product by 30%.