Economics in One Lesson, Chapters 1-6

Lots of other bloggers are currently reading through and blogging about Henry Hazlitt’s excellent book Economics in One Lesson, and so I don’t intend to give a thorough account of it here. Instead, I thought it would bring something different to the party if I pointed out the occasional places where I think that Hazlitt is transmitting conventional wisdom without questioning it. None of them is important to his thesis, and none of them detract from his arguments, but in his efforts to pilot his readers through the economic waters he occasionally distracts us from interesting tributaries with a dismissive wave.

My first quibble with the book is its title. Hazlitt boldly states his lesson up front:

… the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the larger effects of any act of policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Now, that is an important lesson, and it is in fact the lesson that the book teaches as it places the blame for various economic misbehaviors. But does that sentence really explain economics? Would you try to derive, say, the law of diminishing returns or the law of marginal utility from this, or even an understanding of how inflation works? Really what Hazlitt has done here is to state a principle that must be applied when thinking about economics (and many other areas, for that matter) in order to avoid falling into error. So perhaps a better title for the book would be something like How to Avoid Economic Fallacies in One Lesson.

A bit later Hazlitt observes that this tendency, focusing on the immediate effect for one group while ignoring long-range effects on all groups, covers nine-tenths of the common economic errors. The other tenth is covered by the opposite tendency, focusing on the long-range effects on all groups of a particular policy while ignoring the short-range effect on a single group.

This is the error often made by the classical economists. It resulted in a certain callousness toward the fate of groups that were immediately hurt by policies or developments which proved to be beneficial on net balance and in the long term. But comparatively few people today make this error; and those few consist mainly of professional economists.

I’d disagree with this. I think there are plenty of boneheaded economic policies where pain to specific individuals is justified by the supposed greater good (eminent domain, affirmative action) and pain in the short term is justified by supposed benefits in the long term (higher education, foreign wars).

Lastly, in Chapter Three Hazlitt counters the argument that wars are economically beneficial because the destruction they cause creates demand for replacement goods, thereby stimulating the economy. He points out that destruction does not create demand but merely redirects it, i.e. the money spent on replacing destroyed goods is money no longer available to spend on other things. He summarizes his point as follows:

The wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.

I think this is too strongly stated, because it ignores the social inertia that James Howard Kunstler calls the psychology of previous investment—roughly speaking, the pressure to continue down a particular road, no matter how unpromising, because of earlier economic and social commitments we’ve made to going in that direction. Kunstler’s favorite example is suburbia, a living arrangement where long ago the costs began to outweigh the benefits, but one we can’t abandon because we can’t imagine simply jettisoning the roads and automobiles and suburban mansions which cost us so much to acquire. We might very well be better off in the long run if by some magic all of those things were to suddenly disappear. But because the pain of doing without them would be so great in the short term, we will not even move to phase them out gradually, but beyond the point of reasonableness we will cling to cars whose fuel tanks we can barely afford to fill, roads we can barely afford to maintain (much less drive on), and houses we can barely afford to heat.

Gene Logsdon tells the story of how as a young man he helped his father with a dairy herd of ninety cows. Their dairy was barely profitable. Years later, after studying how the Amish did things, he learned that his father’s dairy could have been much more profitable if they had simply cut the herd from ninety cows to thirty—because they would have needed no employees, could have used less sophisticated equipment, and so on. I think in this case Hazlitt would assume that the farmer would do the obvious thing and scale down. In reality, such a move is never made.

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12 thoughts on “Economics in One Lesson, Chapters 1-6

  1. Actually, all of economics can be distilled down into one sentence, and Mic Jagger of the Rolling Stones did it perfectly:
    “You can’t always get what you want, but if you try sometimes, you might find, you get what you need.”

    Allocation of scarce resources, opportunity costs, marginal returns, it’s all there.

  2. Rick, I’m grateful for your insights and perspective, which I know comes from your agrarian leanings and the new direction you are going. As we read, though I’m not well-equipped for this I’m afraid, I do want to consider from a biblical perspective the ideas that Hazlitt proposes. One of my beefs with libertarians is that they either have too much faith in the goodness of man, which would account for not accounting for the inertia which plagues many people in society (they don’t always do the most beneficial thing though you would think they would if given the opportunity, right?) or they excuse wickedness and greed in the name of fair competition (thus, the support for unethical giants like Microsoft or Wal-Mart).

    If you could discuss some of what you’ve read about distributivism (or distributism) and how you think it relates to these topics, that would be great!

  3. I second Carmon’s request. My post on the book was almost wholly driven by my developing agrarian perspective and frustration with the status quo, and I’d love critique.

  4. Interesting insights… all I can say is that DH has scaled down his business (reduced the number of cattle in your example), so that he can fly under the radar of many government regulations which affect the services he offers.

    The monolithic US Federal government is like a snowball rolling down a steep hill, gathering steam and power. The only way to stop it is………..

  5. Rick,
    I am enjoying all these different perspectives and I appreciate your views tremedously. Unfortunately, I really am ignorant in this subject. Most of my ideas on economics are anecdotal…as opposed to antidotal :)

    But I do think the question hanging in the air is how do we get from A to B.

  6. All,

    I almost backed out of contributing to this series.

    Initially I was pretty enthusiastic, since I remembered Hazlitt’s book as being excellent. And in my opinion it still is, with its lesson being a thoughtful and thorough example of applying the golden rule, one we all ought to as we make any sort of plans. But as I began re-reading it, I was dismayed to find that I no longer agreed with one of Hazlitt’s unspoken assumptions, namely that classical economics describes not just one way of organizing economic behavior, but THE way things ought to be. Since that assumption is shared by most Americans, and conservative evangelicals in particular, I wasn’t particularly enthusiastic about staking out yet another fringe position.

    But it looks like it might be time to talk about the fact that classical economics is not an end-of-history, way-thing-ought-to-be, straight-from-the-Bible set of principles, but a relatively recent innovation that has managed to crowd out some very different and equally credible approaches to arranging economic interactions.

  7. *Since that assumption is shared by most Americans*

    I am not aware that most Americans espouse Austrian economic theory. I’m thinking most have never heard of it before and most dont even operate their own families that way. And I disagree that most evangelicals espouse sound economic theory.

    Checking back for the fringe position,
    I am Dana in GA

  8. Dana,

    Sorry, I wasn’t very clear in what I wrote there. I called the prevaling view classical economics (meaning the view developed by Adam Smith and his followers) but I suppose it is really free market—so-called—capitalism as promoted by modern global corporations. And I didn’t mean to suggest that average folk, evangelical or not, are consistent or comprehensive in their thinking about economics, or that they think about it at all. Still, they do live according to certain principles, and those principles are taken from the prevailing view.

    What I was trying to get at is that most Americans, and nearly all conservative evangelicals, assume that there is ONE way to look at economic activity, and to even entertain alternatives to common practice is suspect. I think this is why most people view Ron Paul not as a radical but as a crank.

  9. Rick, I’d love to hear about the other economic models that you actually think would work. I’ve read a bit about distributism, and at times it sounds good to me on paper, but I can’t for the life of me figure out how it would work now, in this country.

    Also, I’m not so sure I agree with this Kuntsler chap about suburbia–couldn’t it be that now that suburbia is here, it actually would be more costly to try to dismantle everything (for what alternative?). I’ll have to think about that one. Kuntsler says that we’d be better off “if by magic” all these things disappeared, but that’s not going to happen–we have to deal with the situation as it actually exists.

    Also, I’ve lived in suburbia all my life, and our family doesn’t have the problems you and Kuntsler mention. Everything I need is within almost walking distance, my husband works from home, we have homeschooled for 16 years, our home is paid for (we don’t live in a McMansion). We even have a decent garden! My alternatives to suburbia are city living (Portland OR–very expensive and not the type of lifestyle I want in any way), or country living. We’d have to change our whole way of life for that, and I’m not interested in being a farm girl. I actually like suburban living.

  10. Kathleen,

    Kunstler’s argument, which is an extreme one, is that suburbia is not viable at any cost. One of his core assumptions is that in the near future a twenty-five mile commute to work will not be merely expensive but flat-out impossible, because the oil it would require will no longer be available. If that is true, then suburbanites will be forced to move to someplace that is either within walking distance from work or where work can be reached via mass transit. This is the “magic” that Kunstler thinks will make suburbia disappear from our lives—no one could afford to live there, even if they were giving away houses.

    Your own suburban situation is very unusual, though not unknown; Debbie and I spent a happy couple of years in Silicon Valley living in a quiet cluster of condos across the street from a strip shopping center with an excellent supermarket. But most of the time we lived where the supermarket was five miles away and the job was fifteen or twenty. Driving was what made it all work. If driving had become an expensive special occasion for us, I’m sure an apartment in a high-density area with bus service to work would have started looking mighty attractive.

  11. Someplace, perhaps mises.org, I heard that economics is a result of needs/wants or something to that effect. This got me thinking, before the fall you plant a seed you get food, you don’t covet, you need but your needs are met. So (and perhaps this is too odd to respond to) was there even such a thing as “economics” before the fall? If the answer is no then what we have is a system (human or given by God) in which we have a mechanism to deal with some of the consequences of the fall. If this is true then I think it follows that economics and economic theories are very important topics for Christians to consider. Perhaps even more than we look at govt. since economics seems foundational in terms of what sort of govt. you end up with. The PBS series (available online) Commanding Heights really drove this last point home for me.

    Off topic, I just listened to this lecture by Cleanth Brooks. I thought is was a real treasure. It takes about 15 minutes to got to Brooks and it also cuts off before he is done. You might enjoy it.

    http://www.isi.org/lectures/lectures.aspx?SBy=search&SSub=speaker&SFor=Cleanth%20Brooks

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