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.