Economics in One Lesson, Chapters 7-12

Here is how Hazlitt begins Chapter 7:

Among the most viable of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Whenever there is long-continued mass unemployment, machines get the blame anew.

Hazlitt’s argument hinges on the phrase on net balance. One page later he admits that machines do in fact create unemployment, as in the case of the English stocking knitters who rioted against the introduction of knitting machines:

Now it is important to bear in mind that insofar as the rioters were thinking of their own immediate or even longer futures, their opposition to the machine was rational. […] the larger part of the 50,000 stocking knitters and their families did not fully emerge from the hunger and misery entailed by the introduction of the machine for the next forty years.

The next sentence I find disingenuous; exactly how much comfort is a displaced stocking knitter supposed to take from the following fact?

But insofar as the rioters believed, as most of them undoubtedly did, that the machine was permanently displacing men, they were mistaken, for before the end of the nineteenth century the stocking industry was employing at least a hundred men for every man it employed at the beginning of the century.

Here Hazlitt is simply following through with a fundamental assumption of classical economics: the free market tends to reallocate resources and labor within a region such that production is maximized. But as Hilare Belloc points out in Economics for Helen, resources and labor will not be reallocated equally within the region. In the case of the rioting knitters, resources and labor were being reallocated away from them, and in such a case it is cold comfort to know that things will work out “on net balance,” i.e. for someone somewhere, if not for them.

I was also annoyed that Hazlitt invoked a common appeal to ridicule concerning labor-saving machinery:

As late as 1970, a book appared by a writer [Gunnar Myrdal] so highly regarded that he has since received the Nobel Prize in economics. His book opposed the introduction of labor-saving machines in the underdeveloped countries on the ground that they “decrease the demand for labor”! The logical conclusion from this would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible.

Perhaps, if you believe along with Hazlitt (Chapter 10) that “The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor.” But individuals (and, I suppose, nations) can have other economic goals, e.g. the sustainability of an enterprise. The Amish, for example, recognize that automating away the labor that has traditionally been done by children will result in adults who do not know how to work; therefore, they are very careful not to adopt labor-saving devices that will leave their children without useful work to do, even if they are less productive than a machine might be.

Another questionable maxim of classical economics shows up in Chapter 11, taken directly from Adam Smith:

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificiers. […] What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.

First, I doubt that in 1776 when Smith published those words that the divisions of labor were anywhere near as sharp as he describes them; at least in colonial America plenty of folks made their own clothes, at least repaired their own shoes, and grew their own food. Second, it is certainly not clear that the kind of outsourcing that Smith describes is “prudent” for a family; I’ve argued elsewhere that it is just the opposite, and here is Robert Heinlein’s famous quote on the subject:

A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently and die gallantly. Specialization is for insects.

As this reading of Hazlitt forces me to rethink classical economics in light of the study I’ve made of agrarianism, I’m beginning to see that the evidence is mounting, in the form of failed predictions, that this is not the way man was meant to conduct economic activity. Consider how Hazlitt ends his chapter on full employment:

It would be far better … to have maximum production with part of the population supported in idleness by undisguised relief than to provide “full employment” by so many forms of disguised make-work that production is disorganized. The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.

Wait a minute. Aren’t our meals being passed through drive-thru windows to us by our children? Isn’t the percentage of women in the workforce greater than it has ever been? And isn’t this full employment within the family—father, mother, teenaged children—what it takes to generate the income that keeps the engines of consumption running at a speed that can prop up the economy?

But not all predictions of classical economics have proved false, and I think we in this country are about to experience the truth of the maxim we began with, namely that the market tends to reallocate resources and labor within a region such that production is maximized. In our case, though, the reallocation of labor and resources will happen away from us and towards some part of the globe where people still remember how to work, perhaps China or India.

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21 thoughts on “Economics in One Lesson, Chapters 7-12

  1. You homed in on exactly the same things I did, though I haven’t posted my thoughts on this section yet.

    I was astonished, after having just read the previous chapters where he says that it’s wrong to think of allocation of tax money as taking money from the right pocket and putting it into the left. If we can’t think of money in this way then how much less can we think of people like that!

  2. Thanks Rick, for an excellent post! I think you and Kelly are doing a great job poking holes Americas favorite sacred cow, so called “free market” Austrian economics.

    “If we can’t think of money in this way then how much less can we think of people like that!”——- come on Kelly, your not valuing people more than money are you! Silly girl, where would a Christian ever get an idea like that :)

  3. I am reading what you are saying, but I just dont buy your disgust with Hazlitt. The American economy, thanks to the Federal government, has not operated in a classical economic fashion for years, perhaps 150. So, I guessing that most of your beef is with the Keynesian policies which mess up the agrarian model.

  4. Rick,
    I think we do have more and more specialization and more and more machination but as Dana says we are not really working under a free market system. That is one reason I had trouble applying what Hazlitt says to my own life. We all know that if the government gets rid of all the soldiers it will not give us back the money it spent on them.

    I also noted that in our current state most people believe that it does take 2 incomes to live and truly it is becoming increasingly expensive to keep up with just the required modern things like various insurances. In the future, I think more and more families will be sharing residences with family members.

  5. What I love about the reading life is that you weave the still-dangling thoughts from previous books into your current reading. I just discovered Wendell Berry two years ago; his articulation of the agrarian lifestyle invariably colors my current reading.

    I had similar thoughts after reading The Curse of Machinery. I picked up Neil Postman’s Technopoly to get a view, like Hazlitt recommended in the first chapter, of what is undone after technological advances. I was uncomfortable with Hazlitt’s full-body embrace of technology.

  6. Dana’s expressed exactly what I was thinking as I read- ‘but we don’t live in a free-market system.’ We give lip service to it, but it’s been a very, very long time since we had anything like a free-market system (see, for example, “Everything I Want to Do Is Illegal”;-D).

    I am kind of reminded of when California’s energy problems were put down to supposed ‘de-regulation,’ but in fact, California remained one of the most regulated and non-free states through-out supposed de-regulation.

    As an agrarian, you see the wisdom in not having the family farm be a monoculture, right? You don’t put all your eggs in one basket, so to speak. Weren’t the rioting English stocking knitters in effect rioting in favor of government protections for their mono-culture?

  7. I think we all agree that socialism is the norm in America today. I’m questioning whether or not capitalism, of the “free market” Austrian type, is the answer to the problem. It seems to me that the two are only different in the type of tyranny they inflict on the people. All the power and capital in the hands of the state or all the power and capital in the hands of a few capitalists. An honest look at history would show that a “no limits-darwinistic type” of free market economy was not what the founders envisioned for the country. Modern “conservatives” seem to want us to beleive that was the case. I think the “you have two choices” between socialism and austrian capitalism is just not true. Why? It suprises me that more Christians are not behind a more humane kind of economy.

  8. Dana, Cindy, DHM,

    Is it possible that, rather than being the natural state of things, the free market is a utopian ideal that we’ve never been able to properly engineer? Right now I’m reading Allan Carlson’s new book Third Ways, which covers seven 20th-century efforts to establish economic systems that were neither captialist nor socialist. One of the chapters is on Karl Polanyi, who wrote The Great Transformation, a revisionist history of the industrial revolution:

    Polanyi notes that the whole social philosophy of economic liberalism actually hinges on the idea that laissez-faire was a natural development, with its foes presumably working to restrict this natural liberty. He counters that “the introduction of free markets, far from doing away with the need for control, regulation, and intervention, enormously increased their range. […]

    “There was nothing natural about laissez-faire, free markets could never have come into being merely by allowing things to take their course.” To the contrary, the liberal market system required an enormous increase in the adminnistrative functions of the state. A central bureaucracy, backed by an efficient minister of the police, was needed to standardize weights and measures, destroy local restraints on trade, enforce contracts, protect shipping, collect debts, and guarantee an open labor market.

    Given that a free market economy actually requires an extensive centralized state in order to operate, I wouldn’t put any faith in our ability to create a centralized state that had just exactly the powers it needed to facilitate free trade, no more and no less, much less one that was impervious to corruption.

    And given that, I think all we can do is look at specific problems and try to trace back to their specific sources in the actual system as it stands today. Perhaps those problems could have been avoided if we had done a better job of engineering the system, but perhaps not. Good contemporary examples to study are the internet bubble of 1995-2000 and the housing bubble that followed; I’d make the case that most of the “market failure” that created these bubbles had little or nothing to do with the government.

    DHM,

    As an agrarian, you see the wisdom in not having the family farm be a monoculture, right? You don’t put all your eggs in one basket, so to speak. Weren’t the rioting English stocking knitters in effect rioting in favor of government protections for their mono-culture?

    Sure. But remember that the English working class was created by pushing peasants off the land into cities, where their only choice was to become wage laborers. If it were a choice it would have been a bad one, but it wasn’t a choice. In effect, all their baskets were taken from them in trade for one new one. I don’t think they were wrong to resist having that last one taken from them, in exchange for a promise that in one hundred years lots of folks would thereby have baskets.

  9. Coming from a position of almost complete ignorance my first thought is that free market concepts are the anti-dote for the current ills but perhaps not the ultimate anti-dote. Maybe some sort of emphasis on free markets keeps the current socialist situation from getting out of hand. My own thoughts run towards whatever is smaller is better which is closer to agrarianism than the machine view of Hazlitt, but I know many people look on modern industrial progress as millennial. I know an old pastor friend of ours used to say, “Just think about a having a toothache a hundred years ago.” That is certainly a point in favor of progress but I am still deeply suspicious of it.

  10. Hmmm…I have the book Third Ways, and I guess I’ll just have to read it sooner than I had planned. Polanyi’s quote doesn’t make sense to me–it seems oxymoronic, so I want to read it in context. I’m not seeing how “free” markets require enormous increases in government control. That seems to be one of the problems, in fact–the one that Dana and DHM pointed out. What most have tended to call “laissez-faire” has been nothing of the sort.

  11. Kathleen,

    Polanyi’s point can be teased out of this sentence from Carlson:

    A central bureaucracy, backed by an efficient minister of the police, was needed to standardize weights and measures, destroy local restraints on trade, enforce contracts, protect shipping, collect debts, and guarantee an open labor market.

    The things mentioned here are so familiar to us that we think of them as natural, but in fact they are not natural at all. For example, contracts are the lifeblood of trade, yet contracts are worthless if they can’t be enforced. And who can enforce a contract between parties in two different communities except an overarching civil authority?

    What Polanyi is claiming, I think, is that free markets actually require an elaborate set of enforceable ground rules in order to operate, rules that only a centralized state can implement. I don’t think the laissez-faire proponents would disagree with this; instead, they would argue that it is possible to engineer a set of ground rules that is neutral where it should be neutral, fair and on net balance beneficial to everyone—the oft-mentioned “level playing field.” But I think this may be an unachievable ideal, and even if it were achievable, I don’t see how you would protect the government behind it from being corrupted.

  12. Cindy, I’m reading Weston Price’s Nutrition and Physical Degeneration. Very interesting reading — before the modern diet, toothaches were extremely rare.

  13. But aren’t those things mentioned what any society needs? Isn’t there always some form of the “necessary evil” (government) in a society? By that, I mean, people need some form of protection against evildoers–and that protection needs to be reliable, such that anyone roaming near one’s home can’t just break in and steal all he owns. This seems to be simply the minimum needed for any group of people (sinners all) to live together in a society. So, having some entity to enforce contracts, weights and measures, and the like doesn’t seem to negate the concept of free markets to me. Unless we are defining free market as absolutely free and existing in a vacuum, or in a society of saints.

    I do agree that uncorrupted government is an unattainable goal–governments are made up of sinful people just like any other group. But, if that’s the case, then government operating within any economic system is going to be corrupt. So, what works better than a free market under these circumstances? And by free market, I don’t mean what we have going now. For background on this, I recommend reading The Big Ripoff: How Big Business and Big Government Steal Your Money. It’s an eye-opener.

  14. Kathleen,

    But aren’t those things mentioned what any society needs? Isn’t there always some form of the “necessary evil” (government) in a society? By that, I mean, people need some form of protection against evildoers–and that protection needs to be reliable, such that anyone roaming near one’s home can’t just break in and steal all he owns. This seems to be simply the minimum needed for any group of people (sinners all) to live together in a society.

    Agreed, but for most people for most of history I think these protections were social, not legal, and the better for it. Liars, cheats, and thieves ran the risk of being ostracized by the small villages they lived and died in. People were judged not according to some abstract set of rules but by traditional wisdom, applied by elders who knew them and their circumstances very well. People defended themselves as threats arose, not by putting their fates in the hands of some external authority.

    Of course, this meant that interactions with other communities were much more dangerous than interactions within the community. For most of history, I think that some people (traders) went ahead and ran the risks, while the rest settled for very limited interaction with the outside world. Government is an attempt to extend those natural protections by replacing natural relationships with artificial ones (e.g. neighbors into citizens, elders into officials), one that has been at best a mixed blessing.

  15. Kelly, how modern is that modern diet?

    Shakespeare:
    “For there was never yet a philosopher – that could endure the toothache patiently” And I know he also wrote about old age being ‘sans teeth,’ so maybe you did not have the toothache because you just pulled the teeth, or got the barber to do it.

    Rick, I am not convinced that for most of history there was no legal code enforcing debt collections, standard weights and measurements, and enforcing contracts. I think that we will find governing bodies enforcing those very things pretty much anywhere we can find written records. ‘Do what you say you will do’ is not an abstract rule- and that’s the basis for most contract law.

    Neither can I see that a truly free market economy results in “All the power and capital in the hands of a few capitalists.” Historically, any time that has happened is when those few made manipulative use of government regulations to prevent ‘free’ trade (see Fulsom’s _Myth of the Robber Barons_). Or go to FEE’s website and look up the story of the Robber Barons and how they utilized government subsidies to put free market transportation lines out of business.
    http://fee.org/Publications/the-Freeman/article.asp?aid=1896

  16. About as modern as the industrial revolution — meaning, when white sugar and white flour got cheap enough to affordable by more than the aristocracy.
    ;-)

  17. But under those conditions (where the protections are social but not legal), what is the best system of economy? Would it not be the free market? If not, what?

  18. DHM,

    I am not convinced that for most of history there was no legal code enforcing debt collections, standard weights and measurements, and enforcing contracts. I think that we will find governing bodies enforcing those very things pretty much anywhere we can find written records.

    One of the rules I try to live by is “When you find yourself in a hole, stop digging.” Even though what you concluded isn’t what I meant to say, it is more or less what I actually said; I’m sorry for putting such a careless, half-baked comment out there. And since sloppy writing put me in this pickle, it’s questionable whether more writing will make things right. Nevertheless, I think I’m among friends here, so I’ll risk taxing everyone’s patience by trying to do a better job of explaining myself. Please don’t take this as my attempt to bludgeon you into agreement with lots of words.

    First, when I said “most people at most times,” it was an overly clever way of referring to decentralized rural communities, which I think is where most people found themselves up until 1900 or so. It’s partly a jab at folks who don’t realize that our predominantly urban society is a recent innovation, and not a very loving jab. I’m sorry for that, and I’ll put it on my list of mean jokes to avoid.

    Second, as you point out, it is wrong to characterize the operating principles of rural communities as social rather than legal. Those principles are laws in any reasonable sense of the word. What I was trying to get at (badly) is that the legal systems found in rural communities tend to be informal, idiosyncratic, subjective, and partial (i.e. meant to be influenced by things like common sense and personal knowledge of the people involved). The example I had in mind was the medieval manor court; here are the laws of Yalding Manor in 14th century England, and here are some of the judgments rendered by the court: April, 1334, October, 1334, April, 1335 and October, 1335.

    This is in contrast the highly formalized, uniform, objective, and impartial systems used by modern centralized governments to resolve disputes between communities. There is reason to think that the development of these systems was pushed in large part by merchants who found it difficult to conduct trade when their only recourse was through community courts. The following passages are copied off of Google Books from Medieval Merchants: York, Beverley and Hull in the Later Middle Ages by ­Jenny Kermode:

    Every long-distance merchant’s business was based on some form of contract: maybe a handshake in the churchyard of St Margaret’s Walmegate, York or a complicated series of agreements involving third parties. It was imperative that each party was confident that a contract was enforceable and legal practice evolved to meet the needs of commerce. Whether battling for compensation in a foreign court or manoeuvring to gain a hold on a defaulting debtor or embezzling partner, merchants were astute manipulators of legal processes. Their direct experience contributed to the development of formal, legal procedures, particularly in making contracts, registering debts, guaranteeing the quality and measurment of commodities. All of these could be seen as a way of reducing their transaction costs. Two aspects are of particular relevance here: the hierarchy of courts and jurisdiction (access, speed, and costs), and the flexibility of legal actions (wager, evidence, and security of judgement).

    At a practical level, we can see in the creation and refinement of financial instruments evidence of the overwhelming need to secure enforcement alongside the desire for a negotiable bond. Merchants might choose between local courts which could process bonds and sometimes statutory bonds, and the central courts in London which could enforce bills of exchange and other contracts under merchant law. Local courts provided adequate enforcement of locally based contracts, even those involving foreigners. In 1424, for example, Hull men took their cases against Dutch merchants before the Grimsby borough courts, even though one complaint dealt with a sale contracted in the Low Countries. The impression is that when plaintiffs sought speedier remedies in one of the central courts it was for many reasons, including the suspicion that it was difficult to get a fair hearing in the courts of another town.

    The possibility of spending time and money to enforce a contract in a distant court was an important consideration for any merchant entering a partnership, securing credit, or dealing with anyone outside his own region. Trade, however, is for optimists. Most merchants presumably hoped that they would not be shipwrecked or assaulted by pirates or have to pursue an erstwhile partner through the royal courts in London, or, even worse, through a court overseas.

    ­ Part of what I take from this is that, while free trade was possible in a decentralized rural system, the inefficiencies and uncertainties of legal recourse put a natural limit on the amount of trade that could take place between communities. To remove that natural limit, it was necessary to impose the centralized governmental mechanisms that Polanyi identified.

    Neither can I see that a truly free market economy results in “All the power and capital in the hands of a few capitalists.”

    I know you aren’t responding to me here, but it brings a couple of questions to mind:

    • Do you have one or more historical economies in mind that would qualify as truly free market, at least closely enough that we could look to them for evidence of what actually happens under that condition?

    • How would you classify post-Soviet Russia, which seems to be pursuing a sort of capitalism that is fairly raw and not much encumbered by government regulation?

    ­

  19. Rick said “And since sloppy writing put me in this pickle”—-Well Rick, look at the bright side. You could write as sloppy as I do :) At least when you write “sloppy” you spell all the words right.

    DHM said….
    “Neither can I see that a truly free market economy results in “All the power and capital in the hands of a few capitalists.”

    Here I would respond the same way Rick did. The reason is simple, I’m begining to think that the “Austrian Free Market” has only ever existed in the imagination of its supporters. The only example I can think of is the Russian one and it dose not look very pretty. Now say what you want about agarainism, it has been done and worked quite well.

  20. I know I am way behind in reading all of this. I had no idea this conversation was going on! However, I thought you might find my little anecdote interesting. We had a friend from El Salvador who was again what he called “pure capitalism” because of what he claimed it had done to his country. (He, unfortunately, hadn’t thought it through enough to realize that socialism was not the antidote.) He claimed that all the money ended up in the hands of the best business people–a handful of families. He said that the rest worked for slave wages and lived in one-room homes. The country was “free” according to his description, but money was power in this situation and all the power ended up in the hands of a few who were savvy.

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