Improved methods of production must constantly supplant obsolete methods, if both old needs and new wants are to be filled by better commodities and better means. If his workers as a body withhold their labor, they may bring a stubborn employer, who has been underpaying them, to his senses. But the more money is turned out in this way, the more the value of any given unit of money falls. This exaggeration is mainly the result of failure to recognize that wages are basically determined by labor productivity. He may find that he is unable to replace these workers by workers equally good who are willing to accept the wage that the former have now rejected. [3] Historically 20 per cent would represent approximately the gross amount of the gross national product devoted each year to capital formation (excluding consumers’ equipment). The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The farmer attempts to make neither the one nor the other, but employs those different artificers. Hazlitt’s focus on non-governmental solutions, strong — and strongly reasoned — anti-deficit position, and general emphasis on free markets, economic liberty of individuals, and the dangers of government intervention make Economics … (It is possible no doubt to imagine that improvements and new inventions merely in replaced machinery and other capital goods of a value no greater than the old would increase the national productivity; but this increase would amount to very little, and the argument in any case assumes enough prior investment to have made the existing machinery possible.) Every increase in hourly wages, unless or until compensated by an equal increase in hourly productivity, is an increase in costs of production. [6][failed verification] In his book Basic Economics, Thomas Sowell also compliments Hazlitt,[27][need quotation to verify] and Sowell's work has been cited as "following" in the "Bastiat-Hazlitt tradition" of economic exposition. Various locals of the painters’ union imposed restrictions on the use of spray-guns, restrictions in many cases designed merely to make work by requiring the slower process of applying paint with a brush. Why do precisely what private agencies already do? With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Functional wages are those that tend to bring about the highest volume of employment and the largest payrolls. How are we to know, however, precisely when labor does have “enough to buy back the product”? But in the course of specific illustration we have found hints of other general lessons; and we should do well to state these lessons to ourselves more clearly. I hope, finally, that I shall be forgiven for making such rare reference to statistics in the following pages. If taxes are taken from people and corporations, and spent in one particular section of the country, why should it cause surprise, why should it be regarded as a miracle, if that section becomes comparatively richer? This means unemployment, a shrinkage in production and a decline in living standards. They begin to talk of paper money, like the more naive inflationists, as if it were itself a form of wealth that could be created at will on the printing press. But the central error, as we have hinted, comes from looking at only one industry, or even at several industries in turn, as if each of them existed in isolation. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible. Group D, for example, even though its own incomes and prices have at last advanced 25 per cent, will be able to buy only as much goods and services as before the inflation started. The tariff has been described as a means of benefiting the producer at the expense of the consumer. The more of it that is diverted to producing frivolities and luxuries, the less there is left for producing the essentials of life for those who are in need of them. This means, in less technical language, that “a 1 per cent reduction in the real rate of wage is likely to expand the aggregate demand for labor by not less than 3 per cent.”[1] Or, to put the matter the other way, “If wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates”[2] so that the total income of the workers would be reduced correspondingly. So, as a result of letting in more British goods, we must export more American goods. On the contrary, it is precisely why they want the inflation. The least efficient firms will be thrown out of business, and the least efficient workers will be thrown out of jobs. Cheap money policies, in short, eventually bring about far more violent oscillations in business than those they are designed to remedy or prevent. To do all this he has to dig into his capital. One function of profits, in brief, is to guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. The most important change it is designed to bring about is to raise commodity prices in relation to wage rates, and so to restore business profits, and encourage a resumption of output at the points where idle resources exist, by restoring a workable relationship between prices and costs of production. In 1910, 140,000 persons were employed in the United States in the newly created auto mobile industry. Those who desire to read further in economics should turn next to some work of intermediate length. New capital does not rush into industries that are obviously dying. But an examination of duties imposed for other purposes would carry us beyond our present subject. A runaway monetary inflation, lifting prices a thousand fold, might none the less make the “national income” figures in monetary terms higher than before the war. But they contend that this will be more than offset by the added production brought into existence by the borrowers who pay back, and even by most of the borrowers who do not pay back. To increase our understanding, we shall go over again some of the ground already covered in Chapter XV on the price system, but we shall view the subject from a different angle. And the results of that have already been discussed. It is clear, in any case, that any individual placing venture capital runs a risk not only of earning no return but of losing his whole principal. Though Congress had started out to fix “the” price of coal, the government soon found itself (because of different sizes, thousands of mines, and shipments to thousands of different destinations by rail, truck, ship and barge) fixing 350,000 separate prices for coal! It is often sadly remarked that the bad economists present their errors to the public better than the good economists present their truths. Or here is a farmer struggling along with primitive methods of production because he has not the capital to buy himself a tractor. The Technocrats were finally laughed out of existence; but their doctrine, which preceded them, lingers on. It is not ordinarily even cumulative: dishoarding, as eccentric recluses die and their hoards are discovered and dissipated, probably offsets new hoarding. It does not make that assertion directly, but it inevitably implies it. There could be no greater fallacy. Mr. Hazlitt — journalist, literary critic, economist, philosopher — was one of the most brilliant public intellectuals of our century. If a rationing system is adopted, in brief, it means that the government adopts a double price system, or a dual currency system, in which each consumer must have a certain number of coupons or “points” in addition to a given amount of ordinary money. We cannot explore that whole network at this point; we shall return to other branches of it later. Spread-The-Work Schemes9. This last point is one that often gives Benjamin concern. The best wage rates for labor are not the highest wage rates, but the wage rates that permit full production, full employment and the largest sustained payrolls. The risks of fluctuating farm prices must be borne by somebody; they have in fact been borne in modern times chiefly by the professional speculators. By reducing industrial imports it also reduced American farm exports, because it prevented foreign nations from getting the dollar exchange needed for taking our agricultural products. The saving has been used year after year to increase the quantity or improve the quality of existing machinery, and so to increase the nation’s output of goods. In some countries the black market kept growing at the expense of the legally recognized fixed-price market until the former became, in effect, the market. Economics In One Lesson by Henry Hazlitt. In other words, the government tries to do through rationing part of the job that a free market would have done through prices. Hazlitt died at the age of 98 in Fairfield, Connecticut. The end result would be that the government would not only tell each consumer precisely how much of each commodity he could have; it would tell each manufacturer precisely what quantity of each raw material he could have and what quantity of labor. The producers cannot make a living. After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before. We need not go here into the merits of the TVA or public projects like it. And just as the supply of and demand for any other commodity are equalized by price, so the supply of and demand for capital are equalized by interest rates. There are two main types of such proposals in addition to those we have already considered, and we shall take a brief glance at them. It is, on the contrary, the consequence of depressions. CONTENTS 11 12 17 36 49 59 61 73 86 92 99 107 118 123 136 Preface They have initiated deliberate slowdowns under the pretense of fighting “speed-ups.” They have denounced, insisted upon the dismissal of, and sometimes cruelly beaten, men who turned out more work than their fellows. Now money can be run off by the printing press. It was a gain, not only to health and welfare, but even in the long run to production, to reduce a seventy-hour week to a sixty-hour week. Attempts to lift the prices of particular commodities permanently above their natural market levels have failed so often, so disastrously and so notoriously that sophisticated pressure groups, and the bureaucrats upon whom they apply the pressure, seldom openly avow that aim. We shall come back to this money illusion later. In the depression of 1932, the game of blaming unemployment on the machines started all over again. But need is not demand. Everything we get, outside of the free gifts of nature, must in some way be paid for. The destruction of houses and cities will make more business for the building and construction industries. Furious “jurisdictional” strikes are fought among unions for the exclusive right to do certain types of borderline jobs. If we assume that the workers, when previously employed for forty hours, were getting less than the level of production costs, prices and profits made possible, then they could have got the hourly increase without reducing the length of the working week. . But we ought to make sure in each case that both sides of the coin have been considered, that all the implications of a proposal have been studied. These taxes inevitably affect the actions and incentives of those from whom they are taken. That much is true. If we keep the price down, everyone will get his fair share. The private enterprise system, then, might be compared to thousands of machines, each regulated by its own quasi-automatic governor, yet with these machines and their governors all interconnected and influencing each other, so that they act in effect like one great machine. Henry is listed on the 1905 New York state census as Henry S. Piebes, and he is listed on Frederick's will as Henry Hazlitt Piebes, Frederick's adopted son. Everything that involves money has a cause and effect. In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. And the added purchasing power of the taxpayers, as we noted in the case of the soldiers, will encourage this. In fact, some careful investigations have shown that the average monthly rise after harvest time has not been quite sufficient to pay such storage charges, so that the speculators have actually subsidized the farmers. It applies just as well, for example, to the erection with public funds of housing for people of low incomes. The more knowing inflationists recognize that any substantial increase in the quantity of money will reduce the purchasing power of each individual monetary unit—in other words, that it will lead to an increase in commodity prices. The slave labor in Germany had full employment. Such relief, in the first place, is paid for in large part, directly or indirectly, out of the wages of those who work. This looks at first glance like a clear loss of employment. The public tolerates these practices because it either believes at bottom that the unions are right, or is too confused to see just why they are wrong. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. The second is a reduction in the working week from forty hours to thirty, but with a sufficient increase in hourly wage rates to maintain the same weekly pay for the individual workers already employed. Certainly it is obvious to everyone that he is giving employment and spreading his money around. One of these is the fallacy of post hoc ergo propter hoc, which sees the enormous rise in wages in the last half century, due principally to the growth of capital investment and to scientific and technological advance, and ascribes it to the unions because the unions were also growing during this period. Elementary illustrations like this are sometimes ridiculed as “Crusoe economics.” Unfortunately, they are ridiculed most by those who most need them, who fail to understand the particular principle illustrated even in this simple form, or who lose track of that principle completely when they come to examine the bewildering complications of a great modern economic society. But that very fact would not only cause every firm in that line to expand its production to the utmost, and to reinvest its profits in more machinery and more employment; it would also attract new investors and producers from everywhere, until production in that line was great enough to meet demand, and the profits in it again fell to the general average level. (This is precisely, however, as we shall later see, what we already do in the case of “non-recourse” government loans to farmers.). [5], During World War I, he served in the Army Air Service. It would be obvious that buying power had been wiped out to the same extent that productive power had been wiped out. This book is an analysis of economic fallacies that are at last so prevalent that they have almost become a new orthodoxy. The sellers of these goods and services will be able to raise their prices because of this increased demand. Sometimes they go further, and charge that all proposals under any circumstances to reduce particular wage rates directly in order to reduce unemployment are “anti-labor.” But what they are themselves proposing, stated in bald terms, is to deceive labor by reducing real wage rates (that is, wage rates in terms of purchasing power) through an increase in prices. If a man wishes to buy a farm, and has, let us say, only half or a third as much money as the farm costs, a neighbor or a savings bank will lend him the rest in the form of a mortgage on the farm. One is to look at the matter only from the standpoint of the farmers that borrow. Then, of course, the thing is endless. . On the assumption that inflation affected everyone and everything evenly (which, we have seen, is never true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs. In this case the “marginal” producers, that is, the producers who are least efficient, or whose costs of production are highest, will be driven out of business altogether. They overlook the woods in their precise and minute examination of particular trees. But the same unsettlement, as we have already observed, would be caused in the capital goods industries by a sudden and substantial decrease in savings. (I hear some reader asking: “Why not solve this by giving tariff protection to all producers?” But the fallacy here is that this cannot help producers uniformly, and cannot help at all domestic producers who already “outsell” foreign producers: these efficient producers must necessarily suffer from the diversion of purchasing power brought about by the tariff.). [14], Unlike many other writers of his generation from the political right, Hazlitt never experienced a period when he was a socialist or communist, or a significant change in his classical liberal political views. An American manufacturer of woolen sweaters goes to Congress or to the State Department and tells the committee or officials concerned that it would be a national disaster for them to remove or reduce the tariff on British sweaters. The problem of production is solved. But there have always been squanderers, and there have apparently always been theorists to rationalize their squandering. We can perhaps make this last point clearer by an exaggerated example. They will throw it into the hands of persons who are less competent or less trustworthy than those who would otherwise have got it. Now the number of farms in existence is limited, and so is the production of tractors (assuming, especially, that an economic surplus of tractors is not produced simply at the expense of other things). Write. Few people have worked as tirelessly to advance the cause of liberty as did Henry Stuart Hazlitt (1894–1993). Those who favor it think only of the interests of the producers immediately benefited by the particular duties involved. It must, it is true, be “worked out.” The result, it is true, may sometimes come to the man who works out the equation as a stunning surprise. But we ought always to know clearly what we are doing. This does not mean, however, that everyone’s relative or absolute wealth and income will remain the same as before. The bridge exists. Hazlitt’s best-known contribution was his 1946 “Economics in One Lesson,” perhaps the most popular economics book ever written. By the time money incomes of group B have increased 20 per cent, prices have still increased an average of only 10 per cent. But it is easy, as experience has proved, for unions, particularly with the help of one-sided labor legislation which puts compulsions solely on employers, to go beyond their legitimate functions, to act irresponsibly, and to embrace short-sighted and anti-social policies. 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