10 things I learned from Economics in One Lesson by Henry Hazlitt
This book was written in 1946, but he talks about universal truths and secondary effects of decisions. He believes that Keynesian economics is completely wrong and argues pretty convincingly against it.
From Chat GPT:
"Keynesian economics, developed by John Maynard Keynes, emphasizes the role of government intervention in stabilizing the economy, particularly during recessions. It advocates for increased government spending and lower taxes to stimulate demand and pull the economy out of depression. Keynesian theory also suggests that active fiscal policy should be used to manage economic cycles, reducing booms and busts through government-led investment and monetary policy."
He points out that higher taxes lead to less investment, which leads to lower wages which leads to stagnation.
1. Broken Window Fallacy
The fallacy is that if somebody has to repair a broken window. It benefits society. He points out that to replace a window someone forgoes buying something like a new suit instead. Since the new suit wasn’t visible and was never made it is usually not part of the perception of someone that believes.
He points out that rebuilding after war feels like an economic boom because there’s a lot of activity. However, this activity is frequently just replacing things that were destroyed, not building new things.
If it was such a benefit to be able to rebuild old things with new things, people would be very busy destroying factories just so that they could rebuild them. It doesn’t make sense.
2. Wrote this before modern monetary policy became a thing, but he believes that everything that the government prints must eventually be recovered in taxes.
Even strong proponents of modern monetary policy refer to government spending as uncollected future taxes. But it is fashionable to think of this as a good thing now.
3. There are indirect consequences to all actions. The direct is what you see, the indirect is what never happened because we took the current course of action.
4. If there are high taxes, without being able to write off losses, it causes people to become risk averse. In an extreme people would not take any chances.
For example, if you had a small business and you could put $100 at risk to make $50 you would only get to keep $35 but if you lost money without being able to deduct your loss against gains for taxes you would lose the whole thing.
The current tax code in United States lets you offset gains with losses to a certain extent.
5. Government loans by definition are loans to people that private businesses would not consider loaning to
Governments take risks with money that does not belong to them, the taxpayers money. This is why governments loaning people money to get useless college degrees is a problem: to have it written into law that the student loan debt cannot be dismissed. It is interesting to wonder if stupidity or wickedness causes the student loan crisis.
The large bank bailouts fit this description. Who else would’ve given Goldman Sachs and other banks like that millions and millions of dollars? No individuals would.
6. Ensuring loans to farmers that are not very good at farming have a number of adverse effects.
A farmer that is good at farming is a good credit risk. They are efficient and can get capital from private industry. When you give resources to somebody who did not earn them and is inefficient, they are subsidized to compete against the people who are more efficient, driving prices of farming materials up and also artificially increasing supply. This lowers the profits of capable people and depresses the market. In these scenarios, societies lose.
7. Business taxes are a way to take money away from profitable businesses, and then redistribute it to unprofitable businesses.
8. On Technology: in the short term, it is disruptive and certain interest groups will lose jobs, but in the long-term it creates jobs
For example, in Adams Smith's Wealth of Nations, he talks about a pin-making machine. A single person without a machine could maybe make one pin a day, but with a machine that same person can make 5000 pins a day.
He talks about the cotton spinning industry before and after the Industrial Revolution. It was estimated that there were about 7500 people employed and making textiles before machines. After machines it was estimated that they were over 320,000 people working in that industry. The machines created jobs.
The same thing happened with the Internet. There are so many jobs now that would not be possible without the Internet, and sometimes it would make no sense if there was no Internet.
For example, he says, why would we carry things on railroad train when we could hire thousands of men to carry on their backs?
9. Unemployment is not the problem: the production of goods is more important than employment.
He points out that India and China (of the 1940s) have no problem with unemployment: everybody works or survive. Their lives are pretty wretched compared to ours because they lack the means of efficient production (factories, tools, etc).
If the production continues to go up, fewer people need to be employed. This is why we don’t have child labor anymore. As long as productivity continues to rise, certain types of people can be supported with things like universal basic income, although he doesn’t use this phrase. A very explicit payment to people that are unwilling or unable to work and can’t afford not to because of the production capacity of everyone and everything else else using machines can pay for it.
It is interesting that this idea of UBI due to increased productivity is over 75 years old.
10. The government controls markets by rating. The free market controls markets by temporary crises that producers solve.
11. When you study a little bit of economics, it leads you towards things like socialism, but when you study a lot of economics, it brings you back to the classical.
It is like the expression where a low, IQ person and high IQ person will frequently come to the same conclusion, but for different reasons in the middle IQ person.
12. On Low Interest Rates and Money Supply
People do not save naturally when interest rates are kept too low for too long. This is almost certainly why the government has had to print so much money recently. When you’re getting less than one percent interest on the savings account, there’s no reason to save, which also means there’s no supply of money to a bank to loan to somebody else.
13. Rent control has a paradoxical effect on the people that is supposed to help
By making sure that rents don’t go up in poor areas it disincentivizes anybody from building new housing because the house cannot be rented affordably. This causes a rise in luxury house prices because they are not restricted in the same way as rent controlled. This also means that people in rent control situations will not use their Property effectively because they are paying subsidized rent.
No comments.