Economics in One Lesson - Hazlitt

Montek Gill

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
PART ONE: The lesson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 1.

The lesson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART TWO: The lesson applied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2.

The broken window . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 3.

The blessings of destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 4.

Public works mean taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5.

Taxes discourage production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 6.

Credit diverts production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 7.

The curse of machinery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 8.

Spread-the-work schemes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Chapter 9.

Disbanding troops and bureaucrats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Chapter 10.

The fetish of full employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Chapter 11.

Whos protected by tariffs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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Introduction
To be added: what is money, the invisible hand, supply and demand are two sides of the same coin

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PART ONE: The lesson

Chapter 1

The lesson
The lesson:
dont have selfish interests
look at both the immediate and long term effects of a policy
look at the effects of a policy on all individual groups rather than just the targeted groups,
and look at them individually on each group and on the all groups a collective unit.

PART TWO: The lesson applied

Chapter 2

The broken window

Say an entity loses a good or service a (really the product of a service in the latter case) by natural
effects (here natural is left undefined and by lose we mean that a is destroyed, and so in particular,
is not transferred to any other entity). This encourages the entity to purchase a from somebody
that produce goods or services of the type of a (and this can be continued the purchasing power of
that somebody is then increased and allows him or her purchase some good or service that he or she
could not before). There is probably some result along the lines of the more transactions/trades
that are occurring between all existing entities, the better for all as a group and so, on average,
individually as well (a booming economy/market or something of that sort). As a result, the
initial natural loss of a could be considered to be a good thing, as the number of trades increases.
But this is not necessarily the case: for it to be a good thing, the new state of the economy has to
be compared to the state of the economy which would have resulted if the initial loss of a hadnt
occurred: in this latter economy, the original entity would have more purchasing power than he or
she has in the case when a is lost, and so would be able to make more trades all that has really
happened is that this purchasing power has been transferred to the producer of the replacement of
a. Another way to put this is, is that one should not confuse need with demand; or well, a need is
particular type of demand, a non-productive one in that it is that which occurs when something is
entirely destroyed.
The part of the lesson relevant here was that one should look at the effects of a policy on all groups
(the baker and glazier), not just one group (the glazier).

Chapter 3

The blessings of destruction

The same thing as the previous chapter but on a larger scale: a war destroys many things, creating
a need for those things, making those trades involving these things more common but only at the
expense of making the more usual type of trades that would have occurred were it not for the war
less common.
Another part of the lesson however should be considered: looking into long term effects. Suppose
that the replacement of a, say a0 , is something better, say a plant which is more efficient, then
while in the short run all that happened was that purchasing power was transferred, in particular,
the original entity lost some purchasing power, it could be that with this increased efficiency, in
the long run, the entity may acquire more purchasing power than he or she would have acquired in
the hypothetical economy where destruction hadnt occurred; perhaps enough of a gain for there
to be a net gain in purchasing power over time. But then, assuming one can judge when it would
be beneficial to make a replacement (which is a reasonable assumption), one could just make the
replacement anyway if no destruction had occurred (the capital for the replacement must already
exist as it did in the case when destruction occurred; the destruction of a itself may cost something
but we assume that it is relatively small and so may reasonably be assumed to exist, and then once
the replacement is made, only a relatively small amount of extra time will be required to offset this
extra expenditure and regain the same net increase in purchasing power).

Chapter 4

Public works mean taxes

Government spending doesnt create any new wealth: the wealth is already there in the accumulated income via taxes, which is just a redistribution of part of everyones wealth into a common
sum which will be spent on the group as a whole; once this is done, the wealth for the group is
already there in this sum, whatever it happens to be spent on, be it a bridge or anything else, wont
be any newly generated wealth.
The idea of wanting to create employment comes from the aforementioned idea that the more
transactions/trades that are occurring between all existing entities, the better for all as a group
and so, on average, individually as well; noting that jobs/employment are just forms of trade.
While forms of and opportunities for trade exist naturally, they can also be created artificially. It is
true that government spending can create employment, but again, this doesnt mean some newly,
out of the blue, generated wealth for the group as whole: the wealth was already there, the point is
the system of having a government and taxes allows one to redistribute some wealth, either directly
(e.g. welfare), to individuals (again, welfare), or to the group as a whole (increase trades by e.g. increasing employment this will of course be for a subgroup though rather than everyone as a whole).
The point is just that there is nothing new, that is, nothing that wouldnt otherwise already exist
in the hypothetical economy where no spending or different spending occurred (always compared
to the hypothetical economy where something didnt occur or something else occurred), just in
another form, that government spending generates. Rather, government spending is just a way
of transferring wealth. However, it is true that at any state, for the long run, certain states of
the economy could lead to better outcome than other states; this is the purpose of the system of
governments and taxes, to choose these better states.

Chapter 5

Taxes discourage production

Having a government and taxes system has pros: the redistribution allows one to change the state
of the entire economy to a more favourable one by providing essential public goods and services;
it also has cons: it takes away private wealth from many who themselves could/would generate
many things that could be good for the economy as a whole (provide private employment). For
the system to be beneficial, there is probably an optimal, or many optimal (multiple maxima),
government/taxes systems, and we must strive to achieve one of these (e.g. there is an, or many,
optimal tax systems how much people should be taxed).

Chapter 6

Credit diverts production

Here we consider one way a government may decide to spend the tax which it has collected: it may
decide to give loans, in particular, loans to those entities who are not provided with loans from
other entities. This is bad for the following reasons: since the government is not an entity spending
its own money, it is less risk averse and so accepts riskier situations. Further, giving a riskier entity
a loan in a particular industry restricts the available space, in that industry, for a less risky entity
with a better track record and so that there is an extra loss.

Chapter 7

The curse of machinery

Historical figures show that introduction of new technology does not, in a term between short and
long, reduce the number of jobs, in fact, it increases it: suppose that new machinery is introduced
into an industry, then the amount of labour going into the production of the machines is likely
less than the amount of labour let go by that industry (otherwise it would not be cost efficient
to purchase the machinery ignoring the possibility of accepting an initial loss for a future gain
here, but that does not change the eventual conclusion); so there is a loss of jobs in that industry,
however the products of that industry are now cheaper and so everybody purchasing such products
has more purchasing power in other industries and so there is more demand and so more jobs in
other industries. Also, because the original product is cheaper, demand for it often goes up, slowly
actually creating more jobs even in the original industry.
Even so, the main effect of the introduction of new technology is not to alter the number of jobs
but rather to increase production.
There is nevertheless an initial loss of jobs, and so in practice, considerations to help this situation
(especially for those who had skills which are now unneeded and who cannot pick up new skills)
need to be taken into account.

Chapter 8

Spread-the-work schemes
Unions may want to impose restrictions on the type of work a worker in a particular industry is
allowed to do to protect industries based on particular subtypes of work. This is a bad idea because:
a person now will have hire two people rather than one for a particular job, will have to spend
more and then cannot spend elsewhere this reduces the number of total trades.
Another idea is to reduce the length of the working week, to increase employment, but increase the
hourly rate of pay to keep the income the same. This is a bad idea because: this will increase the
cost of production and so actually reduce the number of people any employer can employ.

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Chapter 9

Disbanding troops and bureaucrats

When a particular industry supported by the government is not needed, e.g. extra soldiers in times
of peace or extra government officials, it is best to disband that industry. The concern here is
that these people will not be able to find work anywhere because nothing new is created but
something new is created, since the government wont have to support them, there will be fewer
taxes, everybody has more money to spend elsewhere, expanding the other existing industries or
that their purchasing power will be removed, harming other industries but this is of course silly,
they will get that purchasing power by finding work and even better, will become self-reliant rather
than reliant on the taxes collected from others.

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Chapter 10

The fetish of full employment

Full employment is not what should be sought, rather maximal production (together with the wellbeing of everyone as a given) is what should be sought. And it is entirely possible, if not likely,
that the conditions for maximal production involve some people left unemployed and supported by
the government, that is, by the taxes of others. The conditions for maximal production depend on
many factors, e.g. the skills possessed by a given person.

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Chapter 11

Whos protected by tariffs?

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References

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