Economics in One lesson - Henry Hazlitt
jim.com
jim.com
This book will make you very frustrated when you have to listen to politicians talk about economics. :-)
http://jim.com/econ/chap18p1.html
Rent control does help some people - but who is hurts is pretty insightful. The post-war examples in particular.
I love the way author uses simple language to describe complex economics concepts.
Put in a modern setting he's clearly a libertarian economist with little regard for the success of the modern European system in ensuring availability of essentials (food, health care, housing), while stimulating competition on non-essentials (mobile phones, internet access, commercial real estate).
Still a good read though.
I'm vaguely libertarian, and even mainstream economics implies a lot of scary libertarian things (minimum wages and rent controls have terrible side effects!) but fundamentally, economics is an "is" and libertarianism is an "ought". Seeing them mixed together is broken.
This book has lots of good things in it, but it's clearly trying to push you in one direction rather than simply educate you.
The best advice I can give you is to try and separate facts from judgments. Take the minimum wage. It's well understood that minimum wage laws cause unemployment. It doesn't necessarily follow from this that you don't need a minimum wage, though. Without a minimum wage, you might have twice as much unskilled labor working for half the pay, but all of them are below subsistence level and require government assistance. Whereas a higher minimum wage means some people can be dropped from the rolls entirely while others have to collect more. Or maybe you change the welfare system. It's a judgment call which tradeoffs you want to make, just like engineering. There are obvious things (command economies are pretty crap, just like bubble sort is a crap algorithm) but there are more subtle things (like time/space tradeoffs that dictate different algorithms for different applications) that depend on what you're trying to do.
Likewise, consider health care. Some people think it's a moral imperative that a wealthy society provide health care to everyone. Economics asks some tough questions--at what cost, what level of care do we provide--but it also provides answers--what are different ways of doing this, and what are the cost-benefits?
Economics at its best is a science. It doesn't dictate your goals to you, it just warns you of some natural constraints. You might say, "I believe in minimal taxes and don't care about poor people who need housing and health care but can't afford it." Well, economics tells you that's very feasible. You might say, "I believe in minimal taxes and a robust welfare state." Economics tells you there's no free lunch. You might say, "I believe everyone should have health insurance that meets these requirements." Well, economics says, you could give everyone health insurance, or you could have a market in health insurance and give people vouchers to pay for it, or do any other thing you can think of, but here are the effects and tradeoffs of those policies.
In terms of what in economics to study? Microeconomics seems better grounded than macro. Behavioral economics seems promising. Austrian is a mixed bag--there's some stuff that promotes good economic reasoning but then there's also gigantic apologias for anarcho-capitalism based upon some moralistic conception of natural law that totally mix up the science of causes and effects with the moral aspect of goals and intentions.
I find that separating causes and effects from goals and intentions is a big problem not only in economics but also in ecology. There's a difference between saying "I want to sustainably maintain an environment that is good for human life" and "I want to preserve the environment mostly the way it is without human tampering", and an environmental scientist will recommend different policies based upon which goal she implicitly has in mind. Maybe some endangered species can go extinct if there's a better tradeoff for humans, or maybe not. Likewise with economics: there's no such thing as "economics says policy X is bad", only "economics says policy X has effects Y".
You're falling prey to the fallacy that Hazlitt describes, focusing on some specific group, and for the short run, when in fact they harm the people generally and the poor substantially and indefinitely via forced unemployment.
In the minimum wage case, with people forced out of work by a policy essentially making it economically untenable to hire certain low-skill workers, or as many of them, you have fewer people engaged in productive labor. Society incurs a loss to its productive capacity, and our general level of abundance is reduced, including for those on the margin who aren't forced into unemployment.
Meanwhile, those who would be gaining skills and experience in the course of work are instead unemployed and idle. This too detracts from our human capital over time, by reducing the skills and thus earning power of the poor, the ostensible benefactors of minimum wage laws.
This isn't a judgment call, it's exactly the sort of thinking Hazlitt warns against.
Or conversely, if we come down and say we want to reduce sulphur dioxide emissions, we might say, "Oh, let's inspect and license all the smokestacks in the US and write each of them permits every year." Economists will shake their heads and say that's an inefficient allocation method, and then they will invent cap-and-trade, where we sell them permits and let them trade the same fixed number of permits, so that SO2 emissions stay under a determined scarcity, but that scarcity is market-allocated. We've been doing that with SO2 for years and it's one of the great recent triumphs of economics.
And wrt sulpur dioxide, economists since Pigou have been arguing not for cap-and-trade, but for pollution taxes to right externalities. And if you go beyond Pigou, you don't find cap-and-trade, but Coase, who argues that if you structure the system properly, you don't even need intervention to right externalities, the actors will find an efficient arrangement on their own. Even beside this, Libertarians have no principled opposition to righting negative externalities: it's one of the few proper roles of government.
In the end, cap-and-trade is preferred not because it's the most effective, but because it's the most politically expedient. Pollution/Source fuels taxes are cheaper to administer, have better incentives for bureacrats to be faithful, and achieve the same ends. They're better and economists will tell you so. The only reason cap-and-trade is the solution-du-jour is because it doesn't include the word "tax" in it. This is why conservatives are identifying it (correctly) as "Tax-and-trade."
You're not arguing against libertarians, you're arguing against the decades of economists you (I'm sorry to say) don't seem to know.
In macro, there's two measures of inflation: the cost of living index (which is based on the cost of living and a market basket of equivalent goods) and a factor that is used to adjust nominal GDP measurements from year to year. Cost-of-living may change based on efficiencies (for instance, Wal-Mart has been credited with single-handedly holding down the cost of living for years) while the GDP factor is more closely tied to "true" inflation.
In other words, you may be right but cost of living is fucking complicated.
However, it seems to have lost some traction in recent years. My impression is that "Principles of Economics" by N. Gregory Mankiw took its place. If Mankiw's "Principles" is written as clearly as his Macroeconomics textbook, it's certainly worth to start with it.
Of course, both are quite expensive and -- depending on your math education -- demanding. So, as a test whether textbooks are something you could like, you may like to start with the free textbook by R. Preston McAfee's "Introduction to Economic Analysis". It's available here:
As an alternative, you may like to look for smaller textbooks that mix formal and applied economics. They may be demanding but also somewhat practical. The later part may make it easier to get the former part. As a disadvantage, they don't provide much overview. Among those I've read and can recommend, are:
* "Managerial Economics" by Ian Dobbs, and
* "Games for Business and Economics" by Roy Gardner.
Of course, if you're interested in something more entertaining and less formal, there are quite a few books that have been published after the success of "Freakonomics" by Steven Levitt and Stephen J. Dubner.
Unfortunately, none of them are really introductions to the field. They all try to make the point that economics, in general, is interesting by presenting random collections of interesting ideas or stories. Most of them also concentrate on the author's own research which is hardly a good start.
That said, they are still entertaining to read. So, you may like to look at the following ones:
* "The Undercover Economist" by Tim Harford
* "Naked Economics" by Charles Wheelan
I've read the first one and he covers a rather broad selection of topics. I didn't read the second one but the reviews at Amazon made me put it on my wish-list.
So, Henry Hazlitt's book is still unique and worth reading, since it covers one of the more basic idea of economics without using any formal means. Just beware that it's outdated (since it's been written much research has gone into the problem of market failure), and that it's somewhat opinionated.
Of course, the later is a general problem in economics: researchers usually assume a rather simple utility function of public decision makers, namely to maximize public welfare. This is hardly the only possible one, just the only one people can agree upon.
Helping the poor or not is a totally secondary question. If helping the poor means less government, libertarians are for it. If helping the poor means more government, libertarians are against it.
But the libertarian work that you are criticizing does not do that. Hazlitt's arguments do not start from the premise that there "ought" to be limited government. He is simply arguing that the minimum wage or rent control will not have the effects that people want it to have. That's an "is" argument.
Libertarians don't seem to care much for economic equality (hell, neither do I) but it's not the place of economics to choose our value system. And, as a matter of economic fact, maybe some non-libertarian policies will enforce economic equality! (Though even this is arguable.) Or, maybe I care a LOT about enforcing some kind of baseline standard of living for everyone, inefficiencies be damned. Maybe government can help me do this. But most libertarians are uninterested in that goal, too.
Economists don't get to decide what kind of society we want to live in any more than the rest of us. Their job is to tell us whether it's possible, how to get there, and what the costs will be.
the average person: A causes B! we want more of B so let's increase A!
economist: A and B are both side effects of C, pumping resources into A will not produce the desired effect.
I agree that economists should avoid making value judgments as much as possible so that people will listen to them. Robin Hanson recently debated Brian Caplan on exactly this point and made a very convincing case that economists should focus on the efficiency of outcomes.
There are exceptions, where some sort of fair analysis of governments vs. some other solution are done, but even most of those exceptions strike me as being awfully trusting of the monolithic centralized power source.
I am drawn to libertarian economics because the market actually provides a solution to the "magic happens here" step in the form of an emergent solution to problems arrived at by free agents each locally choosing their optimal outcomes, and I describe myself as "little-l" because there's still a role for government in that world (especially in internalizing externalities). This economic idea actually explains why we are where we are; we had governments for thousands of years, but it wasn't until free markets (and some supporting technology) that modern civilization really developed.
My point here is to provide a counterexample to your claim, not to directly advocate libertarianism here. My libertarianism is result, not cause.
I also firmly believe in looking at economics as they are, not as a theorist says they should be... again, "little-l libertarian". I do observe that an awful lot of macroeconomics, if not most of it, is really an agenda looking for evidence; I wonder if the subject is not so large that no human can possibly work the problem the other way in the span of one lifetime.
Its strength lies in how the author demonstrates what might otherwise be abstruse principles through brilliantly simple illustrations and logic.
One can agree with the author's premises or not but there is no better example of a polemical book on such a normally difficult subject that accomplished its purposes so simply yet effectively. In this way, the book is sui generis - there is no other quite like it. It should be read for that reason alone.
The book was not intended to be a primarily technical economic textbook or to serve as a comment on social safety-net issues and shouldn't be evaluated as such.
Look at the first example, "The Broken Window." The author describes a situation in which:
• Some kid breaks a baker's window.
• The crowd that gathers notes that, although unfortunate for the baker, the broken window will provide work for a glazier.
• The crowd fails to realize that the baker was planning to buy a suit, and the work provided for the glazier is counterbalanced by the work lost by the tailor. Also the baker's out a suit.
That's all well and good, but the author never considers the scenario where the baker is wealthy and losing $250 will not affect his spending habits (over at least the course of decades). Then the broken window actually results in $250 of created work for the glazier without any corresponding loss of work elsewhere (by e.g. the tailor) or loss of value (by e.g. the baker, who in the book's scenario couldn't buy a suit because of the broken window). In this scenario, the broken window is actually a net win for the community.
Nor does he consider the scenario where the baker is poor but thrifty and tends to save what he has. This is a very complex situation: in the short run the thrifty baker's spending habits will probably be unchanged by having to replace a window (or at least negligibly changed relative to the $250 that he was forced to spend), but in the long run he probably will end up spending about $250 less because of what he shelled out to the glazier, and moreover will fail to procure some items of value about $250. So then the math goes like this: because of the broken window, the glazier gains $250 dollars of work today. But some other worker loses $250 of work down the line, and the baker, in the long run, loses some items of value $250.
The thing is, spending $250 today creates more work than spending $250 next year, because the money will keep circulating, so it's not easy to demonstrate that the broken window is either helpful or harmful to the community here. (Note: spending $250 today instead of next year has a host of other effects, like increased inflation, that I obviously didn't mention. I don't mean to make a full analysis of these scenarios, just to point out that the author didn't make a full analysis of them himself.)
And a more glaring failure of logic in the second applied lesson: the author says, "No man would want to have his own property destroyed either in war or in peace. What is harmful or disastrous to an individual must be equally harmful or disastrous to the collection of individuals that make up a nation."
That's just not true. (A slightly ridiculous counterexample: when a serial killer dies of a heart attack, the nation he lives in is probably bettered.)
(In spite of all this, I still kind of liked the book.)
> The thing is, spending $250 today creates more work than spending $250 next year
In each of these cases, you're myopically focusing on consumption, while ignoring production. Over any period of time, society has a given productive capacity. Using up that capacity in an avoidable fashion necessarily detracts from the ability to apply that capacity to other problems. For example, if no one broke their windows, some of the glaziers may well go out of business, and engage in other, more socially beneficial (given the circumstances) courses of work, thus decreasing prices & increasing abundance in that area.
Even if the alternative is for money to be saved, rather than spent, then the problem is only changed to one of delayed consumption. And in the mean time of the delay, the baker is, by not using up productive capacity, reducing prices and increasing the availability of goods for others. The broken window is a net loss, just as Hazlitt describes.
Or they could go out of business and engage in less socially beneficial courses of work, like highway robbery. It is always possible to think up a pathological scenario where breaking the window helps/hurts the economy. I think the original framing of the analogy is the most general, but it usually helps to consider the actual case at hand without resorting to analogies at all.
I went into writing that post fully intending to make the point that "producing work" for e.g. the glazier is only useful AT ALL if the glazier isn't already working as much as he wants; moreover, even in such a special circumstance, obviously no additional wealth is created by the window breaking and the glazier getting paid to fix it. But in the special circumstance of the glazier working less than he wants before he gets the job and then getting paid to do the job by a rich guy, something good still happens -- wealth is distributed to the glazier via a mechanism that is voluntary for all parties involved. This is vital. Even in the best of cases, "creating work" through the destruction and replacement of wealth amounts to charity and nothing more. But "forced charity" of this sort can be very good for an economy on the whole in certain circumstances. Like in a depression.
Anyway, I must've been really out of it; I usually don't get wrapped up in the details of making a point to such an extent that I forget the point that I'm trying to make. My entire post was pretty stupid, except for the part where I said that this book is blinded by its own biases (which I stand by). Sorry about that.
PS: I'm still not in a great state of mind (I'm exhausted but experiencing mild insomnia), so I make no guarantees about the quality of the post, either.
More likely: 1) it's being invested in some business activity, which loses that capital in order to pay for a broken window OR 2) he's earning interest on it, negating most of the time difference in your thrifty banker example
Lastly, even if it were under his mattress, putting that money back in circulation increases the amount of money in the market chasing goods, which increases everyone's prices by a small amount.
As to your serial killer counterexample, I think the correct analogy is "if it's harmful to the serial killer to die of a heart attack, it's equally harmful for the nation to die of heart attacks."
PDF warning: http://freedom-school.com/money/how-an-economy-grows.pdf
"Basic economic principles do not change with the size of the economy ... direct relationship between self sacrifice, savings, credit, investment, economic incentive, social and economic progress is always the same!"
Yeah right. As an introduction to basic economic principles this comic is great, but it takes a firm position on aspects of economic theory that are very much up for debate. I'd call this propaganda.
Ok, I can't let logic like that slide by. I'll just list off why it is totally junk reasoning:
- Assumes that worker is getting 'what he is worth to an employer' currently. This would assume that the worker and the employer are on an equal footing, both in power (workers can be coerced and intimidated into lower wages), and intellect (workers can be tricked and bamboozled), and in information (workers know less about the going rates for labor than an employer, if only because employers have lots of employees, but an employee has only one employer usually). - Assumes the worker is optimally employed to maximize earnings. Lots of people work in fields because they fell into that sort of work, and learning a new language or new skills is hard or unnatural to them. Being fired from such a low paying job may make developing other skills a necessity. Think of the guy working at McDonald's who could be trained to be a lineman for the electric company or a truck driver, or the truck driver who could (if he had more ambition, and was willing to give up an income for a few months to go to trade school) be a mechanic on jet engines. - If everyone is held to the same minimum wage, everyone's costs, therefore the price they charge, goes up. Charging more money lets them afford the more expensive workers. - If workers get more expensive, long term investments in mechanization become more attractive. This lowers costs in the long run, and creates jobs that pay more than the original menial job. All that extra money everyone has because the price of everything is so low due to mechanization means they have plenty of money to spend on luxuries they would never have previously considered, this is called 'Starbucks' and employs lots of people. - Even if the worker does lose his job, modern unemployment insurance schemes will make that relatively painless to the old 'free market' system of going to debtors prison or indentured servitude.
A-priori economic arguments are bullshit. It is perfectly possible to prove convincingly that in a system without a government private security firms would enforce law and order. We can be convinced of this because we don't know all the reasons this fails in practice, due to our imperfect understanding of the world. The fact that in every single instance that there has been a lack of a functional police force for more than a few hours things go totally batshit insane should render any such 'convincing' argument totally absurd.
Since the relationship is asymetric, with the employer knowing more, being more capable of negotiating, and probably more savvy and intelligent, it is likely that the employees are paid less than what they could negotiate if they were more savvy, smart, or powerful. Therefore, raising their pay via statute, so long as it is still less than the utility gained by the employer by having them around, won't cause anyone to lose a job. There is very likely a gap in the pay the employees collect, and what they could collect if they were more savvy, or had better negotiating skills, or had access to the labor market data the employer has better access to. In those cases where the new minimum wage falls within this gap you have no reason to suspect any loss of jobs.
However, such arguments are totally unnecessary, as we have been running a huge experiment for 60 years and can appeal to empirical data. We do have a minimum wage, and you will not be able to find anyone cannot find a job that is not suffering from psychiatric illness or a substance abuser. Temporary unemployment during economic downswings doesn't count, obviously.
Why is that? Because the minimum wage law takes that option away from them, increasing unemployment and increasing the underground, untaxed, unregulated, no worker protection or benefits economy.
I am perfectly able to find people today who cannot find a job, who are neither psych nor substance impaired. Convenienently, you say that temporary unemployment during the economic downswing "doesn't count, obviously." I am more inclined to find that statement disingenious rather than obvious. When times are tough, one would expect that wages might come down. When the natural market wage would be lower than the minimum wage, some of those jobs will naturally vanish. How is that to the advantage of a job-seeker?
However, temporary economic hard times are more like a mismatch in the number of people available to do work and the positions available. For example, if the coal plant in your county runs out of coal, there are no coal mining jobs, no matter how cheaply you will work. This doesn't prove anything about the minimum wage.
Since you can't find anyone who is unable to find work due to their labor being worth less than the minimum wage (even digging holes or lugging sacks of concrete pays way more than minimum wage) either the minimum wage is so low that it is moot, or other effects dominate any theoretical 'person worth less than minimum wage' effect in practice.
If minimum wage is totally moot as you argue, what is the downside to abolishing it? It does not require someone to be consisently un or under employed over a number of years to prove that minimum wage laws contribute to unemployment.
Being out of work for 6-12 months, but willing and unable by minimum wage law to work for $5 an hour to put food on your family's table, would be a substantial and avoidable hardship.
Fortunately, in the real world that doesn't actually happen much, because those enterprising hard-working people can find under-the-table paid-in-cash work.
Moving on.
In an anarchic society (no government) "private security firms" do enforce law and order. The problem is that the law is "whoever is strongest (has most weapons, most money to pay their army) wins". That's it. Out of that grows a feudal system.
I'm quite glad that Christianity took hold of those in positions of power and brought us beyond that. But do feel were sliding back in that direction rather.
As for your first point, employers might cut back on luxury consumption, and therefore totally offset the increase in costs. I'm with you there, but I doubt it is a major effect.
Private security firms do not enforce law and order. "Whoever is strongest" is the exact opposite of law. They enforce order, but only in so far as it makes them more money to do so, or benefits those who set the policy of the firm. When one security firm attacks another, that is not law and order. All this is is the current system, but where you shrink the countries down to the size of counties, and make all the new tiny countries dictatorships. In other words, this is Europe circa 900AD.
Have you heard of the crusades, inquisition, witch trials? It was taking away civil authority that finally prevented pious monsters from violently enforcing their whims. You could give months of fulltime proof that what you said is nonsense. In fact, they do it all the time, it's called European History.
I'd say in "25 short lessons". TLDR.
"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
The rest is commentary and application examples.
The rest is just commentary and examples.
The lesson is a clever device by the author, he pwns marketing 101, but is "to grok economics consider future global effects" really that inciteful?
Seems to be a nice book though.