Economics in One Lesson

by Henry Hazlitt

  Ordinarily these selfish feelings would have no effect on the total production of wheat. Wherever competition exists, in fact, each producer is compelled to put forth his utmost efforts to raise the highest possible crop on his own land. In this way the forces of self-interest (which, for good or evil, are more persistently powerful than those of altruism) are harnessed to maximum output.

  But if it is possible for wheat growers or any other group of producers to combine to eliminate competition, and if the government permits or encourages such a course, the situation changes. The wheat growers may be able to persuade the national government—or, better, a world organization—to force all of them to reduce pro rata the acreage planted to wheat. In this way they will bring about a shortage and raise the price of wheat; and if the rise in the price per bushel is proportionately greater, as it well may be, than the reduction in output, then the wheat growers as a whole will be better off. They will get more money; they will be able to buy more of everything else. Everybody else, it is true, will be worse off: because, other things equal, everyone else will have to give more of what he produces to get less of what the wheat grower produces. So the nation as a whole will be just that much poorer. It will be poorer by the amount of wheat that has not been grown. But those who look only at the wheat farmers will see a gain, and miss the more than offsetting loss.

  And this applies in every other line. If because of unusual weather conditions there is a sudden increase in the crop of oranges, all the consumers will benefit. The world will be richer by that many more oranges. Oranges will be cheaper. But that very fact may make the orange growers as a group poorer than before, unless the greater supply of oranges compensates or more than compensates for the lower price. Certainly if under such conditions my particular crop of oranges is no larger than usual, then I am certain to lose by the lower price brought about by general plenty.

  And what applies to changes in supply applies to changes in demand, whether brought about by new inventions and discoveries or by changes in taste. A new cotton-picking machine, though it may reduce the cost of cotton underwear and shirts to everyone, and increase the general wealth, will mean the employment of fewer cotton pickers. A new textile machine, weaving a better cloth at a faster rate, will make thousands of old machines obsolete, and wipe out part of the capital value invested in them, so making poorer the owners of those machines. The further development of nuclear power, though it can confer unimaginable blessings on mankind, is something that is dreaded by the owners of coal mines and oil wells.

  Just as there is no technical improvement that would not hurt someone, so there is no change in public taste or morals, even for the better, that would not hurt someone. An increase in sobriety would put thousands of bartenders out of business. A decline in gambling would force croupiers and racing touts to seek more productive occupations. A growth of male chastity would ruin the oldest profession in the world.

  But it is not merely those who deliberately pander to men’s vices who would be hurt by a sudden improvement in public morals. Among those who would be hurt most are precisely those whose business it is to improve those morals. Preachers would have less to complain about; reformers would lose their causes; the demand for their services and contributions for their support would decline. If there were no criminals we should need fewer lawyers, judges and firemen, and no jailers, no locksmiths, and (except for such services as untangling traffic snarls) even no policemen.

  Under a system of division of labor, in short, it is difficult to think of a greater fulfillment of any human need which would not, at least temporarily, hurt some of the people who have made investments or painfully acquired skill to meet that precise need. If progress were completely even all around the circle, this antagonism between the interests of the whole community and of the specialized group would not, if it were noticed at all, present any serious problem. If in the same year as the world wheat crop increased, my own crop increased in the same proportion, if the crop of oranges and all other agricultural products increased correspondingly, and if the output of all industrial goods also rose and their unit cost of production fell to correspond, then I as a wheat grower would not suffer because the output of wheat had increased. The price that I got for a bushel of wheat might decline. The total sum that I realized from my larger output might decline. But if I could also because of increased supplies buy the output of everyone else cheaper, then I should have no real cause to complain. If the price of everything else dropped in exactly the same ratio as the decline in the price of my wheat, I should be better off, in fact, exactly in proportion to my increased total crop; and everyone else, likewise, would benefit proportionately from the increased supplies of all goods and services.

  But economic progress never has taken place and probably never will take place in this completely uniform way. Advance occurs now in this branch of production and now in that. And if there is a sudden increase in the supply of the thing I help to produce, or if a new invention or discovery makes what I produce no longer necessary, then the gain to the world is a tragedy to me and to the productive group to which I belong.

  Now it is often not the diffused gain of the increased supply or new discovery that most forcibly strikes even the disinterested observer, but the concentrated loss. The fact that there is more and cheaper coffee for everyone is lost sight of; what is seen is merely that some coffee growers cannot make a living at the lower price. The increased output of shoes at lower cost by the new machine is forgotten; what is seen is a group of men and women thrown out of work. It is altogether proper—it is, in fact, essential to a full understanding of the problem—that the plight of these groups be recognized, that they be dealt with sympathetically, and that we try to see whether some of the gains from this specialized progress cannot be used to help the victims find a productive role elsewhere.

  But the solution is never to reduce supplies arbitrarily, to prevent further inventions or discoveries, or to support people for continuing to perform a service that has lost its value. Yet this is what the world has repeatedly sought to do by protective tariffs, by the destruction of machinery, by the burning of coffee, by a thousand restriction schemes. This is the insane doctrine of wealth through scarcity.

  It is a doctrine that may always be privately true, unfortunately, for any particular group of producers considered in isolation—if they can make scarce the one thing they have to sell while keeping abundant all the things they have to buy. But it is a doctrine that is always publicly false. It can never be applied all around the circle. For its application would mean economic suicide.

  And this is our lesson in its most generalized form. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than as producer, are considered.

  To see the problem as a whole, and not in fragments: that is the goal of economic science.

  1George Santayana, The Realm of Truth (1938), p. 16.

  Part Three

  The Lesson After Thirty Years

  Chapter XXVI

  THE LESSON AFTER THIRTY YEARS

  THE FIRST EDITION of this book appeared in 1946. It is now, as I write this, thirty-two years later. How much of the lesson expounded in the previous pages has been learned in this period?

  If we are referring to the politicians—to all those responsible for formulating and imposing government policies—practically none of it has been learned. On the contrary, the policies analyzed in the preceding chapters are far more deeply established and widespread, not only in the United States, but in practically every country in the world, than they were when this book first appeared.

  We may take, as the outstanding example, inflation. This is not only a policy imposed for its own sake, but an inevitable result of most of the other interventionist policies. It stands today as the universal symbol of government intervention everywhere.

  The 194
6 edition explained the consequences of inflation, but the inflation then was comparatively mild. True, though federal government expenditures in 1926 had been less than $3 billion and there was a surplus, by fiscal year 1946 expenditures had risen to $55 billion and there was a deficit of $16 billion. Yet in fiscal year 1947, with the war ended, expenditures fell to $35 billion and there was an actual surplus of nearly $4 billion. By fiscal year 1978, however, expenditures had soared to $451 billion and the deficit to $49 billion.

  All this has been accompanied by an enormous increase in the stock of money—from $113 billion of demand deposits plus currency outside of banks in 1947, to $357 billion in August 1978. In other words, the active money supply has been more than tripled in the period.

  The effect of this increase in money has been a dramatic increase in prices. The consumer price index in 1946 stood at 58.5. In September 1978 it was 199.3. Prices, in short, more than tripled.

  The policy of inflation, as I have said, is partly imposed for its own sake. More than forty years after the publication of John Maynard Keynes’ General Theory, and more than twenty years after that book has been thoroughly discredited by analysis and experience, a great number of our politicians are still unceasingly recommending more deficit spending in order to cure or reduce existing unemployment. An appalling irony is that they are making these recommendations when the federal government has already been running a deficit for forty-one out of the last forty-eight years and when that deficit has been reaching dimensions of $50 billion a year.

  An even greater irony is that, not satisfied with following such disastrous policies at home, our officials have been scolding other countries, notably Germany and Japan, for not following these “expansionary” policies themselves. This reminds one of nothing so much as Aesop’s fox, who, when he had lost his tail, urged all his fellow foxes to cut off theirs.

  One of the worst results of the retention of the Keynesian myths is that it not only promotes greater and greater inflation, but that it systematically diverts attention from the real causes of our unemployment, such as excessive union wage-rates, minimum wage laws, excessive and prolonged unemployment insurance, and overgenerous relief payments.

  But the inflation, though in part often deliberate, is today mainly the consequence of other government economic interventions. It is the consequence, in brief, of the Redistributive State—of all the policies of expropriating money from Peter in order to lavish it on Paul.

  This process would be easier to trace, and its ruinous effects easier to expose, if it were all done in some single measure—like the guaranteed annual income actually proposed and seriously considered by committees of Congress in the early 1970s. This was a proposal to tax still more ruthlessly all incomes above average and turn the proceeds over to all those living below a so-called minimum poverty line, in order to guarantee them an income—whether they were willing to work or not—“to enable them to live with dignity.” It would be hard to imagine a plan more clearly calculated to discourage work and production and eventually to impoverish everybody.

  But instead of passing any such single measure, and bringing on ruin in a single swoop, our government has preferred to enact a hundred laws that effect such a redistribution on a partial and selective basis. These measures may miss some needy groups entirely; but on the other hand they may shower upon other groups a dozen different varieties of benefits, subsidies, and other handouts. These include, to give a random list: Social Security, Medicare, Medicaid, unemployment insurance, food stamps, veterans’ benefits, farm subsidies, subsidized housing, rent subsidies, school lunches, public employment on make-work jobs, Aid to Families with Dependent Children, and direct relief of all kinds, including aid to the aged, the blind, and the disabled. The federal government has estimated that under these last categories it has been handing federal aid benefits to more than 4 million people—not to count what the states and cities are doing.

  One author has recently counted and examined no fewer than forty-four welfare programs. Government expenditures for these in 1976 totaled $187 billion. The combined average growth of these programs between 1971 and 1976 was 25 percent a year—2.5 times the rate of growth of estimated gross national product for the same period. Projected expenditures for 1979 are more than $250 billion. Coincident with the extraordinary growth of these welfare expenditures has been the development of a “national welfare industry,” now composed of 5 million public and private workers distributing payments and services to 50 million beneficiaries.1

  Nearly every other Western country has been administering a similar assortment of aid programs—though sometimes a more integrated and less haphazard collection. And in order to do this they have been resorting to more and more Draconian taxation.

  We need merely point to Great Britain as one example. Its government has been taxing personal income from work (“earned” income) up to 83 percent, and personal income from investment (“unearned” income) up to 98 percent. Should it be surprising that it has discouraged work and investment and so profoundly discouraged production and employment? There is no more certain way to deter employment than to harass and penalize employers. There is no more certain way to keep wages low than to destroy every incentive to investment in new and more efficient machines and equipment. But this is becoming more and more the policy of governments everywhere.

  Yet this Draconian taxation has not brought revenues to keep pace with ever more reckless government spending and schemes for redistributing wealth. The result has been to bring chronic and growing government budget deficits, and therefore chronic and mounting inflation, in nearly every country in the world.

  For the last thirty years or so, Citibank of New York has been keeping a record of this inflation over ten-year periods. Its calculations are based on the cost-of-living estimates published by the individual governments themselves. In its economic letter of October 1977 it published a survey of inflation in fifty countries. These figures show that in 1976, for example, the West German mark, with the best record, had lost 35 percent of its purchasing power over the preceding ten years; that the Swiss franc had lost 40 percent, the American dollar 43 percent, the French franc 50 percent, the Japanese yen 57 percent, the Swedish krone 47 percent, the Italian lira 56 percent, and the British pound 61 percent. When we get to Latin America, the Brazilian cruzeiro had lost 89 percent of its value, and the Uruguayan, Chilean, and Argentine pesos more than 99 percent.

  Though when compared with the record of a year or two before, the overall record of world currency depreciations was more moderate; the American dollar in 1977 was depreciating at an annual rate of 6 percent, the French franc of 8.6 percent, the Japanese yen of 9.1 percent, the Swedish krone of 9.5 percent, the British pound of 14.5 percent, the Italian lira of 15.7 percent, and the Spanish peseta at an annual rate of 17.5 percent. As for Latin American experience, the Brazilian currency unit in 1977 was depreciating at an annual rate of 30.8 percent, the Uruguayan of 35.5, the Chilean of 53.9, and the Argentinian of 65.7.

  I leave it to the reader to picture the chaos that these rates of depreciation of money were producing in the economies of these countries and the suffering in the lives of millions of their inhabitants.

  As I have pointed out, these inflations, themselves the cause of so much human misery, were in turn in large part the consequence of other policies of government economic intervention. Practically all these interventions unintentionally illustrate and underline the basic lesson of this book. All were enacted on the assumption that they would confer some immediate benefit on some special group. Those who enacted them failed to take heed of their secondary consequences—failed to consider what their effect would be in the long run on all groups.

  In sum, so far as the politicians are concerned, the lesson that this book tried to instill more than thirty years ago does not seem to have been learned anywhere.

  If we go through the chapters of this book seriatim, we find practicall
y no form of government intervention deprecated in the first edition that is not still being pursued, usually with increased obstinacy. Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies. They are imposing heavier and more ex-propriatory taxes than ever. They still recommend credit expansion. Most of them still make “full employment” their overriding goal. They continue to impose import quotas and protective tariffs. They try to increase exports by depreciating their currencies even further. Farmers are still “striking” for “parity prices.” Governments still provide special encouragements to unprofitable industries. They still make efforts to “stabilize” special commodity prices.

  Governments, pushing up commodity prices by inflating their currencies, continue to blame the higher prices on private producers, sellers, and “profiteers.” They impose price ceilings on oil and natural gas, to discourage new exploration precisely when it is in most need of encouragement, or resort to general price and wage fixing or “monitoring.” They continue rent control in the face of the obvious devastation it has caused. They not only retain minimum wage laws but keep increasing their level, in face of the chronic unemployment they so clearly bring about. They continue to pass laws granting special privileges and immunities to labor unions; to oblige workers to become members; to tolerate mass picketing and other forms of coercion; and to compel employers to “bargain collectively in good faith” with such unions—i.e., to make at least some concessions to their demands. The intention of all these measures is to “help labor.” But the result is once more to create and prolong unemployment, and to lower total wage payments compared with what they might have been.