It's Complicated

No, I am not talking about the 2009 romantic comedy starring Meryl Streep and Alec Baldwin, It’s Complicated. I am talking about economics. Some find the subject too easy, and some find it too hard (including yours truly). Bertrand Russell (1887-1970), the famous British mathematician, logician, and philosopher, studied economics briefly, but gave up because it was too easy. And the famous theoretical physicist, Max Planck (1888-1947), after whom the prestigious Max Planck Institute of Germany is named, gave up economics because it was too hard.

Well, not according to Henry Hazlitt (1894-1993). He wrote the bestselling, shortest book on basic economics, Economics in One Lesson, in 1946 and updated it in 1979[1]. When I purchased the book many years ago, it had already sold over a million copies. With a blurb on the cover by Ayn Rand, the book’s back cover has testimonials by economics Nobel Laureates, Milton Friedman and F.A. Hayek. It has been on my bookshelf for many years; I have read parts of it off and on and am sure I will be reading it again. (One can find free PDF and e-book versions of the book through Google search).

Henry Hazlitt’s book is as relevant today as it was in 1946. It is also immensely readable. After presenting his one lesson in Chapter 1, Hazlitt explores policy issues in the rest of the book, issues like public works programs, minimum-wage laws, unions, government price-fixing, taxes, tariffs, rent control, and governments rescuing industries.

Chapter 1 begins with Hazlitt’s contention that “Economics is haunted by more fallacies than any other study known to man.” (p15) That’s because economic policies must try and respond to the interests of multiple groups that are often antagonistic to each other. No public policy can ever satisfy the interests of all groups in a society.

Hazlitt continues:

This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to enquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences… In this lies the whole difference between good economics and bad... The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. (pp15-16)??

Chapter 1 also contains Hazlitt’s one lesson in a single sentence: “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.” (p17)

In early March of 2018, President Donald J. Trump decided to impose tariffs on imported steel and aluminum as part of his America First mantra. On March 5, 2018, The Washington Post published my Letter to the Editor on that decision, under the title “Opinion: Lessons on Protectionism:

With President Trump’s decision?to impose tariffs on imported steel and aluminum, he again shows little understanding of basic economic principles and of second- and third-order effects of policies, and an unwillingness to learn from history.

Tariffs are pro-producer and anti-consumer. In this case, the tariffs would likely help a few hundred steel and aluminum companies and their employees but also hurt tens of thousands of consumers of steel and aluminum, as well as millions of their employees. Add to these the tens of millions of ultimate consumers who will end up paying more for their purchases.

Mr. Trump continues to remain oblivious to the consequences of his actions and policies. Imposing tariffs on imports will most certainly invite retaliation from our trading partners and lead to trade wars that will hurt all nations. Several of our prominent industries from agriculture to transportation will likely face retaliatory tariffs from others.

President George W. Bush?imposed tariffs of 8?percent to 30 percent on steel imports?in March?2002. The tariffs raised steel prices for consumers of steel, such as automobile companies, making them less competitive in global markets. The European Union announced it would impose retaliatory tariffs on imports from the United States and took the case to the World Trade Organization. Japan, South Korea, China, Switzerland and Brazil filed similar cases with the WTO,?which ruled against the United States,?and the tariffs were?withdrawn?in December 2003.

Here are a few selected gems of advice Hazlitt offers:

Increase in money supply, whether a result of large government expenditures (paid for by new taxes or sale of bonds), or printing new money, leads to inflation. Inflation itself is a form of taxation, perhaps the worst form. It devalues people’s salaries, savings, and lowers living standards.

This is nothing new; we have known about the relationship between increased money supply and inflation since the Ming Dynasty (1368-1644) of China. The Chinese were the first to use paper money in the world, starting around 1000 AD. The Ming Dynasty was the first to completely replace metal coins with paper money. When the State issued too much paper money, it caused hyper-inflation. The use of paper money was discontinued in 1425 AD when the worth of paper money had fallen to one-seventeenth of its original value.

More recently, many economists believe that the Great Inflation of 1965-1982 in the U.S. was spurred by the cost of the Vietnam War and President Lyndon Johnson’s Welfare Programs, not financed by increase in taxes. In fact, the Congress had approved a tax cut in 1964. The rate of inflation went up from 1.9% in 1965 to 6.2% in 1969 and to 14% by 1980.

Source: https://www.federalreservehistory.org/essays/great-inflation

When a group tries to obtain special benefits from the government, for example through political influence, it has indirect, damaging impact on other groups and the society in general. If multiple groups succeed in obtaining favors from the government, they may benefit temporarily, but in the long run, everyone suffers.

While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that will benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible. (p15)

Inefficient industries often employ lobbyists to seek subsidies or other government assistance to help them survive. If a government subsidizes an industry, for whatever reason, that money is ultimately paid for by the country’s taxpayers. Besides, trying to save an industry means that “capital and labor are employed less efficiently than they would be if they were permitted to make their own free choices.” (pp100-101) This choice leads to lower production, less wealth creation, and lower standards of living. “Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second” (p102).

Austrian political economist Joseph Schumpeter (1883-1950) had arrived at essentially the same conclusion as Hazlitt, in about the same time frame[2]:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p83)

In the last chapter of his book, Hazlitt doesn’t sound too hopeful about national economic policies in the 32 years since the first edition was published. “In sum, so far as the politicians are concerned, the lesson this book tried to instill more than thirty years ago does not seem to have been learned anywhere” (p207). ?“In brief, the main problem we face today is not economic, but political.” (p211)

It’s complicated? Yes?

[1] Henry Hazlitt, Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics. New York: Harper & Brothers, 1946.

[2] Joseph A. Schumpeter, Capitalism, Socialism, and Democracy. New York: Harper & Brothers, 1942.?

Comments welcome!

Originally posted at: www.vinodjain.com/blog