Sunday, March 6, 2011

In One Lesson

Stopped at the used-book store t'other day, saw Henry Hazlitt's Economics in One Lesson and grabbed it. 50 cents. Thought I had a real bargain there. Then I noticed the cover price: 95 cents.

It's my kind of book -- small and thin. A paperback from Manor Books. Ninth printing: 1974. And that would account for the price. 1974.

Original copyright on Hazlitt's book, 1946.

Oh!... Nobody ever read this copy. The well-yellowed pages don't fall open easily.

In Chapter One, Hazlitt writes

There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: "In the long run we are all dead." And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades.

That was written (or copyright, anyway) in 1946, the same year Keynes died. (Keynes is "the bad economist" whose "shallow wisecrack" Hazlitt quoted.)

So I guess Hazlitt was right. Oh, it wasn't a few months. It wasn't even several years. It was decades. First we had the golden age of postwar capitalism. The good years started in 1947, just a few months after Hazlitt wrote the book, and continued until 1973.

My own copy of Hazlitt's book was printed a year later. That was the year the problems began. 1974.

A lot of people, most people maybe, don't see 1974 as the year our problems began. They look to the Obama years and the Great Recession. That puts the beginning of this problem at 2008, the year of the Paulson crisis.

1946 to 2008 is 62 years. Six point two decades. So Hazlitt was right: It was decades after Keynes, before problems arose. Three decades of Keynes, followed by three decades of Wanniski-nomics.

Hazlitt continues:

From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to 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.

It's a fair observation. But of all people, Keynes is the wrong one to accuse of not thinking things through. And in six point two decades, a lot of other people had plenty of opportunity to screw things up.

As for myself, I deal with it by treating Hazlitt's "art of economics" as science.


Calgacus said...

In his Economics of Employment, Abba Lerner makes some interesting comments on Hazlitt's book p.148

In the upside down economy, money and work are scarce, rather than goods
"...One of the finest attacks on topsy-turvy economics is to be found in Henry Hazlitt's Economics in One Lesson Mr. Hazlitt is able to tear to little pieces a large number of propositions of the kind put forward in this chapter because all his argument is based on the assumption, mostly unconscious, of a state of full employment in which topsy-turvy economics is completely out of place. Perhaps he will one day consider the possibility of an economy suffering from unemployment and write the second lesson."

& p.157 Resistance often takes the form of assuming we always have full employment ..Apart from one thing, this is a very good book. It very clearly draws attention to a number of fallacies which can do harm and have done harm to our society. But the one thing that is wrong is that Mr. Hazlitt continually uses arguments that assume that our economy is right side up. For example, he continually takes it for granted that every time some resources are set free, they will in fact be used somewhere else in the economy, and this is why it is important to economize in their use, using as little as possible for any purpose so as to make them available for other uses. He takes it for granted, to take another example, that any increase in spending must raise prices and lower the value of money, just as would indeed be the case if there were full employment and it was impossible to produce any more goods to be bought with the additional money expenditure. In the absence of this possibility it would indeed be true that any increase in money demand would lead to higher prices, but the existence of this possibility is the core of the problem of unemployment..."

The Arthurian said...

"Feed me!"

Excellent excerpts, Calgacus. I never heard of Abba Lerner until recently, never read Lerner, maybe never will. But I like what I see here.

Our economy is through-the-looking-glass. In inversion. I think in these terms. And they stand out in the excerpts: "the upside down economy... topsy-turvy economics... arguments that assume that our economy is right side up." Nice.

Hazlitt's "argument is based on the assumption, mostly unconscious, of a state of full employment." Yeah, Milton Friedman, too, in Free To Choose: The answer is that all holders of money have paid for the road. The extra money raises prices when it is used to induce the workers to build the road instead of engage in some other productive activity...

Friedman says "to build the road instead of engage in some other productive activity.

This mindset, that all resources are occupied (so that building a road takes away from other productive activity) is a hold-over from the 19th century, what Keynes called "the greatest age of the inducement to invest," the economic peak of the cycle of civilization. All of the false views, Bastiat and Say and Ricardo, come from those peak years, from a time when those views held good.

I disagree with one of Lerner's points in the last half of the second excerpt. Lerner disputes Hazlitt's view that prices will rise due to increased spending. Lerner's view is solidly grounded in the concept of "demand-pull" inflation. But demand-pull inflation does not apply to our situation. We have a cost problem. We have cost-push inflation. (See mine of 20 Feb.)