Here is Henry Hazlitt exercising his gift for lucidity to produce a book entitled Economics in One Lesson. If there were such a book this would be it. It deals with those “economic fallacies that are at last so prevalent that they have almost become new orthodoxy,” — to the point that now there is not a major government in the world whose economic policies are not influenced or in fact determined by them.
He undertakes to expose them by analysis and reason and to chase them into the ground. But in the first place, how did they get abroad in this garb of respectability? How is their worldwide vogue to be explained?
Mr. Hazlitt’s explanation is that people have lost the habit of thinking beyond the present. They have been beguiled by the saying, “In the long run we are all dead.” They want everything today; let tomorrow take care of itself.
This will hardly answer the question. As one who wrote a book on thinking as a science, Mr. Hazlitt would instantly concede that the behavior of the human mind has not changed in 2,000 years. Whereas what he is talking about, namely, the rise of economic fallacy to a plane of orthodoxy, displacing axioms that had been unchallenged since Adam Smith, is an event of the last thirty years. Therefore, the probability is that it is a political event, with little or no relation to economic science or to the art of thinking.
For whom is this one lesson intended? If it is intended for those who believe, or who may be persuaded by argument to believe, in free competition as the right regulating principle for a free society, and the only regulating principle that may be trusted to keep it free, then it is wonderfully clear and still as sound as when Harriet Martineau was writing economics for children in Great Britain early in the last century.
But if it is intended for those who believe in another way of organizing society they will say, and say rightly, that there is no such thing as an economic system. There is first a political system and then the economics of it. So you may have a totalitarian system and its economics or a system of free private enterprise and the economics for that, or anything in between. Mr. Hazlitt says, in italics,
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.
Very good. But you may define economics also as the study of how people produce, exchange and consume wealth; and when you have so defined it you see at once that when, as in a free political system, people feed and clothe and house themselves, provide their own security, pursue their own profit and absorb their own losses, the economic canons will be very different from those of a totalitarian system in which people are fed and clothed and housed and minded in their work and in their play by the omnipotent state.
Every fallacy that Mr. Hazlitt identifies is a fallacy on his own premise, and his own premise, as he says, is that of the traditional or classical economist, believing wholly in a free political system. If you change the premise, then what was a fallacy from that point of view may become logical from another.
One chapter is on the mirage of inflation. “The ardor for inflation,” he says, “never dies. It would almost seem as if no country is capable of profiting from the experience of another and no generation of learning from the sufferings of its forebears.” And this he thinks is owing to the fact that people will not consider the secondary consequences; they will look only at the “benefits for a short time to favored groups,” — benefits which are at the expense of others even while they are visible, and at the expense of all when the reckoning comes.
That is all true. But suppose you have those — and we do have them — who regard debasement of the currency as a weapon against the system of free capitalism which they wish to see destroyed. From that point of view is inflation logical or illogical?
In the same way and upon his own premise he comes to the subject of government debt. The fallacy there is the idea that government spending creates wealth. He shows, of course, that what the government spends it must first take, wherefore somebody has less to spend in proportion as the government has more; furthermore, that government debt can represent only postponed taxation because the borrowing must sometime be repaid and it can be repaid only out of revenues from taxation.
That too is true. But again it is true only upon the assumption that you have still and will continue to have the kind of government that is appropriate to a free political system, a government of limited powers, one that borrows only in time of great emergency, intending to pay it back in a meticulous manner and then balance its books again.
But suppose you have those — and we do have them — who regard borrowing, government spending and government debt as instruments of policy, the policy being to redistribute the wealth and income of a nation according to a social plan — the policy of a planned economy in which the government becomes responsible for full employment, full production and the stability of the total enterprise. On that premise a large government debt is an indispensable and powerful implement in the hands of the planners, because it enables them to manipulate the national income by fiscal and monetary measures. And so with wage fixing, price fixing, subsidies, ceilings, floors, and stabilization schemes — all fallacies from the point of view of a free economy but rational enough, almost too rational, if you want a planned economy.
Is the idea of a planned economy itself a fallacy? Will it work? The answer to that question is not what we might wish. The planned economy has a much longer history than the free economy. Is it not now working in a manner to threaten the peace of the world? Is not free capitalism on the defensive against it? But Mr. Hazlitt was not writing a political treatise. What he is saying is this: “If we want to keep our free political system, here are the economic principles to which we must return.” And he makes those principles very clear.
This review originally appeared in American Affairs, 1946, Vol 8, No. 4, pp. 276–277.
