it says precisely If we keep the price down, everyone will get his fair share. There is so much that is false in this picture and “solution” that we can here point only to some of the main fallacies. This means a destruction of wealth. But even such calculations rest on the assumption that the forced increase in wages has brought about no unemployment. The smashed window will go on providing money and employment in ever-widening circles. If the money was raised by taxation, we saw, then for every dollar that the government spent on public works one less dollar was spent by the taxpayers to meet their own wants, and for every public job created one private job was destroyed. Arbitrarily-fixed prices and arbitrarily-limited profits can only prolong shortages and reduce production and employment. But they could just as well be settled by shipments of cotton, steel, whisky, perfume, or any other commodity. This supposed encouragement often takes the form of a direct grant of government credit or a guarantee of private loans. Just as the subscribers to a lottery, considered as a unit, lose money because each is unjustifiably hopeful of drawing one of the few spectacular prizes, so it has been calculated that the total labor and capital dumped into prospecting for gold or oil has exceeded the total value of the gold or oil extracted.). This means that they are being subsidized more than those with less purchasing power. Let us take the first case. It is merely directed against the fallacy that a tariff on net balance “provides employment,” “raises wages,” or “protects the American standard of living.” It does none of these things; and so far as wages and the standard of living are concerned, it does the precise opposite. We can think of these non-existent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. Cycle continues as individual goods reach equilibrium. . They would have been unproductive. In a free economy, in which wages, costs and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities—and what articles will not be made at all. Elementary illustrations like this are sometimes ridiculed as “Crusoe economics.” Unfortunately, they are ridiculed most by those who most need them, who fail to understand the particular principle illustrated even in this simple form, or who lose track of that principle completely when they come to examine the bewildering complications of a great modern economic society. One of these is the fallacy of post hoc ergo propter hoc, which sees the enormous rise in wages in the last half century, due principally to the growth of capital investment and to scientific and technological advance, and ascribes it to the unions because the unions were also growing during this period. Even the much vaunted “government credit” rests on the assumption that its loans will ultimately be repaid out of the proceeds of taxes. But American consumers would be forced to subsidize this industry. They had forgotten the potential third party involved, the tailor. This is no accident. )” [me: It’s happening today in San Francisco, 2020]. The householder, however, is worse off. It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. Because there is less for everybody, because there is less to go around, real wages and real incomes must decline either through a fall in their monetary amount or through higher living costs. Public policy, however, tends to favor “full employment” bills over “full production” bills. In fact, if I am only one of a substantial number of people supplying that commodity or service, and if free competition exists in my line, this individual restriction will not pay me. The needs of China today are incomparably greater than the needs of America. He can see the inequity in holding down the price of that. There is a mysterious “leak” somewhere. Let us observe more clearly how it does this. Thus the exploitation of capital by labor can at best be merely temporary. Everywhere the means is erected into the end, and the end itself is for gotten. Their competition for jobs will drive down the pay offered even in these alternative occupations. It increases demand and reduces supply. And the means they suggest in the fiscal field are like those of the battlefield. For speculators, in the hope of making a profit, would do most of their buying at that time. The mental habit is so strong that even professional economists and statisticians cannot consistently break it. If the relief is $30 a week, for example, workers offered a wage of $1 an hour, or $40 a week, are in fact, as they see it, being asked to work for only $10 a week—for they can get the rest without doing anything. It is important to keep in mind, finally, that there will not merely be a difference in the pattern of post-war as compared with pre-war demand. That in fact is one reason why it is not good to bring such protected interests into existence in the first place. Throw them out of work, and you create unemployment and a fall in purchasing power, which would spread in ever-widening circles. It has simply lost the amount that it cost to make the car. At any given moment, as Benjamin sees it, the actual producing power of the nation is limited. Now he has become overnight an unskilled workman again, and can hope, for the present, only for the wages of an unskilled workman, because the one skill he had is no longer needed. This supposed encouragement often takes the form of a direct grant of government credit or a guarantee of private loans.”. The householder who is forced to employ two men to do the work of one has, it is true, given employment to one extra man. It is true, no doubt, that an artificial reduction in the interest rate encourages increased borrowing. The result in the long run is that consumers are prevented from getting better and cheaper products, and that real wages are held down. The fact is that, though the volume of saving of the very rich is doubtless affected much less proportionately than that of the moderately well-off by changes in the interest rate, practically everyone’s saving is affected in some degree. It makes no claim to originality with regard to any of the chief ideas that it expounds. It is true, for example, that persons engaged exclusively or chiefly in export business might gain on net balance as a result of bad loans made abroad. Recomendaram-me Economia em uma lição (Economics in One Lesson) de Henry Hazlitt, como o livro Pop mais claro e fiável sobre economia, e tenho a dizer que foi o melhor livro de não-ficção que li até à data. And as long as this situation exists, there will be a tendency for employers to bid workers up to their full economic worth. But in themselves ignoring or slighting the long run effects, they are making the far more serious error. It will be poorer by the amount of wheat that has not been grown. One could go on to cite such make-work practices in many other fields. “By implication they put the blame for higher prices on the greed and rapacity of businessmen, instead of on the inflationary monetary policies of [the government].”, “If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity.”. Suppose, in spite of the self-contradictoriness of the assumption, that all workers by coercive methods could raise their wages by an equal percentage? The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousand fold by a factor that is insignificant in, say, physics, mathematics or medicine—the special pleading of selfish interests. which do not alter the end result) is the only way in which the British can eventually make use of these dollars. . The great burden of income taxes is imposed on a minor percentage of the nation’s income; and these income taxes have to be supplemented by taxes of other kinds. But there would also be many indirect losses brought about by the effect on the economy of these direct losses. In each case the beneficiaries of such policies get “purchasing power.” But in each case someone else loses an exactly equivalent amount. Sometimes they do both. Employers are primarily driven by profit maximization. For what is really being lent is not money, which is merely the medium of exchange, but capital. But this will not cancel out the gains and losses of the transition period. Domestic trade is also conducted in the main by crossing off checks and other claims against each other through clearing houses. The farmer is encouraged, with the taxpayers’ money, to withhold his crops excessively. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. I know of no other modern book from which the intelligent layman can Review of Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly, by John Quiggin (Princeton University Press, 2019).. Never in the history of the world has there been enough of these. It recognizes, for example, that when it keeps the price of milk or butter below the level of the market, or below the relative level at which it fixes other prices, a shortage may result because of lower wages or profit margins for the production of milk or butter as compared with other commodities. It would be considered unspeakably silly for the wood-gathering member of the family to complain that they could gather more firewood if his brother helped him all day, instead of getting the fish that were needed for the family dinner. You cannot say that the purchasing power has been taken away from the taxpayers. The most obvious case in which intimidation and force are used to put or keep the wages of a particular union above the real market worth of its members’ services is that of a strike. (This resounding error, as we shall see, is also the starting point of most currency cranks and share-the-wealth charlatans.) I forget the first day when it made its appearance in a legislative bill; but with the advent of the New Deal in 1933 it had become a definitely established principle, enacted into law; and as year succeeded year, and its absurd corollaries made themselves manifest, they were enacted too. They cannot in a few weeks acquaint themselves with the subject as thoroughly as the hired brains who have been devoting their full time to it for years; they are accused of being uninformed, and they have the air of men who presume to dispute axioms. Amateur writers on economics are always asking for “just” prices and “just” wages. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. Let us now look at some of the results of government attempts to hold the prices of commodities below their natural market levels. . In nearly every effort to “stabilize” the price of a commodity, the interests of the producers have been put first. It does not expand its operations, or it expands only those attended with a minimum of risk. But now the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services. It is at least possible for unions to make their gains in the short run at the expense of employers and investors. Perhaps in an individual case it may work out all right. In the theaters unions insist on the use of scene shifters even in plays in which no scenery is used. They can see the bridge. The marginal producers are driven out of business. This increases the average cost of producing the product. 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. Everything we get, outside of the free gifts of nature, must in some way be paid for. More money will be lost by loans to them. The whole economic progress of mankind has consisted in getting more production with the same labor. Disbanding Troops and Bureaucrats10. It should not be difficult to decide, after our analysis, with whom the real folly lies. Now suppose, again for the sake of arithmetical simplicity, that the price of the product that each group of workers makes rises by the same percentage as the increase in that group’s wages. They could turn out almost anything you cared to mention in huge and practically unlimited amounts. when they actually happened the bureaucrats responsible for the result merely replied that they would have happened anyway. . It is not even possible to halt an inflation, once embarked upon, at some preconceived point, or when prices have achieved a previously-agreed-upon level; for both political and economic forces will have got out of hand. Expanded operations by purchasing more machinery and raw material. Each chapter has the same title. Government loans will waste far more capital and resources than private loans. But the same unsettlement, as we have already observed, would be caused in the capital goods industries by a sudden and substantial decrease in savings. If, under such circumstances, the automobile workers needed a 30 per cent increase to keep the economy from collapsing, would a mere 30 per cent have been enough for the others? But it does benefit them. The borrowing must some day be repaid. Lesson: Visible consequences results in consideration of only two visible parties in the transaction: the baker and the glazier. It says precisely the things which need most saying and says them with rare courage and integrity. The only exception to this occurs when a group of workers is receiving a wage actually below its market worth. . Where business is increased in one direction, it is correspondingly reduced in another. But need is not demand. The author agrees that basic infrastructure, military spending, government administrative costs and emergency services (police, fire, etc.) There is not a major government in the world at this moment, however, whose economic policies are not influenced if they are not almost wholly determined by acceptance of some of these fallacies. Others, like the telephone or the airplane, perform operations that direct human labor could not perform at all. As these are likely to consist for the most part of workers, they will simply have their real wages reduced by having to pay more for a particular product. Inflation, as we shall later see, while it complicates the analysis, does not at bottom change the consequences of the policies discussed. 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. Even if we assume that the problem could be solved technically—a tariff for A, an industrialist subject to foreign competition; a subsidy for B, an industrialist who exports his product—it would be impossible to protect or to subsidize everybody “fairly” or equally. We have already seen how this actually happened historically with stockings and other textiles. It overlooks, first of all, that consumers will suffer the loss of that product. Among men of good will such an aim can be taken for granted. Such prices are a special privilege. Price fixing wages results in higher unemployment and reduced labor supply. Now there is a half-truth in the “backed-up” demand fallacy, just as there was in the broken-window fallacy. Do increases in wages come at the expense of employer profits? ryan robinson computer skills for economic analysis economics in one lesson critical analysis critical analysis in 1946, author henry hazlitt wrote the book The essential political aims of the “silver Senators” could have been as well achieved, at a fraction of the harm and cost, by the payment of a frank subsidy to the mine owners or to their workers; but Congress and the country would never have approved a naked steal of this sort unaccompanied by the ideological flimflam regarding “silver’s essential role in the national currency.”. The protective tariff injured them more than they knew. 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. This has prevented most people from recognizing that the same principles govern both. In the past it has been the lure of high profits in special firms or industries that has led him to take that great risk. Cost hikes due to wage hikes are poorly estimated because many studies only look at direct wage inputs. The rationing of each commodity as it grows scarce, in other words, must put more and more pressure on the unrationed commodities that remain. Let us, therefore, try to see exactly what happens when technical improvements and labor-saving machinery are introduced. But in recent years, as their power has grown, and as much misdirected public sympathy has led to a tolerance or endorsement of anti-social practices, unions have gone beyond their legitimate goals. These new firms are inefficient compared with those they displace; they turn out inferior and dishonest goods at much higher production costs than the older concerns would have required for continuing to turn out their former goods. In most countries it will shrink in total amount. During the transition period the large, long-established firms, with a heavy capital investment and a great dependence upon the retention of public good-will, are forced to restrict or discontinue production. Anybody, one would think, would be able to avoid it after a few moments’ thought. The classical economists, refuting the fallacies of their own day, showed that the saving policy that was in the best interests of the individual was also in the best interests of the nation. If money that would previously have been used for savings were thrown into the purchase of consumers’ goods, it would not increase employment but merely lead to an increase in the price of consumption goods and to a decrease in the price of capital goods. Hazlitt articulates the core idea of the book in chapter one: “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 remainder of the book explores this idea through a range of economic fallacies, public misconceptions, and failed government policies. Because his bathroom leak has been repaired at double what it should have cost, he decides not to buy the new sweater he wanted. But, alas, the world is not ruled by the engineers, thinking only of production, but by the business men, thinking only of profit. If, therefore, the old employees succeed by force in preventing new workers from taking their place, they prevent these new workers from choosing the best alternative open to them, and force them to take something worse. Suppose we do assume that the right number of additional workers of each skill is available, and that the new workers do not raise production costs. Fixed prices will necessarily involve “just” allotments and allocations for production and consumption as among nations, but only cynics will anticipate any unseemly international disputes regarding these. All the money in a nation, as these theorists picture the matter, will be offered against all the goods. So that while labor might get a broader slice of a smaller pie, during this period of transition and adjustment to a new equilibrium, it may be doubted whether this would be greater in absolute size (and it might easily be less) than the previous narrower slice of a larger pie. 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. “That wealth consists in money, or in gold and silver,” wrote Adam Smith nearly two centuries ago, “is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value. Flashcards. Moreover, whatever the sum we offer for relief, we create a situation in which everyone is working only for the difference between his wages and the amount of the relief. For we may define “savings” and “investment” as constituting respectively the supply of and demand for new capital. To fix the price of bread, it may fix the wages in bakeries, the price of flour, the profits of millers, the price of wheat, and so on. By nominally keeping the price ceilings, however, the politicians in power tried to show that their hearts, if not their enforcement squads, were in the right place. All that we really want to do is to correct these violent, senseless fluctuations in price. It is true that a particular group of bridge workers may receive more employment than otherwise. The argument for “parity” prices ran roughly like this. On the assumption that there is only a fixed amount of work to be done, the conclusion is drawn that a thirty-hour week will provide more jobs and will therefore be preferable to a forty-hour week. If he had twice as much money he could buy twice as many things; if he had three times as much money he would be “worth” three times as much. From time immemorial proverbial wisdom has taught the virtues of saving, and warned against the consequences of prodigality and waste. This fallacy is still the basis of many labor union practices. Suppose they are paid for by deficit financing—that is, from the proceeds of government borrowing or from resort to the printing press? The whole argument of this book may be summed up in the statement that in studying the effects of any given economic proposal we must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone. According to Economics in One Lesson, Henry Hazlitt ____ minimum wage laws. But the provision in the Federal law, that an employer must pay a worker a 50 per cent premium above his regular hourly rate of wages for all hours worked in any week above forty, was not based primarily on the belief that forty-five hours a week, say, was injurious either to health or efficiency. Moreover, the demand for the product has increased, and the business should be allowed to charge the prices necessary to encourage its expansion to supply this demand.” And so on. “The politicians—remembering that tenants have more votes than landlords—cynically continue their rent control long after they have been forced to give up general price controls.”, “The pressure for rent control comes from those who consider only its imagined short-run benefits to one group in the population. There is no more persistent and influential faith in the world today than the faith in government spending. After he takes your money he has more purchasing power. Legal price ceilings cannot cure either. Then there will be a real scarcity, and consumers will have to pay exorbitant prices for the commodity. Suppose, for example, that the government prints money to pay war contractors. Because it is now more profitable to make that article than others, the people already in the business expand their production of it, and more people are attracted to the business. The real cause, however, is the uncertainty brought about by the government policies. How is the problem of alternative applications of labor and capital, to meet thousands of different needs and wants of different urgencies, solved in such a society? Higher production costs and scarcer supplies will tend to raise prices, so that workers can buy less with the same dollar wages; on the other hand, the increased unemployment will shrink demand and hence tend to lower prices. The new firms owe their very existence or growth to the fact that they are willing to violate the law; their customers conspire with them; and as a natural consequence demoralization spreads into all business practices. Consumers want good prices, variety and ample supply. It is seldom, moreover, that any honest effort is made by the price-fixing authorities merely to preserve the level of prices existing when their efforts began. There is here no net gain to industry as a whole. When Ludwig von Mises’ new treatise on economics, now in preparation, appears, it will extend beyond any previous work the logical unity and precision of modern economic analysis. To that task we shall now proceed. They do it by making goods cheaper for consumers (as in our illustration of the overcoats), or they do it by increasing wages because they increase the productivity of the workers. And this applies in every other line. This fundamental fact, it is true, is obscured for most people (including some reputedly brilliant economists) through such complications as wage payments and the indirect form in which virtually all modern exchanges are made through the medium of money. This means, in less technical language, that “a 1 per cent reduction in the real rate of wage is likely to expand the aggregate demand for labor by not less than 3 per cent.” Or, to put the matter the other way, “If wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates” so that the total income of the workers would be reduced correspondingly. “This is inherent in the modern division of labor and in an exchange economy.”, “Mere inflation—that is, the mere issuance of more money, with the consequence of higher wages and prices—may look like the creation of more demand. An increase in costs of production, where the government controls prices and forbids any price increase, takes the profit from marginal producers, forces them out of business, means a shrinkage in production and a growth in unemployment. If an automobile company lends a man $1,000 to buy a car priced at that amount, and the loan is not repaid, the automobile company is not better off because it has “sold” the car. The total sum that I realized from my larger output might decline. To blame “excessive saving” for the business decline would be like blaming a fall in the price of apples not on a bumper crop but on the people who refuse to pay more for apples. Do Unions Really Raise Wages?20. (I have already put the reader on notice that we shall postpone to a later point the complications introduced by an inflationary expansion of credit.) This is the argument that if the farmer gets higher prices for his products he can buy more goods from industry and so make industry prosperous and bring full employment. These taxes inevitably affect the actions and incentives of those from whom they are taken.  The less he withdraws from the existing stock of wealth for his own use, the more he leaves for others. Good economists: Considers the long-run and indirect consequences. If they cannot find sufficient return anywhere to compensate them for their risk, they will cease to invest at all. The most frequent of these is the proposal to shorten the working week, usually by law. I shall not weary the reader with a recital of the fantastic figures put forward by this group or with corrections to show what the real facts were. If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. Each person is likely to think that he can so manage the political forces that he can benefit from the subsidy more than he loses from the tax, or benefit from a rise for his own product (while his raw material costs are legally held down) and at the same time benefit as a consumer from price control. This falling value can be measured in rising prices of commodities. There is actually no limit to the amount of work to be done. 2. Why should they be guided by the market? This can be done by many methods: by an increase in capital accumulation—i.e., by an increase in the machines with which the workers are aided; by new inventions and improvements; by more efficient management on the part of employers; by more industriousness and efficiency on the part of workers; by better education and training. This work is licensed under a Creative Commons Attribution 4.0 International License, except for material where copyright is reserved by a party other than FEE. The power capacity already being exerted by the steam engines of the world in existence and working in the year 1887 has been estimated by the Bureau of Statistics at Berlin as equivalent to that of 200,000,000 horses, representing approximately 1,000,000,000 men; or at least three times the working population of the earth. Focus on policies that maximize production. What is true of this elementary equation is true of the most complicated and abstruse equations encountered in mathematics. It is unfortunate for clarity of economic thinking that the price of labor’s services should have received an entirely different name from other prices. But he is always likely to regard his own business as in some way an exception. 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. This is the error often made by the classical economists. Wages are prices despite the difference in terminology (which prevents some from recognizing that the same price principles apply to wages). . And this brings us to the real effect of a tariff wall. Who gains when everyone equally subsidizes everyone else? Not only do these policies put one item after another out of production by leaving no incentive to make it, but their long-run effect is to prevent a balance of production in accordance with the actual demands of consumers. The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. It is true that supply is in part determined by costs of production. When people risk their own funds they are usually careful in their investigations to determine the adequacy of the assets pledged and the business acumen and honesty of the borrower. What to do about the surplus of money will be discussed in a later chapter. Once again, however, the matter does not end there. In our own day the most persistent argument put forward for inflation is that it will “get the wheels of industry turning,” that it will save us from the irretrievable losses of stagnation and idleness and bring “full employment.” This argument in its cruder form rests on the immemorial confusion between money and real wealth. Terms in this set (26) Who is Henry Hazlitt? On the other hand is the group—and it has included some eminent economists—that holds a rigid mechanical theory of the effect of the supply of money on commodity prices. It is sometimes argued, for example, that machines create more jobs than would otherwise have existed. Rent control advocates often view housing supply as inelastic. (It is possible no doubt to imagine that improvements and new inventions merely in replaced machinery and other capital goods of a value no greater than the old would increase the national productivity; but this increase would amount to very little, and the argument in any case assumes enough prior investment to have made the existing machinery possible.) When your money is taken through taxes to support needless bureaucrats, precisely the same situation exists. It is the fallacy of overlooking secondary consequences. Passing over everything that this elementary treatise may owe to his writings in general, my most specific debt is to his exposition of the manner in which the process of monetary inflation is spread. Each of us is trying to save his own labor, to economize the means required to achieve his ends. When prices are arbitrarily held down by government compulsion, demand is chronically in excess of supply. As a working newspaper man, moreover, I am acutely aware of how quickly statistics become out-of-date and are superseded by later figures. That lower living standard will be brought about either by lower average money wages than would otherwise prevail or by higher average living costs, or by a combination of both. The lure of high profits in certain industries is essential to attract risk-takers. The price of that product therefore falls in relation to the price of other products, and the stimulus to the relative increase in its production disappears. Real wealth, of course, consists in what is produced and consumed: the food we eat, the clothes we wear, the houses we live in. Less wealth is created. Still another objection is made against saving. They will have that much taken away from them which they would otherwise have spent on the things they needed most. The manufacturer, however, would have adopted the machine only if it had either made better suits for half as much labor, or had made the same kind of suits at a smaller cost. The first thing to be noticed about this table is that total production increases each year because of the saving, and would not have increased without it. What is Hazlittâs purpose in writing this book? “Yes,” they will freely admit, “the economic arguments for parity prices are unsound. Economists Paul H. Douglas and A.C. Pigou independently determined that the elasticity of labor demand is between 3 and 4: “A 1% reduction in the real rate of wage is likely to expand the aggregate demand for labor by not less than 3%. The more of it that is diverted to producing frivolities and luxuries, the less there is left for producing the essentials of life for those who are in need of them. On net balance industry in general has gained nothing. But our aim here is not to trace all the results that followed historically from efforts to save particular industries, but to trace a few of the chief results that must necessarily follow from efforts to save an industry. Efficiency and productivity gains allow the business owner to deploy profits in multiple ways: The spent profits, in turn, generate additional demand and employment. Rather than repeat most of the previous argument, I leave it to the reader to trace the effects of export subsidies as I have traced the effects of bad loans. Through these examples we can move from the most elementary problems in economics to the most complex and difficult. This is that they will waste capital and reduce production. It is said that the various consumers’ goods industries are built on the expectation of a certain demand, and that if people take to saving they will disappoint this expectation and start a depression. To that extent they were in advance of many of their present-day critics, who are befuddled by money rather than instructed by it. Taxpayers want to pay low taxes but reap government benefits. Apart from this negligible hoarding of cash, then (and even this exception might be thought of as a direct “investment” in money itself) “savings” and “investment” are brought into equilibrium with each other in the same way that the supply of and demand for any commodity are brought into equilibrium. “The effect of keeping interest rates artificially low, in fact, is eventually the same as that of keeping any other price below the natural market. “Labor” is no better off, because a day’s employment of an unneeded tile-setter has meant a day’s disemployment of a sweater knitter or machine handler. A Chevrolet six-cylinder touring car cost $2,150 in 1912; an incomparably improved six-cylinder Chevrolet sedan cost $907 in 1942: adjusted for “parity” on the same basis as farm products, however, it would have cost $3,270 in 1942. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. A Swiss Family Robinson, perhaps, finds this problem a little easier to solve. We cannot in the long run pay labor as a whole more than it produces. In addition, the capital available for risk-taking itself shrinks enormously. There is first of all a misunderstanding of what it is that has been causing prices to rise. “Keep your eye on Joe Smith,” these writers insist. It is reflected in hundreds of make-work rules and feather-bed practices by labor unions; and these rules and practices are tolerated and even approved because of the confusion on this point in the public mind. Good volumes in this class, which will bring the reader abreast of recent refinements in economic thought, are Frederic Benham’s Economics (525 pages) and Raymond T. Bye’s Principles of Economics (632 pages). They do not mean the freedom of ordinary people to buy and sell, lend and borrow, at whatever prices or rates they like and wherever they find it most profitable to do so. A much smaller proportion of the American population needs to work than that, say, of China or of Russia. Profits actually do not bulk large in our total economy. If no honest attempt is made to pay off the accumulated debt, and resort is had to outright inflation instead, then the results follow that we have already described. Thus the government is driven to controls in ever-widening circles, and the final consequence will be the same as that of universal price-fixing. The wage-rate structure, in fact, may become even more distorted; for the great mass of unorganized workers, whose wage rates even before the inflation were not out of line (and may even have been unduly depressed through union exclusionism), will be penalized further during the transition by the rise in prices. But in terms of the actual production and exchange of real things it is not. The joint system means merely that Farmer A and Industrialist B both profit at the expense of Forgotten Man C. So the alleged benefits of still another scheme evaporate as soon as we trace not only its immediate effects on a special group but its long-run effects on everyone. It leads to the over-expansion of some industries at the expense of others. Whereas Alvin spends not only the full $50,000 income each year but is digging into capital besides, Benjamin lives much more modestly and spends only about $25,000. The first chapter of this remarkable book is called “Of the Division of Labor,” and on the second page of this first chapter the author tells us that a workman unacquainted with the use of machinery employed in pin-making “could scarce make one pin a day, and certainly could not make twenty,” but that with the use of this machinery he can make 4,800 pins a day. 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. Costs must be considered. But many unions have insisted on rigid subdivisions of labor which have raised production costs and led to expensive and ridiculous “jurisdictional” disputes. The public tolerates these practices because it either believes at bottom that the unions are right, or is too confused to see just why they are wrong. The real purchasing power for goods, however, as we have seen, consists of other goods. This would be analogous to the notion that in a free market prices in general are chronically too low. Each of us must also sell something, even if for most of us it is our own services rather than goods, in order to get the purchasing power to buy. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the taxpayers would have spent their money if it had not been taxed away from them, there can be no objection. If they defer spending, they believe they will get more for their money. It will hire the best buyable minds to devote their whole time to presenting its case. He is a disciple (to go no further back) of Rodbertus, who declared in the middle of the nineteenth century that capitalists “must expend their income to the last penny in comforts and luxuries,” for if they “determine to save . Every dollar of the amount he has saved in direct wages to former coat makers, he now has to pay out in indirect wages to the makers of the new machine, or to the workers in another capital industry, or to the makers of a new house or motor car for himself, or of jewelry and furs for his wife. It brings about a scarcity. This exaggeration is mainly the result of failure to recognize that wages are basically determined by labor productivity. But in any case, machines, inventions and discoveries increase real wages. But we shall assume an example that involves the main possibilities. They consist of mortgages; of installment credits for the purchase of automobiles, refrigerators, radios, tractors and other farm machinery, and of bank loans made to carry the farmer along until he is able to harvest and market his crop and get paid for it. Not only should we have to regard all further technical progress as a calamity; we should have to regard all past technical progress with equal horror. (We may be sure, if the history of wage bargaining even within individual unions is any guide, that the automobile workers, if this last proposal had been made, would have insisted on the maintenance of their existing differentials; for the passion for economic equality, among union members as among the rest of us, is, with the exception of a few rare philanthropists and saints, a passion for getting as much as those above us in the economic scale already get rather than a passion for giving those below us as much as we ourselves already get. “The much vilified price system solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other.”. There is a still further factor which makes it improbable that the wealth created by government spending will fully compensate for the wealth destroyed by the taxes imposed to pay for that spending. As was so amply demonstrated in one country after another, particularly in Europe during and after World War II, some of the more fantastic errors of the bureaucrats were mitigated by the black market. The policy, therefore, under present conditions, seems unlikely to accomplish either its economic or its political aims. They will become self-supporting civilians. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Then the first effect of these expenditures will be to raise the prices of supplies used in war and to put additional money into the hands of the war contractors and their employees. It is impossible for him to satisfy all these needs at once; he has not the time, energy or resources. John Stuart Mill and other classical writers, though they sometimes failed to take sufficient account of the complex consequences resulting from the use of money, at least saw through the monetary veil to the underlying realities. For at any moment the factors of production are limited. They are told that the farmers’ crops are all dumped on the market at once, at harvest time; that this is precisely the time when prices are lowest, and that speculators take advantage of this to buy the crops themselves and hold them for higher prices when food gets scarcer again. Some governments remove rent controls from “luxury” housing while keeping price controls on low or middle class housing. Those fallacies all stem from one of two central fallacies, or both: that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups. “In the long run business and employment in America would be hurt, not helped, by foreign loans that were not repaid. E.g. People begin to ask themselves why they should work six, eight or ten months of the entire year for the government, and only six, four or two months for themselves and their families. An enormous literature is based on this fallacy, and, as so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other. If we assume that the workers, when previously employed for forty hours, were getting less than the level of production costs, prices and profits made possible, then they could have got the hourly increase without reducing the length of the working week. “One occupation can expand only at the expense of all other occupations.”. But if an attempt is made to keep up the price of an agricultural commodity and no artificial restriction of output is imposed, unsold surpluses of the over-priced commodity continue to pile up until the market for that product finally collapses to a far greater extent than if the control program had never been put into effect. It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other. The Printing History of ECONOMICS IN ONE LESSON: Harper & Brothers edition published July, 1946; 1st printing July, 1946; 2nd printing July, 1946; 3rd printing August, 3946; 4th printing October, 1946; 5th printing February, 1947; 6th printing February, 1948; Reader’s Digest condensed version published August, 1946; February, 1948; Spanish edition (Editorial Kraft, Buenos Aires) published December, 1947; Pocket Book edition published November, 1948; 1st printing October, 1948; Special edition for The Foundation for Economic Education, Inc. May, 1952. Group D, for example, even though its own incomes and prices have at last advanced 25 per cent, will be able to buy only as much goods and services as before the inflation started. They consider him a good risk. Policies that benefit individual groups at the expense of other groups. 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