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Economics In One Lesson by Henry Hazlitt

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"The Blessings of Destruction"

Nothing could be more intuitive than recognizing that if something is destroyed then it must also be someone's loss.  Even a child understands this when he sees his tower of playing cards come tumbling down like so many investment banks from the recklessness of a sibling; or when a remote control airplane becomes irreparable after one too many nose dives into the pavement.  Destruction can be nothing else - no more than down can also be up.

But it seems that at some greater magnitude of destruction the rules change.  Maybe down can be up - as long as the down is very very large.  And perhaps down can be up - as long as those advocating for this definition are sufficiently "educated" or influential.  Indeed, it has been academics and politicians who have led the charge against logical economic thought in favor of illogical economic thought - from Keynes and FDR to Krugman and Obama.

Destructionomics has influenced policies like crop burning and provided an illusory silver lining to wartime annihilation.  And lest you think this illogic is relegated to the distant past, think again.  Of course, as Hazlitt points out, destructionomists only see half of the truth.  They only see the jobs created to fill the need caused by the destruction.  They do not account for the jobs that were destroyed or the jobs that would have been created.

Hazlitt further illuminates the fallacy of confusing need for demand.  But before addressing this, a quote by that superfluous man, Albert Jay Nock, will serve to set the stage for a more complete dissection of this fallacy:

"The general preoccupation with money led to several curious beliefs which are now so firmly rooted that one hardly sees how anything short of a collapse of our whole economic system can displace it. One such belief is that commodities—goods and services—can be paid for with money. This is not so. Money does not pay for anything, never has, never will. It is an economic axiom as old as the hills that goods and services can be paid for only with goods and services; but twenty years ago this axiom vanished from everyone's reckoning, and has never reappeared. No one has seemed in the least aware that everything which is paid for must be paid for out of production, for there is no other source of payment."

It is true that the need associated with the devastations of war are real.  But to equate need with demand is to presume that the need can be filled by production.  However, as Nock explains, the lack of productive gains eliminates this possibility.  Instead, destruction actually decreases the amount of goods and services in society.  Therefore, if structures previously destroyed are built once more, it is only because goods and services in some other part of the world were destroyed in order to do it, or goods and services that would have come to market were never allowed to.  Destruction is always a "net negative" for society.  The added complication of money is simply resolved.  Money is merely an intermediary.  It is simply the atmosphere through which goods and services travel from one owner to another.  An atmosphere ideally suited to its purpose and better than any other yet invented.  But only this and nothing more.

Hazlitt further explains how thinking of purchasing power in terms of money can lead to faulty economic reasoning, especially in the presence of a fiat money system that is prone to inflation by the monetary authority.  He called this the "monetary illusion" and the "monetary veil."  That is, people tend to see the rising nominal value of wages and confuse this with a greater degree of purchasing power.  "That which is not seen" is the decreasing real wage rate - the relative values between one's labor and the goods and services purchased with that labor.  Note that this perspective eliminates money in the calculation; effectively relegating it to its proper position - a medium of exchange.

Hazlitt's next chapter is "Public Works Mean Taxes."  Can government spending save us?

"The Lesson" and "The Broken Window"

Note: this book is organized as "The Lesson" (Chapter 1) and as "The Lesson Applied" (All remaining Chapters).

In the first chapter (The Lesson) Hazlitt writes that the fallacies so abundant in economic thought are a result of two phenomena: 1) the "special pleading of selfish interests," and 2) the "fallacy of overlooking secondary consequences."

Let me address them in reverse order.  Recounting Frederic Bastiat's famous work, That Which is Seen, and That Which is Not Seen, Hazlitt claims that the "Broken Window" fallacy, or the tendency to see only the immediate effects of a policy on a specific group at the expense of seeing the long-term effects on all groups, is to blame.

In chapter two (The Broken Window) Hazlitt explains how a young vandal throws a rock through a business owner's window.  And while the crowd of on-lookers grows many of them begin to see the silver lining.  After all, a new window will provide work to the window maker.  In fact, if windows were never broken many window makers would be forced out of a job.  Their conclusion is that this whole event turned out to be a benefit to society-at-large rather than a cost.

Why is this line of thinking fallacious?  Let's use Robinson Crusoe to illustrate the consequences of property destruction (as Murray Rothbard most famously used him to illustrate the rights to property).  Crusoe has just washed up on his island, and so he begins to prioritize his efforts in such a way as to maximize his probability of survival.  If he attempted to build a permanent shelter first he may very well die of thirst before he got the chance to look for water.  In other words, certain productive efforts can only be realized after other, more basic and more necessary tasks have been completed and realized.

Let's assume Crusoe has effectively prioritized and that he now has 1) water, 2) a fire, 3) a temporary shelter, and 4) a store of food.  He begins to imagine a more permanent structure to provide him shelter and a greater degree of comfort.  But before he begins to build, his store of food is ravaged by a pack of wild beasts.  Now, for Crusoe to begin to build his house before he replenished his food would be folly.  This is why destruction (of a window or anything) is always a loss to society.  A community cannot advance to greater and greater levels of sophistication if it is continually repairing its capital base.  In fact, if windows could be made that would never break, this would be a great advance in productivity.  Yes, the window making industry would significantly contract, but now all that labor is free to move on to produce more advanced and more useful goods and services.

If the fallacy of "overlooking secondary consequences" is the cause of bad policy, it is the "special pleading of selfish interests" that determines who benefits at the expense of whom.  This brings up the idea of the concentration of benefits and the diffusion of costs.  If the benefits of a certain policy are concentrated into a group that can effectively organize itself, a lobby may develop to advocate for policy in their favor.  Conversely, if the costs of this policy are concentrated in a group that can also organize itself, the first group may find its efforts frustrated by an equally influential counterparty.  However, if the costs are spread out among many groups and the cost to each individual is minimal, the former group will likely take advantage of the latter.

The rest of the book consists of illustrations of the broken window fallacy in current (as of the writing of the book) policy.  I'll try to add some more current illustrations.

Intro post to Economics in One Lesson by Henry Hazlitt

This book is a must-read for anyone interested in making sense of the political-economic environment.  Hazlitt's teachings are timeless.  I venture to say that at any point in time since people began to transact with each other one would be able to find examples of the economic truths illustrated in this book.

He is one of the most easy-to-read writers on economic theory in history.  And not only is his clarity world-class, his logic is unrelenting - almost dizzying.  The mind of a mere mortal, as it follows the trail that the writer is blazing, is often naturally enticed down rabbit trails that lead to fallacious conclusions.  However, Hazlitt always brings the reader back to the straight and narrow - even at the expense of whiplash.