This review originally appeared in American Affairs, 1946, Vol 8, No. 4, pp. 276–277. Reprinted from FEE.org
Henry Hazlitt exercised his gift for lucidity to produce a book entitled, Economics in One Lesson.
The book deals with “economic fallacies that are at last so prevalent that they have almost become new orthodoxy,” to the point that now, you would be hard-pressed to find one major government in the world whose economic policies are not influenced or in fact determined by these principles.
Hazlitt 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?
Thinking as a Science
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 Lesson Intended?
If it is intended for those who believe—or who may be persuaded by argument to believe— in free competition as the only moral regulating principle for a free society, then it is as wonderfully clear as when Harriet Martineau was writing economics for children in Great Britain in the early 20th 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 private free enterprise and its corresponding economic system, 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, what was once a fallacy from that point of view may become logical from another.
One chapter in Hazlitt’s book 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.”
The former demonstrates Hazlitt’s belief 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 they do exist—who regard debasement of the currency as a weapon against free capitalism, a system 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.
Theft Funds Governments
He shows, of course, that anything the government spends it must first take, therefore 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 be repaid at some point 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 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.
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: “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.