The One Lesson
Economics, wrote Henry Hazlitt, is haunted by more fallacies than any other study known to man. This is due in no small part to the special pleading of selfish interests. But there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences. In this lies almost the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. FULL ARTICLE
Comments (27)
When I first read Hazlitt's "Economics in One Lesson" I thought it was overly simplistic. The two points would seem to be so obvious that anyone should understand. Since that time in economic discussions I have referenced Hazlitt's book more than any other source simply because those who think they know economics, especially those who have a piece of paper to shake in your face, do not grasp the truth of this simplistic message.
Brevity is truely the soul of wit proven by Hazlitt's lesson as the most important idea in economic study. This book should be required reading at the beginning of every economics course.
Published: October 12, 2007 7:28 AM
I've read the Hazlitt text and had my 10 year old daughter read it, we both loved it. Truly a classic.
http://amateureconblog.blogspot.com/2006/10/henry-hazlitt-bio-and-works.html
Published: October 12, 2007 7:44 AM
In “Pure Theory of Capital” Hayek points out that Keynes merely catered to the prevailing views of politicians and businessmen of his day, which is the reason for his immediate popularity. Hayek also writes that businessmen are much better informed about the short run effects, that is the day-to-day operations of business, than economists. Because they’re experts in the short run, and because they’re rewarded for performing well in the short run, they pay little attention to the long run. In turn, politicians are concerned about the short run because businessmen and their employees are focused on it. So if you want to be popular, you’ll focus on the short run as did Keynes. But the economists job is to force the businessman to look up once in a while at the long term effects of policies.
In addition to the short run/long run issue, the other chief cause of fallacies is the old mercantile idea that one person (or nation) cannot gain except at the expense of another. Put the two together and you have a recipe for disaster.
Published: October 12, 2007 8:17 AM
I would say that there is a fallacy in assuming there are only "secondary" effects. There are as many effects as there are people effected. And "The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups". So we are all now part of special interest groups, and I only have liberty and justice when my group is finally considered?
I realize that this may merely be semantics, but I would think that an economic philosophy that properly defines us all as several and finite, each with a different experience and to some extent reality, all endeavoring to interact with a singular material world which has natural limits that tossing around such broad stroke concepts as "not just one group but ALL groups" has already crossed the line into Statist thinking and is basing arguments from an a priori Statist view.
The total of an economy (and the market) is the sum total of all human action. When force and coercion are used when life and property are not threatened, a proverbial flutter of the butterfly's wings has taken place. The total effect, by individual, can never be known. But as far as the State and its coercion one truth can be determined just as an infinite series can be summed, the State can never exceed the total productivity of free human endeavor, it can only decrease it. We just have to look at the economically illiterate around us, the prisons bursting with non-violent offenders, a $50 Trillion accrual basis debt to see the overall effects on society as a whole without getting a lengthy biography of every last man, woman, and child.
Published: October 12, 2007 8:41 AM
The beauty of Hazlitt's One Lesson is that it provides a simple, easy-to-understand principle that applies to a wide variety of issues, not that it provides a comprehensive economics philosophy. It's merely a subset of a larger economic view. Furthermore, that principle illustrates why the use of coercion in the economy does more harm than good. If only we could get high schoolers (or at least college students) to read it, we could develop generations of people with better economic understanding.
Published: October 12, 2007 9:05 AM
What Hazlitt is actually saying is that change happens at the margin. One must look at more than just the marginal change to understand the economics. All the straws broke the camel's back but only the 10,001th is seen to be the immediate cause.
Published: October 12, 2007 10:39 AM
Brad, Hazlitt speaks in terms of groups because it is usually in such collectives that individuals engage in rent-seeking. In a sense, all others who do not belong to those specific groups belong to a more general group, i.e. that of individuals being ripped off. It is silly to reduce things to the level where one cannot speak of individuals with certain common traits (e.g. those harmed by rent-seeking) as a group anymore.
Published: October 12, 2007 11:55 AM
Brad: "...to see the overall effects on society as a whole without getting a lengthy biography of every last man, woman, and child."
You make a valid point. Socialism uses divide and conquer by putting us in groups (capitalist and worker, e.g.) and pitting us against each other. However, some effects won't show up at the economy level because the damage/benefit they cause cancel each other out. Still, the effects are important. For example, inflation at the economy level show up as nothing but a reduction in the purchasing power of money, so monetarists believe it doesn't cause any harm. At the group level, inflation enriches financial institutions and debtors while impoverishing manufacturing and savers. Also, credit expansion benefits some groups of businesses while punishing others. An obvious example is that import restrictions help some domestic producers while punishing others. So I think some group distinction is necessary.
Published: October 12, 2007 12:46 PM
The central thesis of Hazlitt's One Lesson is not so much a lesson on economics, but a lesson on the manner in which economics is discussed. It is an observation on the proper mode of economic discourse, not economics per se.
It is, nevertheless, an observation on fallacies of discourse that are perpetrated again and again and again ...
Published: October 12, 2007 12:56 PM
George,
I disagree. Many of the "findings" of the mainstream economists violate directly Hazlitt's lesson. These economists could never come up with their conclusions if they were considering all the effects and the fullness of time. As a matter of fact many intentionally choose limited time frames and limited data in order to prove their theories.
Published: October 12, 2007 2:14 PM
DickF, we do not disagree. The error of their conclusions flows from the (unstated) error in their mode of discourse.
I tend to believe that many of these economists (and their lay supporters) have a tendency to adopt the mode of discourse that promises to lead them to the conclusions they want -- that people have a tendency to begin with their conclusion, and then craft a rationalization that justifies it.
It is always easier to justify a governmental program if you decide beforehand that you will not be considering all of the effects that undermine all of your preferred conclusions.
I agree with the general sentiment of the earlier poster who said that there is no such thing as a "secondary effect." It is kind of like the idea of a "side effect" of a drug. A drug has only effects. The fact that some effects are wanted and some are unwanted doesn't mean that the unwanted ones are any less predictable, or any less the result of the same cause.
The truth of the matter is that the long-term harm of these governmental intrusions are essentially unmeasurable. That is yet another implication of the Mises Calculation Problem.
Published: October 12, 2007 4:05 PM
I was fortunate enough to have Hazlitt's book as required reading in my intro econ class in college (thanks to Dr. Steve Margolis at NC State). That year I went from a self-described conservative (even chairing the College Republicans--hurts just to type it) to a card-carrying libertarian/anarcho-capitalist and never looked back.
Published: October 12, 2007 10:46 PM
Very fortunate. Instead, I got lugged with "Sloman Economics" in the first year, and Mankiw's text this year.
Published: October 13, 2007 12:40 AM
I purchased this book two weeks ago and just finished reading it. Outstanding--I'll recommend it to everyone I know whether or not they understand deductive economic principles.
Published: October 13, 2007 5:13 PM
A $50 broken window and a suit that was never made,indeed.
Let's extrapolate that into 9-11 the broken World Trade Center, Broken Pentagon and Lives lost etc.
Possibly Trillions of Dollars spent, thousands more lives lost and maimed and injured in hunting down the perpetrators.. What an enormous sum of wealth has been lost, much never to be seen, only to be speculated upon by some economists.
Question... What is the Ethics that drives this madness?
Matt
Published: October 13, 2007 7:08 PM
There's this book, "The Logic of Failure" by Dietrich Dorner, which discusses how human decision and policy making about complex systems (from African villages to English cities) is usually hazardous to the systems because most humans ignore the one question---overlooking the myriad secondary consequences that vast wisdom alone can foresee (but which any intellect can understand in hindsight). This idea is, of course, from Bastiat's 150-year old essay "What Is Seen and What Is Not Seen" (available online and thru Mises.org). Great post.
Published: October 13, 2007 10:24 PM
I would like to see Ron Paul write a book that unlike his new "A Foreign Policy of Freedom",
would be targeted to the average person and include the following things:
1) An introduction to monetary theory. But make sure to stress the Mengerian insights of how money and other market institutions are natural growths as opposed to deliberate human creations. I think that Dr. Murphy did a nice job of touching on this in his PIG to Capitalism but I would like to see it discussed in even more depth in Ron's book.
I would love to see this quote by Menger in the book:
“Natural organisms almost without exception exhibit, when closely observed, a really admirable functionality of all parts with respect to the whole, a functionality which is not, however, the result of human calculation, but of natural process. Similarly we can observe in numerous social institutions a strikingly apparent functionality with respect to the whole. But with closer consideration they still do not prove to be the result of an intention aimed at this purpose, i.e., the result of an agreement of members of society or of positive legislation. They, too, present themselves to us rather as “natural” products(in a certain sense), as unintended results of historical development. One needs, e.g., only to think of the phenomenon of money, an institution which to so a great measure serves the welfare of society, and yet in most nations, by far, is by no means the result of an agreement directed at its establishment as a social institution, or of positive legislation, but is the unintended product of historical development. One needs only to think of law, language, of the origin of markets, the origin of commodities and of states, etc.”
Menger's insights(more people could be included here like Spencer/Hayek...) are important missing ingredients to the libertarian message. People believe that the human ant-farm needs management, that it is too complex, we believe that since the social order is the result of human action, it must be the result of human planning/design and that without big ape government we will disintegrate into tribal chaos which is wrong. We find it very hard to believe that a government apparatus made of so many people with good intentions can lead to all of our problems. The book should introduce and add to people's vocabulary and list of concepts the concept of "the market process" and briefly explain how it is the market process that creates the social order, and how individual freedom is a necessity for its smooth functioning and how government interference screws things up. These simple concepts/insights are what will open people's minds and allow the rest of the pro-individual freedom message to transform the way they see the world.
2) A few graphs/charts statistics showing the cancerous growth of the public sector, fed money creation, fed employee wages compared to private sector/etc...
3) more stuff...
book should be short and accessible and maybe even targeted to your average high school student.
I have little doubt that with the help of the mises institute a great book like this, that can serve as the intellectual foundation for the ron paul revolution, can be put together in less than a week, and would become a national bestseller soon afterwards.
Published: October 14, 2007 4:07 AM
Very interesting ideas Jorge, but this is something, I believe, more suited to Hoppe than Paul (in fact I believe Hoppe's latest book will probably be broaching on these issues - except it will not be addressed to the general audience.) Also crucial is that an Austrian finally tackles Karl Polanyi's arguments against Hayek in his The Great Transformation, for once and for all. I can't believe that vile book has been given such little attention by Austrians (and libertarians in general.)
Published: October 14, 2007 9:53 AM
I am sure that Hoppe will write a fine book but it will have little effect on the real world compared to what the aforementioned suggestion would.
It is great to see Ron Paul constantly tell people that the most important thing they can do is to educate themselves and understand how freedom works. I like how he has turned his campaign into a traveling economics lecture. I only wish he did it more and made the teaching of economics the #1 priority of his message.
To the mind that has not had the fortune of stumbling upon the Austrian school, the message of freedom is one that easily leads to a sort of tribal chaos... again... people have a hard time understanding how a government apparatus made up of nice people can be the cause of our problems, and this is why libertarians are seen as fools when we go out there insulting politicians, calling them "evil" and all sorts of non-sense. Without an understanding of the market process, the only way politicians and the masses that elect them can think of solving problems is via gov made bureaucracies. Their ignorance is not to blame.
as Hayek said:
“Most people are still unwilling to face the most alarming lesson of modern history: that the greatest crimes of our time have been committed by governments that had the enthusiastic support of millions of people who were guided by moral impulses. It is simply not true that Hitler or Mussolini, Lenin or Stalin, appealed only to the worst instincts of their people: they also appealed to some of the feelings which also dominate contemporary democracies.”
Government is neither good nor evil, it is an outgrowth of our fears, tribal instincts/etc...
Americans don't buy into this whole government is evil/bad stuff.
People think that following a document like the constitution is silly. A document can't think and react. They believe that it was ok in an older simpler world. We, thanks to our understanding of economics, know that individual freedom, and the recipe for such freedom that the constitution provides leads to the social order. But the masses do not have this understanding and inevitably fall for statist ideas.
Anyways... this is much too big a topic for now... Just wanted to somehow see this book come to existence and I know that readers of this blog can make this happen.
Ron does not have to write it himself. I'm sure with his many friends it could be put together for him and he can just write an intro/etc or have book be ghostwritten . It would become the sort of Bible of the Ron Paul revolution. I might just be overtly optimistic but I can see it becoming a best seller and add yet another tremendous boost to the intellectual revolution we are witnessing.
Ron has 5 million in cash... This little book seems like a fine investment which will cost the campaign close to nothing and perhaps even become a great source of revenue.
I wish ron would change the way he presents himself from being the "champion of the constitution" to the "champion of economic prosperity" or something like that... again just talking about the constitution, as long as the masses have little to no understanding of economics, leads to ron being seen as an antiquated loony for many. If he associates himself more with sound economics then people will want to know why he makes such a claim as opposed to dismissing him as a recipe for chaos.
And while I am at this. I would love to see ron make a few simple videos on youtube where he challenges the other republicans and democrats to reply to his videos... with youtube.. we dont have to wait for mainstream media to air debates.
if ron paul makes a small 3 minute video challenging others to post replies to his video and they dont, this will be a tremendous embarrassment to all other candidates which will resonate through the internet and outside of it.
I think this would be huge.
Ron could post a video reply to the various videos that other candidates have created, take his time to pick apart their silly statist solutions. And again, with the help of so many talented and knowledgeable people his videos could include statistics graphs and other stuff that can help the economic lessons be even more effective...
I just have a bad feeling that all the money will be spent on 30 second adds about "freedom and the constitution" ... I am still very hopefull that even if this is all that is done with the money that the revolution will still transform america relatively soon but I am convinced that a book such as what I have described and the video idea will greatly increase the chances or the rate at which the revolution is progressing
Published: October 14, 2007 5:44 PM
I agree on most of the above - the State does one thing very well; indoctrinating people into its message, or making them so cynical they have no option but to give in towards the end.
Ah, a good book, BTW, on natural order is Bionomics by Dr Rothschild.
Published: October 14, 2007 6:24 PM
This book single-handedly changed the way I view everything economic and political. I owe my informed opinion to Economics in One Lesson.
An absolute MUST-READ.
Published: October 15, 2007 10:21 PM
I wish I could get one of these so called "professional" or "classical" economists to debate the gold standard and management of a media of exchange without quitting.
Todd Marshall
Plantersville, TX.
Published: October 16, 2007 9:16 PM
I wish I could get one of these so called "professional" or "classical" economists to debate the gold standard and management of a media of exchange without quitting.
Here's one from Megan McArdle: http://meganmcardle.theatlantic.com/archives/2007/09/theres_gold_in_them_thar_stand.php
My personal valuation objection is I don't hold the "intrinsic" value of gold to be very high, so I see it as quite risky to denominate my wealth in it and I truly do not want to carry gold just to prove that the paper I have is backed up by it. But a more useful objection is there is no guarantee that a gold "standard" will remain a "standard", at least without carrying the actual gold with us and using it, which is rather cumbersome. But paper (or digital bits) can be issued to represent gold you say. True enough, but there is nothing stopping the issuer of the paper from "cheating" and we're back where we started from. At least with fiat money we're not trying to deceive ourselves into believing it is anything but.
Published: October 16, 2007 10:27 PM
Nelson,
That article was awful.
Here is a powerful and sweet tasting antidote to gold standard myths and fears and the nonsense mentioned in article:
in the mises.org/media section listen to:
Salerno's "The Gold Standard in Theory and Myth "
And Hulsmann's "Deflation and Liberty " and " The Economics of Deflation " these three are some of my all-time fav mises.org/media lectures... yummy!
So listen to them and come back here and let us know that you have repented.
Published: October 17, 2007 12:46 AM
My personal valuation objection is I don't hold the "intrinsic" value of gold to be very high
It has no intrinsic value - nothing does. All value results from the subjective wants of people.
But a more useful objection is there is no guarantee that a gold "standard" will remain a "standard", at least without carrying the actual gold with us and using it, which is rather cumbersome.
Rather less cumbersome than what we use now. A tiny gold coin is worth a rather fat walletful of paper.
Published: October 17, 2007 1:51 AM
Rather less cumbersome than what we use now. A tiny gold coin is worth a rather fat walletful of paper.
It would still be more cumbersome. I'd just as soon not have to pay for candy bars and the like with gold dust.
Published: October 17, 2007 9:20 AM
I use coins all the time in England. Not much of a problem.
Published: October 17, 2007 12:38 PM