At the end of WWII, Keynesian economics seem to have won the day in the United States. While the money spent by the Federal government it during the great depression on various old programs such as the TVA and the WPA had only had eight moderate effect on the state of the economy, the massive debts spending by the Federal government during the war produced what was undeniably a booming economy. This seemed to confirm that Keynes and the “new economics” was right. However, there were dissenting opinions. One of these opinions was provided in 1946 by Henry Hazlitt in his book Economics in One Lesson. In this work, Hazlitt attacked the conventional wisdom of the “so called brilliant” experts who supported Keynes. He believed that fundamental economic principles were in opposition to these new ideas.
Prior to an examination of what he believes are examples of Keynes’s various mistakes, Hazlitt makes clear his view that the fact and effectiveness of economic policies should be judged by its effect on the entire economy, rather than just the effect it has spawned a particular target industry. In other words, it was Hazlitt's contention that the problem with the new economics' is that it only viewed the immediate impact of a particular policy on a particular group, and failed to take into account long-term effects.
Whereas it was Keynes view that deficit spending helped the economy to grow, which in turn would produce taxation sufficient to pay the debts, it was Hazlitt's view that this was incorrectly "overlooking secondary consequences." He felt that they were not taking into account how inflationary policy could impact other sectors of the economy outside of finance, such as interest rates and lending. As Hazlitt put it:
“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences."
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It is the “new” economists, as Hazlitt terms them, that are unable to see the ways in which inflationary monetary policy affect any other sector of the economy outside of the financial sector, including lending and thus interest rates. When all you have is a hammer, everything looks like a nail, and the Fed’s hammer doesn’t consider the lower or middle class. Hazlitt calls this the fallacy of “overlooking secondary consequences”.Hazlitt demonstrates this concisely here:
“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. 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.”
- Henry Hazlitt, Economics in One Lesson.
Economics in One Lesson has never received its due credit. Many of the principles Hazlitt espoused have become widely accepted amongst free-thinking economists today, but he was writing in a time even more hostile to laissez-faire policies than even today. How is it that such foundational theories, proven right over time, become so demonized in the eyes of the public? It is obvious why the State benefits from fallacious economic policies (see: parasitism), but why the general public? Hazlitt addressed this in the following way:
“The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.”
– Henry Hazlitt, Economics in One Lesson.
The Keynesian inflationary economic policies of today are based on obvious falsehoods and illogical justifications. Hazlitt points out the uncontroversial truth by asking “Doesn’t every little boy know that if he eats enough candy he will get sick?” Why is it that public economic policy practices very rarely if ever consider the future? It is after all something we all learn at a rather young age. On this, Hazlitt says:
“Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom. But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore.”
- Henry Hazlitt, Economics in One Lesson.
The Broken Window
Hazlitt includes more than just a sound explanation of the all-pervasive “broken window fallacy”. He also explains how this, and other fallacies are caused by the previously mentioned rejection of the “elementary truth”. Clearly, when a window is broken the local glazier will have a slight increase in sales. The short-sighted “bad economist” would see only the immediate benefit, refusing to account for the legitimate needs and wants of the consumer that would have been more efficiently allocated without the unexpected window repair bill. While this is a fallacy that many accept on the surface, Hazlitt notes that in terms of large scale disasters the fallacy still prevails. To demonstrate this Hazlitt connects the belief of the Keynesians that war improves the economy with the broken window fallacy, under “one of a hundred disguises”.
“They tell us how much better off economically we all are in war than in peace. They see “miracles of production” which it requires a war to achieve. And they see a postwar world made certainly prosperous by an enormous “accumulated” or “backedup” demand. In Europe they joyously count the houses, the whole cities that have been leveled to the ground and that “will have to be replaced.” In America they count the houses that could not be built during the war, the nylon stockings that could not be supplied, the worn-out automobiles and tires, the obsolescent radios and refrigerators. They bring together formidable totals.”
- Henry Hazlitt, Economics in One Lesson
Hazlitt answers this fallacious analysis in a concise fashion that is prevalent throughout the entire book, his grasp on market economics is apparent in his opinion of inflationary economists and their policies:
“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. But in terms of the actual production and exchange of real things it is not. Yet a fall in postwar demand may be concealed from many people by the illusions caused by higher money wages that are more than offset by higher prices.”
- Henry Hazlitt, Economics in One Lesson.
There is no better introduction to free market economics than Hazlitt’s Economics in One Lesson, it has remained timeless and will continue to be an invaluable resource in the promotion of liberty and free markets. You can download this book for free, or support the Mises Institute by ordering a copy for yourself here.
