Chapters 2 & 3 - The Broken Window and the Blessings of Destruction

We are now entering the second part of the book, the application of the one sentence economic lesson. Part 2 has 22 chapters. We will skip the 2nd chapter for I made a revision of it here (This hyperlink will work once my site is up. It was written in Filipino. You can read it in English using the Google Translate at the bottom of the page).

Chapter 3 is all about the fallacy of thinking that war is advantageous to the economy. This is why understanding Chapter 2, the parable of broken window is necessary to grasp the real nature of this economic fallacy. The so-called advantage of war, which is the "increase" in demand is actually a "diversion of demand". Hazlitt explains this "benefit":

"The destruction of houses and cities will make more business for the building and construction industries. The inability to produce automobiles, radios, and refrigerators during the war will bring about a cumulative post-war demand for those particular products...But when they build more houses they will have just that much less manpower and productive capacity left over for everything else. When they buy houses they will have just that much less purchasing power for everything else. Wherever business is increased in one direction, it must...be correspondingly reduced in another" (p. 15).

An important factor in this subtle "increase" in demand is made possible through the printing of money. As the salary of people increases due to additional money supply, people will think that they are better off and this will make an impression that more demand has been created. Hazlitt elaborates the impact of the increase in money supply:

"...printing money is the world's biggest industry...But the more money is turned out in this way, the more the value of any given unit of money falls. This falling value can be measured in rising prices of commodities. But as most people are so firmly in the habit of thinking of their wealth and income in terms of money, they consider themselves better off as these monetary totals rise, in spite of the fact that in terms of things they may have less and buy less" (pp. 14-15).

"...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" (p.17).

Personal Remark

In the second chapter of the book, two subordinate economic fallacies are exposed under the main economic fallacy of thinking that war is advantageous. These are the fallacy of thinking that war creates increase in demand and the fallacy of thinking that demand is created through the increase in money supply. Without analyzing the sequence of economic actions prior to and after the destruction caused by war, identifying these fallacies is really difficult.  

Chapter 1 - The Lesson

The book has three parts. Part 1, which is also the first chapter of the book presents the summary of economics in just one sentence. It's amazing how the whole of economics can be captured in a single statement:

"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" (p. 5).

Other lessons that can be gleaned from the first chapter include the following:

1. The nature of the study of economics

"Economics is haunted by more fallacies than any other study known to man" (p.3).

2. Reasons for the existence of numerous economic fallacies

• Due to the existence of selfish interests

• Due to "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" (p. 4).

3. The strategy in spreading economic fallacies

"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" (p.3).

4. The distinction between bad and good economists

"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 economists 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" (p. 4).

5. The absence of common sense in public economics and the celebration of economic fallacies as wisdom

"Doesn't everybody  know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end? Doesn't every little boy know that if he eats enough candy he will get sick? Doesn't the fellow who gets drunk know that he will wake up next morning with a ghastly stomach and a horrible head? Doesn't the dipsomaniac know that he is ruining his liver and shortening his life?...do not the idler and the spendthrift know, even in the midst of their glorious fling, that they are heading for a future of debt and poverty?" (p.4).


"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 such shallow wisecracks pass as devastating epigrams and the ripest wisdom" (pp.4-5).

6. The result of ignoring long-term consequences


"...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...But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed" (p.5).

7. The most frequent economic fallacy


"The most frequent fallacy by far today, the fallacy that emerges again and again in nearly every conversation that touches on economic affairs, the error of a thousand political speeches, the central sophism of the 'new' economics, is to concentrate on the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole" (p.6).

8. The repetition of the error of 17th century mercantilism


"They are sometimes surprised to find themselves in accord with seventeenth-century mercantilism. They fall, in fact, into all the ancient errors...that the classical economists, we had hoped, had once for all got rid of" (p.7).

9. The reason for the popularity of bad economists


"The reason is that the demagogues and bad economists are presenting half-truths...But to consider all the chief effects of a proposed course on everybody often requires a long, complicated, and dull chain of reasoning. Most of the audience finds this chain of reasoning difficult to follow and soon becomes bored and inattentive" (p.7).

Personal Remark

Recapitulating the insights I gathered from the first chapter, I see several interrelated causes for the perpetuation of economic fallacies. They include the difficulty of understanding sound economics due to its tight reasoning, the influence of special interest groups, human inclination to see immediate results, the subtlety of professional economists to sell half-truths, the setting aside of common sense in public economics and the refusal to see the long-term effects of a particular economic policy. I expect to see a detailed content of all these causes as I continue digesting the book.

Preface

The Preface of "Economics in One Lesson" introduced the nature of the content of the book. For readers to appreciate the significance of the book for our time, it is appropriate to see in advance what you can expect in reading the book. Allow me to share in this post the exact statements from the Preface under several categories:

As to the content of the book in general:

"This book is an analysis of economic fallacies that are at last so prevalent that they have almost become a new orthodoxy" (p.vii).

As to the significance of the book:

"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" (ibid.).

As to claim to originality of ideas:

"It makes no claim to originality with regard to any of the chief ideas that it expounds. Rather its effort is to show that many of the ideas which now pass for brilliant innovations and advances are in fact mere revivals of ancient errors, and a further proof of the dictum that those who are ignorant of the past are condemned to repeat it" (p. viii).

"'The notion that we can dismiss the views of all previews thinkers surely leaves no basis for the hope that our own work will prove of any value to others'" (ibid.).

The 3 authors that influenced Henry Hazlitt's ideas in this book (p. ix):

1. Frederic Bastiat

2. Philip Wicksteed, and

3. Ludwig von Mises

As to the reasons why influential "economists" are not mentioned in the book:

"The object of this book is not to expose the special errors of particular writers, but economic errors in their most frequent, widespread or influential form. Fallacies, when they have reached the popular stage, become anonymous anyway" (ibid.).

"It is the beliefs which politically influential groups hold and which governments act upon that we are interested in here, not the historical origins of those beliefs" (p.x).

As to rare reference to statistics: 

"...I am acutely aware of how quickly statistics become out-od-date and are superseded by later figures" (ibid.).

As to Hazlitt's target reader:

"I have tried to write this book as simply and with as much freedom from technicalities as is consistent with reasonable accuracy, so that it can be fully understood by a reader with no previous acquaintance with economics" (ibid.).

As to the original sources of 3 chapters in the book (p.xi):

1. The New York Times,

2. The American Scholar, and

3. The New Leader

As to Mises' touch in the book:

"I am grateful to Professor von Mises for reading the manuscript and for helpful suggestion" (ibid.).

Overall Remark

Even though this book was written in 1946, the analysis of economic fallacies contained in this book remains relevant. This is because nothing happened since then that could be accounted as a major breakaway from the prevailing economic ideas. 

In my perusal of the book, I am surprised about the "newness" of its content. I just wonder why Hazlitt's explanation appears to make sense whereas the prevailing economic news appears to be confusing. It also makes me wonder why ideas in the book are not taught in the mainstream education. Thanks to Hazlitt's concern to educate those who lack education in economics.