Hazlitt: Economics in One Lesson

Economics in One Lesson
Henry Hazlitt
(Currency, 1988) [1946]
218 p.

Hazlitt’s approach to economics can be summarized in one key principle:

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.

That’s it. That’s the one lesson. Elaborating the point, he argues that a great many specific fallacies of economic reasoning stem from either not considering the effects of economic policies in the long term, or not considering the effects on all groups, or both.

The bulk of the book is devoted to systematic examination of a variety of economic policies in the light of this basic principle, and to ferreting out the fallacies that proliferate when the principle is ignored. We get brief but punchy analyses of government stimulus spending and government price-fixing (whether in the form of tariffs, or rent controls, or minimum wages, or subsidies, or something else). He challenges the claims that, for instance, unions raise wages, or that thrift causes economic harm, or that full employment is an ideal, or that technological advances cause unemployment. These claims can be true in the short-term or if we confine our view to certain groups, but they look quite different if we take the longer, wider view. A fairly detailed outline of the arguments in the book can be found here.

The argumentation is generally clear — though, of course, being a notorious dullard in these matters I was unable to follow all of the reasoning. I could understand why government stimulus spending can appear to be a panacea without actually being so — because we see the bridge but we don’t see what would have been done with the capital and labour had the bridge not been built — and he was very good at describing the causes and the evils of inflation, and at tracing the many downstream, often hidden, consequences of price-fixing. But when he described the role of profits in our economy as being “to guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand,” I didn’t know what he was talking about.

His considerations throughout are strictly economic: what happens to productivity, prices, supply, demand, etc. in response to certain policies. He knows that a people might have political or moral reasons to enact a certain policy that is economically disadvantageous, and he agrees that those considerations have their proper and legitimate place. His arguments are intended, however, to contradict the claims, oft made, that such policies are actually economically advantageous.

In the end, after numerous sallies against fallacies great and small, he comes around to the satisfying conclusion that when we follow the key principle stated above, the course of sound economic policy usually corresponds with common sense:

It would not occur to anyone unacquainted with the prevailing economic half-literacy that it is good to have windows broken and cities destroyed; that it is anything but waste to create needless public projects; that it is dangerous to let idle hordes of men return to work; that machines which increase the production of wealth and economize human effort are to be dreaded; that obstructions to free production and free consumption increase wealth; that a nation grows richer by forcing other nations to take its goods for less than they cost to produce; that saving is stupid or wicked and that squandering brings prosperity.

I find this satisfying because, although I could never claim to be well-instructed in the theory of economics, and although there may be challenges to the arguments Hazlitt presents that I have not noticed, I do have a decent intuitive grasp of what does and does not make for good economic policy in my own household’s affairs, and I’ve never been able to understand why things that would be patently foolish when applied on our small scale can be sensible when applied on the large. I am edified to hear Adam Smith endorse my intuitions:

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.

The book was originally published in 1946, and in 2021 my Prime Minister, as prices began rising after a year and a half of flooding the country with newly-minted cash, said he was “not interested” in monetary policy. The book is still relevant, and still a good read.

Corporate taxes

When the topic is economics I tend to keep my mouth shut; I know that I don’t know. But there is one question that has, from time to time, been a bother to me: why do corporations pay taxes?

I can understand citizens paying taxes: there are certain goods — defence, transportation infrastructure, garbage collection — that we all benefit from, and we contribute money with which those goods can be acquired. It seems to me that the fairest sort of tax is a flat tax — the same number of dollars from each citizen goes into the pot — although few people advocate that, and maybe for good reasons that I haven’t thought of.

But it is odd to me that individuals, who are already paying taxes, should pay more taxes — that is, corporate taxes — just because they have decided to work together on something. What is the rationale for that (apart from a simple cash grab by the government)?

Anyway, I air these half-baked thoughts today because I came upon an article, at Public Discourse, which advocates abolishing corporate income taxes. The author, Thomas Haine, gives a few reasons why doing so might cause problems — reasons I, naturally, had not thought about — but concludes that they are not insurmountable. Indeed, he thinks abolishing such taxes would be a bi-partisan winner, at least at a grassroots level. (Politicians, I understand, are rarely in favour of tax reductions.)

It is all very interesting, in a perplexing and foggy kind of way, and I wish I had a clue as to whether it made any sense.

Chesterton: The Outline of Sanity

The Outline of Sanity
G.K. Chesterton
(Ignatius, 1987) [1926]
210 p.

This is Chesterton’s main work on his economic ideal, which went under the name of ‘Distributism’. This is a side of Chesterton’s thought to which I have not had much exposure, in part because I am not really interested in (and don’t really understand) economics, and so haven’t sought it out.

Distributism was proposed as an economic “third way” between capitalism and socialism. Chesterton believed that both capitalism and socialism had monopoly as their telos, tending to concentrate ownership and wealth in the hands of a few. Distributism, on the contrary, is a scheme for distributing property and private ownership on as large a scale as possible. Property, Chesterton believed, promoted liberty and was a bulwark to protect the family and private life against the intrusions of the state. In practical terms, the Distributist ideal bears a certain resemblance to a peasant society, each family owning a home and a small plot of land, supporting itself by growing food and plying a trade or running a small business. This resemblance gave Chesterton a clever riposte to the complaint that Distributism is an impossible ideal: on the contrary, he says, it has already been realized in history.

Of course, many other objections spring to mind quite readily, and much of The Outline of Sanity is given over to Chesterton’s attempts to answer them. One criticism is that the Distributist scheme is unstable: even were widespread property ownership realized, the natural dynamics of the market would tend to destroy it. A powerful and intrusive state would be required to maintain the status quo, and this is incompatible with the Distributist idea. But Chesterton counters that in fact a Distributist state on the model of a peasantry could be stable if people were unwilling to sell, if there were a kind of social stigma against forsaking one’s land:

You do not make laws for a peasantry. You make a peasantry; and the peasants make the laws. I do not mean, as will be clear enough when I come to more detailed matters, that laws must not be used for the establishment of a peasantry or even for the protection of it. But I mean that the character of a peasantry does not depend on laws. The character of a peasantry depends on peasants. Men have remained side by side for centuries in their separate and fairly equal farms, without many of them losing their land, without any of them buying up the bulk of the land.

In other words, the Distributist state relies not only on a body of law, but also on a particular kind of citizen: responsible, self-reliant, possessing a sense of pride in his labour, and unwilling to relinquish his way of life for financial gain. His ideal citizens, someone once said, would be “devout Catholics, keen patriots, and heavy drinkers.” You and I may maintain some doubt as to whether this describes our friends and neighbours, but this is Chesterton’s vision.

Another objection is that an economy structured around small-scale family businesses and agriculture could not support large-scale industrialization and all that comes with it. This is quite true, and Chesterton does not try to deny it, but he again counters that the object of economic activity is, or should be, to increase human happiness, not necessarily to increase human wealth or display human ingenuity. It may be best to turn the machines off and shut the refineries down if it results in greater happiness: “If we can make men happier, it does not matter if we make them poorer, it does not matter if we make them less productive, it does not matter if we make them less progressive, in the sense of merely changing their life without increasing their liking for it.” (More.) This objection is true as far as it goes, but again I have some doubt as to how popular such a proposal could be. Charges of “Luddite!” would be flying so thickly that one would have to be careful not to get hit.

The Distributist state is largely static, and so would be anathema to those who, for reasons that I have never quite been able to fathom, believe that the economy must grow every quarter, month, week, and day of the year. Granted, the economy must grow at the same rate as the population in order to maintain the standard of living, but beyond that the constant stress on growth strikes me as bizarre.

All of this is to say that the economic state of affairs proposed by Distributism is vastly different in many respects from the current state of affairs. Even I, who profess a capacious ignorance of the theory and practice of economics, can see that much. Certain things which we currently possess and value would have to be forsaken in order for something like Distributism to be realized. Chesterton is again very candid about this, saying that it would require, especially in the beginning, a spirit of renunciation.

In the economic battle of the titans in the twentieth-century, capitalism has been the big winner, socialism the big loser, and Distributism — well, Distributism has neither won nor lost, because it has not really been tried. In that sense I suppose it has lost. But there are signs here and there that something like Distributism might be gaining some traction. The economic turmoil of the last few years has provoked some to ask whether there might be another way. The backlash against “globalization”, against big corporations, and against factory farming in favour of local, organic foods and family-scale farms and businesses is certainly in the spirit of Distributism. Farmer’s markets are Distributist. The “crunchy conservatives” are tilling a nearby field. These account for only a small ripple in the overall economy, but they are there nonetheless, and I imagine Chesterton would have seen them as a sign of hope.