"The Lesson: The art of economics consists in looking not merely at the immediate but at the longer effect of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." - Economics In One Lesson
Economics is the study of how society allocates scarce resources and goods against unlimited wants and desires. Economics is also the ability to recognize secondary consequences – called “the unseen”. The most widespread fallacy in economics is considering only the short-term effect for one industry while ignoring the long-term effect for all others, thus allowing policies to be implemented that are a detriment to the economic condition of society as a whole. Henry Hazlitt’s “Economics in One Lesson” seeks to change that.
An abbreviated version of "The Broken Window" story at the beginning of the book goes as follows: A thug throws a rock and breaks a window at a bakery. The broken window creates new business ($250) for some glazier who must now be called to fix the damage. The glazier will now have more money to spend. This is known as “the seen”. He will spend this new money at Merchant A, who will then spend that money at Merchant B. The misconception is that this cycle continues to enrich merchant after merchant. But the baker will be out of the money that he was planning to spend on a new suit ($250). Since he must replace the window, he no longer has the money to purchase the suit. That is “the unseen”, the money the tailor would have received. Instead of having a window and $250, the baker only has a new window. The baker isn’t the only one who’s lost, the entire community is out one new suit. The glazier’s gain of business is merely the tailor’s loss of business. This is the broken window fallacy.
Let’s apply this fallacy to a couple of current economic issues.
Another economic myth says that by increasing tariffs on inexpensive steel from China, we can protect American jobs from foreign competition. The consequence of this policy is the cost of steel for US businesses and consumers will rise, as the low-cost steel from China is no longer available. While the American steel industry has about 200,000 workers, there are more than 6 million US workers in industries that rely on steel in their manufacturing. As foreign steel becomes more expensive, American steel sales grow. The increases we see in the steel industry are dwarfed by the loss of jobs and increased costs for the other industries, which now must pay more for steel. “The seen” is the increase in American steel jobs, and “the unseen” is the loss of jobs in industries that use the now more expensive steel. Tariffs simply redistribute jobs from the unfavored industries to the favored.
Another myth says that technology (including robots) will increase unemployment. That is, technology reduces the need for workers since jobs are replaced by machines. But the consequence of technology is positive. If you look past the job that is lost, you will see the new jobs that are created, including the new manufacturer of the machines and the need for operators of the new machines. Creative destruction destroys the old to create the new. Profits come from introducing efficiencies that cut the cost of production. This rise in productivity gives us higher wages as well as savings from the decrease in the costs of the product. Increased production makes us all richer in the end. In this case, “the seen” are the lost jobs replaced by the machine, while “the unseen” are the new jobs created by the technology along with increases in efficiency and production. Granted, this is a very broad and simplified example. We have already seen many instances of technology that have improved our lives: the automobile replaced the horse and buggy, the bulldozer replaced the shovel, and the computer replaced the typewriter. There is little to fear and much to gain through automation.
These are only a few of the economic myths addressed in Henry Hazlitt’s “Economics in One Lesson”, a classic originally written in 1946. The book, still relevant today, demolishes other economic myths while revealing how low-skilled jobs are lost due to a minimum wage, and how rent control results in a shortage of housing. The book is written in simple terms for the average reader to understand.
Economics is not the mathematical study of graphs and tables. It is about the decisions that you and I make every day to satisfy our wants and needs, and why understanding how economic policies affect the economy is so important. Take your first step today and become a more knowledgeable consumer.
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