All the way with Hazlitt - as far as he goes

The reader of a book review will rightly want to know the ideology of the reviewer. Very well: being of Georgist persuasion, I divide the "means of production" into two categories: those that can be produced or reproduced by competitors, and those that can't. On the former category, I'm as far Right as you can get, believing that such assets should be privately owned and exempt from tax, to encourage capital formation.

That may explain my mostly sympathetic reaction to a book much admired by advocates of free markets and small government: Economics in One Lesson (1946; revised 1978) by Henry Hazlitt (1894-1993).

His opening shot is: "Economics is haunted by more fallacies than any other study known to man." These fallacies are promoted in support of "endless pleadings of self-interest" and are assisted by "the fallacy of overlooking secondary consequences." Hazlitt's "one lesson" is then stated: "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 "lesson" is not Hazlitt's Big Idea, but only his method. His Big Idea is drummed out again and again as he demolishes a long list of interventionist policies and the fallacies that support them.

He begins with the "broken window" fallacy -- the idea that you can stimulate the economy by making work that wouldn't otherwise need to be done. In reality, of course, wasteful duplication of productive effort can only result in a net reduction in purchasing power. Later chapters deal with various guises of the broken window, including war, unnecessary public works, needless bureaucracy, opposition to labour-saving machinery, and demarcations of responsibility that cause multiplication of labour rather than division of labour.

A related fallacy treats purchasing power in terms of money instead of productive power, with the result that the alleged creation or saving of purchasing power leads to a misdirection of productive power (analogous to repairing the broken window). Numerous examples are given in the chapters on government-mandated lending, make-work schemes, tariffs, export subsidies, and price controls (including minimum wages and rent caps).

Labour-saving machinery multiplies the productive power of labour and the resulting capacity to pay for labour. Hazlitt gives examples in which mechanization of an industry, by reducing the prices of its products and thereby increasing sales and revenue, led to an increase in employment in that very industry.

But usually the new jobs are widely dispersed. In what was originally the last chapter, Hazlitt admits the tendency of "even the disinterested observer" to notice concentrated losses rather than diffused gains, and says of the losers: "It is altogether proper...that the plight of these groups be recognized... and that we try to see whether some of the gains from this specialized progress cannot be used to help the victims find a productive role elsewhere." Obviously that won't happen without government intervention.

Nor is this the only example of Hazlitt's capacity for nuance. After ten pages denouncing tariffs he says: "As a postscript to this chapter I should add that its argument is not directed against all tariffs, including duties collected mainly for revenue, or to keep alive industries needed for war..."

His nuance extends to workplace relations (chapter 20). A strike, he says, is legitimate, but not if it involves pickets; and strikebreakers are legitimate, but not if they threaten violence, can't do the work, or are paid more than the strikers were. After concluding that minimum wages substitute unemployment for low wages (chapter 19) except for workers who are being paid less than the market-clearing rate, he suggests that the exception is better handled by unionization than by minimum wages.

But an elephant turns the page when he concludes (s.19.3): "We cannot in the long run pay labor as a whole more than it produces. The best way to raise wages, therefore, is to raise marginal labor productivity." Indeed we cannot pay labour more than its marginal product. But we can and do pay it considerably less, due to taxes that cause workers to cost more than their wages (payroll tax), to receive less than their wages (personal income tax), and to consume less than they spend (GST/VAT or sales tax).

How should the offending taxes be replaced? That brings us to the other category of "means of production" -- assets that can't be produced or reproduced by competitors. Georgists contend that the market values of such assets, being publicly created, are the proper source of public revenue. The most important example is land, whose value can be tapped by means of rates, "land tax" and "capital gains" tax.