The future of economic policy

Henry Hazlitt summed up the guiding principle of economics in one sentence:

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.

The reprinting of the Hazlitt classic Economics in One Lesson is timely. As the world responds to the massive economic losses of the COVID-19 crisis, it will be prudent to base policies on sound economic theory.

Describing Hazlitt's book, F.A. Hayek, 1974 Nobel Laureate in Economic Science wrote: "It is a brilliant performance. It says precisely the things which need most saying and says them with rare courage and integrity. I know of no other modern book from which the intelligent layman can learn so much about the basic truths of economics in so short a time."

Nassim Taleb, who wrote The Black Swan, advised that there was likely to be more wisdom in a book written 20 or 50 years ago, that was still in print, than anything your Harvard Professor told you yesterday. The former had been tested in the maelstrom of public opinion and voted a success.

This certainly applies to Henry Hazlitt's, Economics in One Lesson. First written in 1946, it has been continuously in print for nearly 75 years. A new special edition has been published this year with support from the Mises Institute.

Hazlitt builds on the work of Frederic Bastiat, the French economist who wrote over 170 years ago and whose work is also still in print. He expands on Bastiat's famous essay That Which is Seen and That Which is Unseen. His simple lesson is that good economics must account for both the present and the future effects and must examine the consequences not only for a targeted special group but for everybody else too.

Hazlitt begins by restating the Bastiat story of the broken window. A hooligan throws a brick through the baker's window smashing glass all over the loaves of bread. The baker will need to replace the window creating work for the glazier and the manufacturers of glass who in turn will have the funds to buy goods and services from others. The general public misunderstand the consequences. They think that "the smashed window will go on providing money and employment in ever-widening circles. The logical conclusion [is that] the hoodlum who threw the brick, far from being a public menace, was a public benefactor." But what is not seen is that the baker was about to purchase a new suit but now has to spend that money on the window. The tailor is disadvantaged and also all those who would have benefited from his additional purchases. The wealth of the community is reduced. Whereas it might have had a window and a suit, it now only has the window – and diminished economic activity.

A similar fallacy relates to the claimed benefits from war and natural disasters. The rebuilding of destroyed homes and factories requires diversion of resources that could have been used for other purposes. Or as Frank Muir and Dennis Norton famously explained "You can't have your kayak and heat it too."

In 2020, the governments of the world spent a fortune they did not have to ameliorate the unemployment caused by lockdowns designed to protect us from the coronavirus. Central banks have gone on a printing spree to provide the funds to compensate people who have been unable to work. As I have written elsewhere, counterfeit is not the path to prosperity. Presciently, Hazlitt saw the errors of Modern Monetary Theory before it knew its name!

"Everything we get, outside the free gifts of nature, must in some way be paid for. The world is full of so-called economists who in turn are full of schemes for getting something for nothing. They tell us that the government can spend and spend without taxing at all; that it can continue to pile up debt without ever paying it off, because "we owe it to ourselves." We shall return to such extraordinary doctrines at a later point. Here I am afraid that we shall have to be dogmatic. And point out that such pleasant dreams in the past have always been shattered by national insolvency or a runaway inflation. Here we shall have to say simply that all government expenditures must eventually be paid out of the proceeds of taxation; that inflation itself is merely a form, and a particularly vicious form, of taxation."

What Hazlitt is telling us is very simple. Common sense if you like. But our responses are so ingrained that it takes considerable intellectual effort to change our thinking. Take public housing for example. Our first response is that it seems like an excellent idea to use public funds to create housing for low income families. We see the houses being built and the families enjoying them. What we don't see is the alternatives that might have been. Other citizens have been taxed and to that extent have been unable to spend on things they would have preferred. The policy does not even necessarily produce more homes. Worse, it makes low income families dependent on the state.