Economics in One Lesson

by Henry Hazlitt

What is the book about as a whole?

The book takes one lesson synthesized by Henry Hazlitt and applies it to a broad array of economic fallacies and claims in order to demonstrate how things work or don’t: 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.

What is being said in detail?

Concept Inventory: Economics, Taxes, Production, Credit, Full Employment, Employment, Unemployment, Tariffs, Regulation, Prices, Exports and Imports, Fallacy, Profits, Losses, Savings, Wages, Laws, Price System, Minimum Wages

Inflation, Secondary Consequences, Laissez-Faire Capitalism, Net Balance, Labor Unions, Depression, Producers, Consumers, Subjectivity of Value, Economic Freedom, Government Intervention, Bureaucracy, Purchasing Power, Tariff Wall, Protected Industries, Real Wages, Private Companies, Domestic Trade, International Trade.

Perhaps the most important thing worth mentioning is how through the economic lesson one can verify the use and benefits of an economic statement. I will not state every fallacy (you can read the book for that) but I hope to explain through the broken window fallacy the methodology of Hazlitt in determining why it was false.

The Broken Window Fallacy claims that destruction brings prosperity. This is how Hazlitt describes it:

“A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never bro- ken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.”

Now, how do we apply the lesson to verify whether this is the case? The lesson states that we should especially look at the long term consequences for ALL groups. If we do, we realize that clearly, not every group was benefited and not in the long term. Beginning with the shopkeeper, he had to incur into a cost because of this act of vandalism. The $50 he had to spend on the window he now cannot spend on something else. If we follow the example from the book let’s say that the shopkeeper wanted to buy a new suit. This now means that the producer of the suit has lost a customer and that the shopkeeper will have to work double the amount to be able to pay for his suit (he needs to make $50 more again). This is where we explore the concept of accumulated capital. If the window had not been destroyed the shopkeeper would’ve had a new suit and then wealth and prosperity would begin to accumulate. The producer of the window would’ve been fine anyways because he had already profited from selling that first window and the producer of the suit would have also been benefited from the shopkeeper’s purchase. In the long run the Broken Window Fallacy is a fallacy because it does not seek out to bring prosperity in the long term and for all of the players involved.

This same procedure applies for the rest of the fallacies. Usually they promise much prosperity in the short term but fail to explain how this would be sustainable in the long run. Like a child who immediately eats too many candies, we often incur in economic policies that bring satisfaction immediately but harm us in a longer term.

What was most meaningful to me?

Perhaps the most meaningful thing to me of this book was realizing that I had blindly accepted many of the economic fallacies that govern popular thought. For our Principles of Economics exam we had to write a short essay explaining some principle of the book. I related the fallacy of the Broken Window and “The Blessings of Destruction” with a personal conversation that left me puzzled for years.

A couple of years ago I encountered myself having an argument with one of my friends because she claimed that war was a way to bring about economic prosperity in a nation. She claimed that war helped generate jobs because men that had to fight in war would be replaced by men and women who stayed in their countries, the creation of weapons and pursuit of medicine would stimulate investment, basically being at war generated such a rush in the population that everything became more efficient and in the end if they won (and speaking of the United States we assumed they probably would) they would get to keep plenty of new resources from the losing country. Back then I knew little on economics but my common sense told me that something had to be wrong with this theory so I asked her about what would happen then when war was over (If my memory serves me well, we were discussing the case of Afghanistan) and her response was: “that’s why the U.S. is always at war, it’s not cool but look at them how rich they are”. Having no substantive argument to answer I felt completely disillusioned at this vision of the world and went back home with much disappointment.

On his third chapter of Economics in One Lesson, The Blessings of Destruction, Hazlitt analyzes such fallacy that destruction (war in this case) bring about prosperity and advancement. Hazlitt claims that the fallacy of war bringing progress is simply a disguised version of the Broken Window Fallacy. People see that during war there are technological advancements, that the destruction of houses and factories generates the to build new ones and thus stimulates the building industry and the metal, and other industries related to this construction plan. People point out at the rise in demand of certain industries and production. What Hazlitt does, applying his lesson is take a broader look at the issue, he analyzes the consequences in the long run and for all groups in order to determine whether war is actually that much of a “blessing”. He begins by making the distinction between NEED and DEMAND, and how they are NOT the same. He draws on the case of how for Demand to be calculated it must be accompanied with the available purchasing power people have (to actually be considered part of the demand). In china, he says, the needs of the people are much higher than in the united stated, however the purchasing power is greater in the united states so the “new businesses” that war in china could stimulate are “incomparably smaller” because they do not hold this corresponding purchasing power to balance with their needs. During War and shortly after war one can observe increases in demand in certain industries such as the construction one, however this, like in the broken window fallacy, only demonstrate that efforts have been redirected and that people have needed to adjust their priorities to the consequences of war rather than to actual products that they would’ve demanded during peace time. Most of the “good” inflation and creation during war would’ve happened during peacetime without incurring in costs of such magnitude. The cases are clear in Germany and Japan where after incurring in war these countries were left impoverished with their great cities destroyed and with much debt to replace for all of the accumulated capital that was broken.

Today I see it with much more clarity that all of the “benefits” brought about by war that people love to speak about are only benefits to some groups for some time. Overall war destroys accumulated capital goods and when analyzed in the bigger scheme of things, war is more of a regression than a truthful step towards prosperity.