Other Enigmas of Economics

by Röpke, Wilhelm

Once we have become aware of the element of the mysterious and the problematical in the economic process in which we ourselves are engaged, we are alerted as well to the enigmatic aspects of all the individual parts of the process. Once we have begun to ask questions and have sloughed off the naive unconcern of the unphilosophical man who regards all these things as “given,” our intellectual curiosity pushes us ever deeper into the thickets of economics. What about “interest,” for example? Here is one of the biggest conundrums of economics and one which will no doubt appear as disconcerting at first sight to the modern tenderfoot as it did to the writer in his own youth. Or again: how many are there who regard money as something self-evident, something on which it is unnecessary to waste much discussion? They know what money is in its concrete form of coin and bank note and that one must have it to survive, but that is the end of the matter for them. It requires a serious monetary disturbance, such as the inflationary crises which developed in some countries after both World Wars, to bring home to people what irreplaceable services are rendered by a healthy monetary system, what fecund and also destructive forces lie hidden in those pieces of paper and those small discs of metal which are passed so nonchalantly from hand to hand. Then, even the uninitiate can see some point in reflecting on the meaning of money. And when once this act of reflection has commenced, how quickly comes insight into and appreciation of the mysteries and the problems which lie hidden here. It is then that the realization comes that money is not something natural and self-evident, but a human invention, and as such an historical phenomenon which acquires significance only at a certain stage of economic development, namely, that of an advanced society founded on the market and the division of labor.
Let us take a step further, leaving aside for the moment the broader interrelationships of economic life (whose problematical aspects are really not so difficult to discern) and confine our attention to a single banal fact, selected at random. Assume that we have a pencil costing $.05 and a watch costing $50. Whence comes this difference in price? There are three possible explanations. First: the two prices are simply the result of chance. Chance, clearly, plays a role in the formation of prices as anyone will attest who has ever attended an auction or paid some exorbitant price in an Eastern bazaar. And there is little doubt but that on most of our imperfectly organized markets the formation of prices takes place within a more or less wide range of indeterminacy. Yet no one would seriously maintain that price formation is governed only by the capricious play of chance. It would, at any rate, be difficult to make such an assertion about the pencil and the watch. There is too great a difference between the two prices and too little likelihood of supposing an inversion of the prices. Experience proves that, in reality, prices of all commodities are coordinated in a single system in which each individual price tends to remain stable for a considerable period of time, varying only within relatively narrow limits; a marked change will occur only for good and sufficient reasons.
A second explanation is that prices are arbitrarily set by the public authorities. It will be at once evident that this explanation does not apply in our case nor to our experiences, though we are all familiar with a few instances in which the authorities have fixed prices. In wartime, of course, the exception becomes the rule and an elaborate apparatus of price control is set up by the government to prevent a rise in the prices of vitally needed commodities (ceiling price policy). Even in normal times, there are many prices which are fixed (institutional prices). Examples are theatre tickets, taxi fares, etc. But it is precisely our wartime experiences with price control which have made at least one thing clear: a government which fixes prices too far below the level they would have reached in the absence of the official regulations will encounter increasing resistance, ending in complete defiance. It is well to remember that even in these instances of compulsory price fixing, the fixing is linked to factors which have nothing to do with compulsion or chance. It is these factors which provide the last and most satisfactory explanation: prices are formed in accordance with inherent social necessities. The elucidation of such price formation is one of the chief tasks of economics.

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Ordered Anarchy

by Röpke, Wilhelm

THE PROBLEM
“Grasp the exhaustless life that all men live! Each shares therein, though few may comprehend: Where’er you touch, there’s interest without end.”
GOETHE (Faust, Prelude on the Stage)
1. Ordered Anarchy
On the threshold of every scientific speculation about the universe (as the Greek philosophers taught us long ago) is inscribed the word “wonder.” Before explaining anything, we must first feel that it needs explanation; before answering questions, we must first learn how to ask them. Science cannot progress where men take the world, their own existence, for granted. If our knowledge of these phenomena is to increase, we must see them naively, with the eyes of children. Unfortunately, if understandably, the more the familiar and commonplace is a given fact, the less does it excite the sensation of “wonder.” Is there anything, for instance, more familiar or more humdrum than economic life? What is so usual, even banal, as the housewife’s daily marketing, the farmer’s sale of a calf, the working-man’s weekly pay check, the sale of a share on the stock exchange? Still, it needs but a moment’s reflection to discover behind these banal occurrences something unexplained, even mysterious. Once we have made this discovery, we have already taken the first steps onto the terrain of economics.
Despite the power of the human imagination, it can only feebly picture the economic life of our age in all its variety and complexity. If only we might at this moment have the gift of omnipresence, what an unimaginable number of activities, mutually interacting with and determining each other, we would behold. We would see millions of factories in which thousands of different products are being manufactured; people sowing somewhere, somewhere reaping; a thousand boats and trains hauling to the four corners of the earth cargoes of fantastic variety; shepherds tending flocks in Australia and New Zealand; miners digging copper ore in the Congo or in the American far West and starting it on its way throughout the whole world; the Japanese spinning silk, the Javanese gathering tea—all swelling an unbroken stream of goods flooding across the land into warehouses and factories and from thence into millions of shops. We would see a still finer network of little streams going from the shops into countless households, rivulets of food and clothing and all the other things required by an army of billions: laborers, office workers, clerks, businessmen, farmers—the very ones whose work has created the mighty river of goods. Simultaneously, we would see another current of goods (machines, tools, cement, and similar products not intended for direct consumption) supplying the factories in city and country—the auxiliary goods needed to keep the first stream of consumption goods flowing. And still the panorama would not be complete, for in every direction we would see a host of services being performed: a surgeon beginning an operation, a lawyer making a plea, an economist endeavoring to explain the economic system to a circle of unknown readers. And more than this: we would behold the bewildering moment-to-moment fluctuations of the money market and the securities market—phenomena which we sense are contributing in a mysterious fashion to the movement and progress of our economic system. Finally, our attention would be drawn to small and large ducts labeled “taxes” and “exercises” debouching at all stages of the economic process and serving to divert part of the flow of goods to the state for the maintenance of the army, the administrative agencies of the government, the schools and the courts.
Today, we are witnessing a rapid decline in the number of individuals who satisfy their wants independently of the outside world. The modern farmer manages to retain in a greater degree than any other class the independence of the self-sufficient man, although even he satisfies a growing share of his needs by selling his surplus produce in exchange for the things he does not raise. The rest of mankind, however, is almost completely dependent upon this indirect method of want-satisfaction. Indirect production, in turn, is based upon the principle, familiar to everyone, of the division of labor, but it presupposes, nonetheless, a harmonious coordination of the divided elements of the economic process.1 Who in the countries of the free world is charged with this coordination? What would happen if no one were in charge?
Consider, for a moment, the problem of the daily provisioning of a great city. Its millions of inhabitants must be provided with the basic necessities, to say nothing of the “luxuries” which cheer and brighten existence: so many tons of flour, butter, meat, so many miles of cloth, so many millions of cigars and cigarettes, so many reams of paper, so many books, cups, plates, nails, and a thousand other things must be daily produced in such wise that a surplus or deficiency of any particular good is avoided. The goods must be available hourly, monthly, or annually (according to the kind of good in question) in exactly the quantities and qualities demanded by a population of several millions. But the people’s demand for goods is necessarily dependent upon their purchasing power (money). The existence of purchasing power presupposes, in turn, that the millions who appear in the market as consumers have previously as “producers” (whether employees or independent proprietors) so adjusted their output, both in quantity and quality, to the general demand for goods that they were able to dispose of their stock without loss. Now the highly differentiated modern economic system encompasses not alone a single city, however great, not alone a country however vast, but, in a way to which we shall give our particular attention later, the whole terrestial globe. The craftsman in an optical instrument factory makes lenses for export to the most distant countries, which in turn supply him with cocoa, coffee, tobacco and wool. While he is polishing lenses he is also producing, indirectly, all these things more abundantly and more cheaply than if he produced them directly. This immensely extended and intricate mechanism can function only if all its parts are in such constant and perfect synchronization that noticeable disorder is avoided. Were this not the case, the provisioning of millions would be immediately imperiled.
Who is charged with seeing to it that the economic gears of society mesh properly? Nobody. No dictator rules the economy, deciding who shall perform the needed work and prescribing what goods and how much of each shall be produced and brought to market. Admittedly, people today must perforce accept a great deal more dictation from authorities of all kinds than a few decades ago. Yet by and large the world outside of the Communist bloc—the “capitalist” world, to use a popular if vague expression—still adheres to the principle that decisions about production, consumption, saving, buying and selling, are best left to the people themselves. Thus, the modern economic system, an extraordinarily complex mechanism, functions without conscious central control by any agency whatever. It is a mechanism which owes its continued functioning really to a kind of anarchy. And yet capitalism’s severest critics must admit that all of its parts synchronize with amazing precision. Political anarchy leads invariably to chaos. But anarchy in economics, strangely, produces an opposite result: an orderly cosmos. Our economic system may be anarchic, but it is not chaotic. He who does not find this a wondrous phenomenon and thereby deserving of the most patient study cannot be expected to take much of an interest in economics.
The order which is immanent in our economic system compels recognition even by those who are far from finding it perfect. Indeed, even those who radically disapprove of this kind and degree of order and who wish to replace it with a system of conscious and centralized control (socialism) cannot deny that it exists. Order there is in our economic system; we have a centuries-long proof of it; it is a fact which is beyond debate but which is at the same time compatible with every political faith. Honesty compels the admission that the existence of ordered anarchy is cause for astonishment, that it is something which urgently requires explanation. Further reflection, moreover, must occasion serious doubt as to whether an enormously complicated and differentiated process such as is represented in the economic systems of the advanced industrial nations could be “commanded” in all its details from on high, after the fashion of an army or a factory, without the direst consequences. The existence of order in spite of anarchy—”spontaneous order” if we wish—is not alone an astounding phenomenon in itself. The processes peculiar to economic life in a free society make evident the fundamental superiority of the spontaneous order over the commanded order. Spontaneous order is not just another variety of order, albeit one with the surprising ability to function, if need be, even without command from on high. For if the organization of the economic system of a free society can be shown to differ fundamentally from the organization of an army, there is reason for believing that a spontaneous economic order is the only possible one. Notwithstanding, our enthusiasm for spontaneous order will be tempered by the realization that as measured against any given ideal, it may leave much to be desired.

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Economics in One Lesson by Henry Hazlitt

Public Works Mean Taxes

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to “insufficient private purchasing power.” The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the “deficiency”.

An enormous literature is based on this fallacy, and, as so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other. We cannot explore that whole network at this point; we shall return to other branches of it later. But we can examine here the mother fallacy that has given birth to this progeny, the main stem of the network.

Everything we get, outside of 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 is 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.

Having put aside for later consideration the network of fallacies which rest on chronic government borrowing and inflation, we shall take it for granted throughout the present chapter that either immediately or ultimately every dollar of government spending must be raised through a dollar of taxation. Once we look at the matter in this way, the supposed miracles of government spending will appear in another light.

A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works — of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments—is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of “providing employment” or of adding wealth to the community that it would not otherwise have had.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

“Parity” Prices

Dismissing all these considerations, let us return to the central fallacy that specially concerns us here. This is the argument that if the farmer gets higher prices for his products he can buy more goods from industry and so make industry prosperous and bring full employment. It does not matter to this argument, of course, whether or not the farmer gets specifically so-called parity prices.

Everything, however, depends on how these higher prices are brought about. If they are the result of a general revival, if they follow from increased prosperity of business, increased industrial production and increased purchasing power of city workers (not brought about by inflation), then they can indeed mean increased prosperity and production not only for the farmers, but for everyone. But what we are discussing is a rise in farm prices brought about by government intervention. This can be done in several ways. The higher price can be forced by mere edict, which is the least workable method. It can be brought about by the government’s standing ready to buy all the farm products offered to it at the parity price. It can be brought about by the government’s lending to farmers enough money on their crops to enable them to hold the crops off the market until parity or a higher price is realized. It can be brought about by the government’s enforcing restrictions in the size of crops. It can be brought about, as it often is in practice, by a combination of these methods. For the moment we shall simply assume that, by whatever method, it is in any case brought about.

What is the result? The farmers get higher prices for their crops. In spite of reduced production, say, their “purchasing power is thereby increased. They are for the time being more prosperous themselves, and they buy more of the products of industry. All this is what is seen by those who look merely at the immediate consequences of policies to the groups directly involved.

But there is another consequence, no less inevitable. Suppose the wheat which would otherwise sell at $2.50 a bushel is pushed up by this policy to $3. 50. The farmer gets $1 a bushel more for wheat. But the city worker, by precisely the same change, pays $1 a bushel more for wheat in an increased price of bread. The same thing is true of any other farm product. If the farmer then has $1 more purchasing power to buy industrial products, the city worker has precisely that much less purchasing power to buy industrial products. On net balance industry in general has gained nothing. It loses in city sales precisely as much as it gains in rural sales.

There is of course a change in the incidence of these sales. No doubt the agricultural-implement makers and the mail-order houses do a better business. But the city department stores do a smaller business.

The matter, however, does not end there. The policy results not merely in no net gain, but in a net loss. For it does not mean merely a transfer of purchasing power to the farmer from city consumers, or from the general taxpayer, or from both. It also frequently means a forced cut in the production of farm commodities to bring up the price. This means a destruction of wealth. It means that there is less food to be consumed. How this destruction of wealth is brought about will depend upon the particular method pursued to bring prices up. It may mean the actual physical destruction of what has already been produced, as in the burning of coffee in Brazil. It may mean a forced restriction of acreage, as in the American AAA plan, or its revival. We shall examine the effect of some of these methods when we come to the broader discussion of government commodity controls.

But here it may be pointed out that when the farmer reduces the production of wheat to get parity, he may indeed get a higher price for each bushel, but he produces and sells fewer bushels. The result is that his income does not go up in proportion to his prices. Even some of the advocates of parity prices recognize this, and use it as an argument to go on to insist upon parity income for farmers. But this can only be achieved by a subsidy at the direct expense of taxpayers. To help the farmers, in other words, it merely reduces the purchasing power of city workers and other groups still more.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

Public Works Mean Taxes

I have deliberately chosen the most favorable examples of public spending schemes—that is, those that are most frequently and fervently urged by the government spenders and most highly regarded by the public. I have not spoken of the hundreds of boondoggling projects that are invariably embarked upon the moment the main object is to “give jobs” and “to put people to work.” For then the usefulness of the project itself, as we have seen, inevitably becomes a subordinate consideration. Moreover, the more wasteful the work, the more costly in manpower, the better it becomes for the purpose of providing more employment. Under such circumstances it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

The Drive for Exports

EXCEEDED ONLY BY the pathological dread of imports that affects all nations is a pathological yearning for exports. Logically, it is true, no thing could be more inconsistent. In the long run imports and exports must equal each other (considering both in the broadest sense, which includes such “invisible” terms as tourist expenditures, ocean freight charges and all other items in the “balance of payments”). It is exports that pay for imports, and vice versa. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have no funds with which to buy our goods. When we decide to cut down our imports, we are in effect deciding also to cut down our exports. When we decide to increase our exports, we are in effect deciding also to increase our imports.
The reason for this is elementary. An American exporter sells his goods to a British importer and is paid in British pounds sterling. But he cannot use British pounds to pay the wages of his workers, to buy his wife’s clothes or to buy theater tickets. For all these purposes he needs American dollars. Therefore his British pounds are of no use to him unless he either uses them himself to buy British goods or sells them (through his bank or other agent) to some American importer who wishes to use them to buy British goods. Whichever he does, the transaction cannot be completed until the American exports have been paid for by an equal amount of imports.
The same situation would exist if the transaction had been conducted in terms of American dollars instead of British pounds. The British importer could not pay the American exporter in dollars unless some previous British exporter had built up a credit in dollars here as a result of some previous sale to us. Foreign exchange, in short, is a clearing transaction in which, in America, the dollar debts of foreigners are canceled against their dollar credits. In England, the pound sterling debts of foreigners are canceled against their sterling credits.
There is no reason to go into the technical details of all this, which can be found in any good textbook on foreign exchange. But it should be pointed out that there is nothing inherently mysterious about it (in spite of the mystery in which it is so often wrapped), and that it does not differ essentially from what happens in domestic trade. Each of us must also sell something, even if for most of us it is our own services rather than goods, in order to get the purchasing power to buy. Domestic trade is also conducted in the main by crossing off checks and other claims against each other through clearing houses.
It is true that under the international gold standard discrepancies in balances of imports and exports were sometimes settled by shipments of gold. But they could just as well have been settled by shipments of cotton, steel, whisky, perfume, or any other commodity. The chief difference is that when a gold standard exists the demand for gold is almost indefinitely expansible (partly because it is thought of and accepted as a residual international “money” rather than as just another commodity), and that nations do not put artificial obstacles in the way of receiving gold as they do in the way of receiving almost everything else. (On the other hand, of late years they have taken to putting more obstacles in the way of exporting gold than in the way of exporting anything else; but that is another story.)
Now the same people who can be clearheaded and sensible when the subject is one of domestic trade can be incredibly emotional and muddleheaded when it becomes one of foreign trade. In the latter field they can seriously advocate or acquiesce in principles which they would think it insane to apply in domestic business. A typical example is the belief that the government should make huge loans to foreign countries for the sake of increasing our exports, regardless of whether or not these loans are likely to be repaid.
American citizens, of course, should be allowed to lend their own funds abroad at their own risk. The government should put no arbitrary barriers in the way of private lending to countries with which we are at peace. As individuals we should be willing to give generously, for humane reasons alone, to people who are in great distress or in danger of starving. But we ought always to know clearly what we are doing. It is not wise to bestow charity on foreign people under the impression that one is making a hardheaded business transaction purely for one’s own selfish purposes. That could only lead to misunderstandings and bad relations later.
Yet among the arguments put forward in favor of huge foreign lending one fallacy is always sure to occupy a prominent place. It runs like this. Even if half (or all) the loans we make to foreign countries turn sour and are not repaid, this nation will still be better off for having made them, because they will give an enormous impetus to our exports.
It should be immediately obvious that if the loans we make to foreign countries to enable them to buy our goods are not repaid, then we are giving the goods away. A nation cannot grow rich by giving goods away. It can only make itself poorer.
No one doubts this proposition when it is applied privately. If an automobile company lends a man $5,000 to buy a car priced at that amount, and the loan is not repaid, the automobile company is not better off because it has “sold” the car. It has simply lost the amount that it cost to make the car. If the car cost $4,000 to make, and only half the loan is repaid, then the company has lost $4,000 minus $2,500, or a net amount of $1,500 It has not made up in trade what it lost in bad loans.
If this proposition is so simple when applied to a private company, why do apparently intelligent people get confused about it when applied to a nation? The reason is that the transaction must then be traced mentally through a few more stages. One group may indeed make gains—while the rest of us take the losses.
It is true, for example, that persons engaged exclusively or chiefly in export business might gain on net balance as a result of bad loans made abroad. The national loss on the transaction would be certain, but it might be distributed in ways difficult to follow. The private lenders would take their losses directly. The losses from government lending would ultimately be paid out of increased taxes imposed on everybody. But there would also be many indirect losses brought about by the effect on the economy of these direct losses.
In the long run business and employment in America would be hurt, not helped, by foreign loans that were not repaid. For every extra dollar that foreign buyers had with which to buy American goods, domestic buyers would ultimately have one dollar less. Businesses that depend on domestic trade would therefore be hurt in the long run as much as export businesses would be helped. Even many concerns that did an export business would be hurt on net balance. American automobile companies, for example, sold about 15 percent of their output in the foreign market in 1975. It would not profit them to sell 20 percent of their output abroad as a result of bad foreign loans if they thereby lost, say, io percent of their American sales as the result of added taxes taken from American buyers to make up for the unpaid foreign loans.
None of this means, I repeat, that it is unwise for private investors to make loans abroad, but simply that we cannot get rich by making bad ones.
For the same reasons that it is stupid to give a false stimulation to export trade by making bad loans or outright gifts to foreign countries, it is stupid to give a false stimulation to export trade through export subsidies. An export subsidy is a clear case of giving the foreigner something for nothing, by selling him goods for less than it costs us to make them. It is another case of trying to get rich by giving things away.
In the face of all this, the United States government has been engaged for years in a “foreign economic aid” program the greater part of which has consisted in outright government-to-government gifts of many billions of dollars. Here we are interested in just one aspect of that program—the naive belief of many of its sponsors that this is a clever or even a necessary method of “increasing our exports” and so maintaining prosperity and employment. It is still another form of the delusion that a nation can get rich by giving things away. What conceals the truth from many supporters of the program is that what is directly given away is not the exports themselves but the money with which to buy them. It is possible, therefore, for individual exporters to profit on net balance from the national loss — if their individual profit from the exports is greater than their share of taxes to pay for the program.
Here we have simply one more example of the error of looking only at the immediate effect of a policy on some special group, and of not having the patience or intelligence to trace the long-run effects of the policy on everyone.
If we do trace these long-run effects on everyone, we come to an additional conclusion—the exact opposite of the doctrine that has dominated the thinking of most government officials for centuries. This is, as John Stuart Mill so clearly pointed out, that the real gain of foreign trade to any country lies not in its exports but in its imports. Its consumers are either able to get from abroad commodities at a lower price than they could obtain them for at home, or commodities that they could not get from domestic producers at all. Outstanding examples in the United States are coffee and tea. Collectively considered, the real reason a country needs exports is to pay for its imports.



Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

“Parity” Prices

SPECIAL INTERESTS, as the history of tariffs reminds us, can think of the most ingenious reasons why they should be the objects of special solicitude. Their spokesmen present a plan in their favor; and it seems at first so absurd that disinterested writers do not trouble to expose it. But the special interests keep on insisting on the scheme. Its enactment would make so much difference to their own immediate welfare that they can afford to hire trained economists and public relations experts to propagate it in their behalf. The public hears the argument so often repeated, and accompanied by such a wealth of imposing statistics, charts, curves and pie-slices, that it is soon taken in. When at last disinterested writers recognize that the danger of the scheme’s enactment is real, they are usually too late. They cannot in a few weeks acquaint themselves with the subject as thoroughly as the hired brains who have been devoting their full time to it for years; they are accused of being uninformed, and they have the air of men who presume to dispute axioms.

This general history will do as a history of the idea of “parity” prices for agricultural products. I forget the first day when it made its appearance in a legislative bill; but with the advent of the New Deal in 1933 it had become a definitely established principle, enacted into law; and as year succeeded year, and its absurd corollaries made themselves manifest, they were enacted too.

The argument for parity prices ran roughly like this. Agriculture is the most basic and important of all industries. It must be preserved at all costs. Moreover, the prosperity of everybody else depends upon the prosperity of the farmer. If he does not have the purchasing power to buy the products of industry, industry languishes. This was the cause of the 1929 collapse, or at least of our failure to recover from it. For the prices of farm products dropped violently, while the prices of industrial products dropped very little. The result was that the farmer could not buy industrial products; the city workers were laid off and could not buy farm products, and the depression spread in ever-widening vicious circles. There was only one cure, and it was simple. Bring back the prices of the farmer’s products to a parity with the prices of the things the farmer buys. This parity existed in the period from 1909 to 1914, when farmers were prosperous. That price relationship must be restored and preserved perpetually.

It would take too long, and carry us too far from our main point, to examine every absurdity concealed in this plausible statement. There is no sound reason for taking the particular price relationships that prevailed in a particular year or period and regarding them as sacrosanct, or even as necessarily more “normal” than those of any other period. Even if they were “normal” at the time, what reason is there to suppose that these same relationships should be preserved more than sixty years later in spite of the enormous changes in the conditions of production and demand that have taken place in the meantime? The period of 1909 to 1914, as the basis of parity, was not selected at random. In terms of relative prices it was one of the most favorable periods to agriculture in our entire history.

If there had been any sincerity or logic in the idea, it would have been universally extended. If the price relationships between agricultural and industrial products that prevailed from August 1909 to July 1914 ought to be preserved perpetually, why not preserve perpetually the price relationship of every commodity at that time to every other?

When the first edition of this book appeared in 1946, I used the following illustrations of the absurdities to which this would have led:

A Chevrolet six-cylinder touring car cost $2,150 in 1912; an incomparably improved six-cylinder Chevrolet sedan cost $907 in 1942; adjusted for “parity” on the same basis as farm products, however, it would have cost $3,270 in 1942. A pound of aluminum from 1909 to 1913 inclusive averaged 22.5 cents; its price early in 1946 was 14 cents; but at “parity” it would then have cost, instead, 41 cents.

It would be both difficult and debatable to try to bring these two particular comparisons down to date by adjusting not only for the serious inflation (consumer prices have more than tripled) between 1946 and 1978, but also for the qualitative differences in automobiles in the two periods. But this difficulty merely emphasizes the impracticability of the proposal.

After making, in the 1946 edition, the comparison quoted above, I went on to point out that the same type of increase in productivity had in part led also to the lower prices of farm products. “In the five year period 1955 through 1959 an average of 428 pounds of cotton was raised per acre in the United States as compared with an average of 260 pounds in the five-year period 1939 to 1943 and an average of only 188 pounds in the five year ‘base’ period 1909 to 1913. When these comparisons are brought down to date, they show that the increase in farm productivity has continued, though at a reduced rate. In the five-year period 1968 to 1972, an average of 467 pounds of cotton was raised per acre. Similarly, in the five years 1968 to 1972 an average of 84 bushels of corn per acre was raised compared with an average of only 26.1 bushels in 1935 to 1939, and an average of 31.3 bushels of wheat was raised per acre compared with an average of only 13.2 in the earlier period.

Costs of production have been substantially lowered for farm products by better application of chemical fertilizer, improved strains of seed and increasing mechanization. In the 1946 edition I made the following quotation:*

“On some large farms which have been completely mechanized and are operated along mass production lines, it requires only one-third to one-fifth the amount of labor to produce the same yields as it did a few years back.”

Yet all this is ignored by the apostles of “parity” prices.

The refusal to universalize the principle is not the only evidence that it is not a public-spirited economic plan but merely a device for subsidizing a special interest. Another evidence is that when agricultural prices go above parity, or are forced there by government policies, there is no demand on the part of the farm bloc in Congress that such prices be brought down to parity, or that the subsidy be to that extent repaid. It is a rule that works only one way.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

Who's “Protected” by Tariffs?

On the subject of the tariff we must keep in mind one final precaution. It is the same precaution that we found necessary in examining the effects of machinery. It is useless to deny that a tariff does benefit—or at least can benefit—special interests. True, it benefits them at the expense of eveiyone else. But it does benefit them. If one industry alone could get protection, while its owners and workers enjoyed the benefits of free trade in everything else they bought, that industry would benefit, even on net balance. As an attempt is made to extendthe tariff blessings, however, even people in the protected industries, both as producers and consum ers, begin to suffer from other people’s protection, and may finally be worse off even on net balance than if neither they nor anybody else had protection.

But we should not deny, as enthusiastic free traders have so often done, the possibility of these tariff benefits to special groups. We should not pretend, for example, that a reduction of the tariff would help everybody and hurt nobody. It is true that its reduction would help the country on net balance. But somebody would be hurt. Groups previously enjoying high protection would be hurt. That in fact is one reason why it is not good to bring such protected interests into existence in the first place. But clarity and candor of thinking compel us to see and acknowledge that some industries are right when they say that a removal of the tariff on their product would throw them out of business and throw their workers (at least temporarily) out of jobs. And if their workers have developed specialized skills, they may even suffer permanently, or until they have at long last learnt equal skills. In tracing the effects oftariffs, as in tracing the effects of machinery, we should endeavor to see all the chief effects, in both the short run and the long run, on all groups.

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; nor is it directed against all arguments for tariffs. It is merely directed against the fallacy that a tariff on net balance “provides employment,” “raises wages,” or “protects the American standard of living.” It does none of these things; and so far as wages and the standard of living are concerned, it does the precise opposite. But an examination of duties imposed for other purposes would carry us beyond our present subject.

Nor need we here examine the effect of import quotas, exchange controls, bilateralism and other means of reducing, diverting or preventing international trade. Such devices have, in general, the same effects as high or prohibitive tariffs, and often worse effects. They present more complicated issues, but their net results can be traced through the same kind of reasoning that we have just applied to tariff barriers.


Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

Who's “Protected” by Tariffs?

The tariff has been described as a means of benefiting the producer at the expense of the consumer. In a sense this is correct. Those who favor it think only of the interests of the producers immediately benefited by the particular duties involved. They forget the interests of the consumers who are immediately injured by being forced to pay these duties. But it is wrong to think of the tariff issue as if it represented a conflict between the interests of producers as a unit against those of consumers as a unit. It is true that the tariff hurts all consumers as such. It is not true that it benefits all producers as such. On the contrary, as we have just seen, it helps the protected producers at the expense of all other American producers, and particularly of those who have a comparatively large potential export market.
We can perhaps make this last point clearer by an exaggerated example. Suppose we make our tariff wall so high that it becomes absolutely prohibitive, and no imports come in from the outside world at all. Suppose, as a result of this, that the price of sweaters in America goes up only $5. Then American consumers, because they have to pay $5 more for a sweater, will spend on the average five cents less in each of a hundred other American industries. (The figures are chosen merely to illustrate a principle: there will, of course, be no such symmetrical distribution of the loss; moreover, the sweater industry itself will doubtless be hurt because of protection of still otherindustries. But these complications may be put aside for the moment.)
Now because foreign industries will find their market in Americatotally cut off, they will get no dollar exchange, and therefore they will be unable to buy any American goods at all. As a result of this, American industries will suffer in direct proportion to the percentage of their sales previously made abroad. Those that will be most injured, in the first instance, will be such industries as raw cotton producers, copper producers, makers of sewing machines, agricultural machinery, typewriters, commercial airplanes, and so on.
A higher tariff wall, which, however, is not prohibitive, will produce the same kind of results as this, but merely to a smaller degree.
The effect of a tariff, therefore, is to change the structure of American production. It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another. It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller. Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.
In the long run, notwithstanding the mountains of argument pro and con, a tariff is irrelevant to the question of employment. (True, suddenchanges in the tariff, either upward or downward, can create temporary unemployment, as they force corresponding changes in the structure of production. Such sudden changes can even cause a depression.) But a tariff is not irrelevant to the question of wages. In the long run it always reduces real wages, because it reduces efficiency, production and wealth.
Thus all the chief tariff fallacies stem from the central fallacy with which this book is concerned. They are the result of looking only at the immediate effects of a single tariff rate on one group of producers, and forgetting the long-run effects both on consumers as a whole and on all other producers.
(I hear some reader asking: “Why not solve this by giving tariff protection to all producers?” But the fallacy here is that this cannot help producers uniformly, and cannot help at all domestic producers who already “outsell” foreign producers: these efficient producers must necessarily suffer from the diversion of purchasing power brought about by the tariff.)

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Economics in One Lesson by Henry Hazlitt

Who's “Protected” by Tariffs?

It is important to notice that the new tariff on sweaters would not raise American wages. To be sure, it would enable Americans to work in the sweater industry at approximately the average level of American wages (for workers of their skill), instead of having to compete in that industry at the British level of wages. But there would be no increase of American wages in general as a result of the duty; for as we have seen, there would be no net increase in the number of jobs provided, no net increase in the demand for goods, and no increase in labor productivity. Labor productivity would, in fact, be reduced as a result of the tariff.

And this brings us to the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results, in fact, in a net loss to the country. For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages.

Let us observe more clearly how it does this. We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles. There is here no net gain to industry as a whole. But as a result of the artificial barrier erected against foreign goods, American labor, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall the average productivity of American labor and capital is reduced.

If we look at it now from the consumer’s point of view, we find that he can buy less with his money. Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. The general purchasing power of his income has therefore been reduced. Whether the net effect of the tariff is to lower money wages or to raise money prices will depend upon the monetary policies that are followed. But what is clear is that the tariff—though it may increase wages above what they would have been in the protected industries—must on net balance, when all occupations are considered, reduce real wages—-reduce them, that is to say, compared with what they otherwise would have been.

Only minds corrupted by generations of misleading propaganda can regard this conclusion as paradoxical. What other result could we expect from a policy of deliberately using our resources of capital and manpower in less efficient ways than we know how to use them? What other result could we expect from deliberately erecting artificial obstacles to trade and transportation?

For the erection of tariff walls has the same effect as the erection of real walls. It is significant that the protectionists habitually use the language of warfare. They talk of “repelling an invasion” of foreign products. And the means they suggest in the fiscal field are like those of the battlefield. The tariff barriers that are put up to repel this invasion are like the tank traps, trenches and barbed-wire entanglements created to repel or slow down attempted invasion by a foreign army.

And just as the foreign army is compelled to employ more expensive means to surmount those obstacles — bigger tanks, mine detectors, engineer corps to cut wires, ford streams and build bridges—so more expensive and efficient transportation means must be developed to surmount tariff obstacles. On the one hand, we try to reduce the cost of transportation between England and America, or Canada and the United States, by developing faster and more efficient planes and ships, better roads and bridges, better locomotives and motor trucks. On the other hand, we offset this investment in efficient transportation by a tariff that makes it commercially even more difficult to transport goods than it was before. We make it a dollar cheaper to ship the sweaters, and then increase the tariff by two dollars to prevent the sweaters from being shipped. By reducing the freight that can be profitably carried, we reduce the value of the investment in transport efficiency.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

Who's “Protected” by Tariffs?

Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. Suppose that there had been no tariff on foreign knit goods, that Americans were accustomed to buying foreign sweaters without duty, and that the argument were then put forward that we could bring a sweater industry into existence by imposing a duty of $5 on sweaters.

There would be nothing logically wrong with this argument so far as it went. The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business. But American consumers would be forced to subsidize this industry. On every American sweater they bought they would be forced in effect to pay a tax of $5 which would be collected from them in a higher price by the new sweater industry.

Americans would be employed in a sweater industry who had not previously been employed in a sweater industry. That much is true. But there would be no net addition to the country’s industry or the country’s employment. Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 50,000 persons might be employed in a woolen sweater industry, 50,000 fewer persons would be employed elsewhere.

But the new industry would be visible. The number of its employees, the capital invested in it, the market value of its product in terms of dollars, could be easily counted. The neighbors could see the sweater workers going to and from the factory every day. The results would be palpable and direct. But the shrinkage of a hundred other industries, the loss of 50,000 other jobs somewhere else, would not be so easily noticed. it would be impossible for even the cleverest statistician to know precisely what the incidence of the loss of other jobs had been—precisely how many men and women had been laid off from each particular industry, precisely how much business each particular industry had lost—because consumers had to pay more for their sweaters. For a loss spread among all the other productive activities of the country would be comparatively minute for each. It would be impossible for anyone to know precisely how each consumer wouldhave spent his extra $5 if he had been allowed to retain it. The overwhelming majority of the people, therefore, would probably suffer from the illusion that the new industry had cost us nothing.


Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

Who's “Protected” by Tariffs?

A MERE RECITAL of the economic policies of governments all over the world is calculated to cause any serious student of economics to throw up his hands in despair. What possible point can there be, he is likely to ask, in discussing refinements and advances in economic theory, when popular thought and the actual policies of governments, certainly in everything connected with international relations, have not yet caught up with Adam Smith? For present-day tariff and trade policies are not only as bad as those in the seventeenth and eighteenth centuries, but incomparably worse. The real reasons for those tariffs and other trade barriers are the same, and the pretended reasons are also the same.

Since The Wealth of Nations appeared more than two centuries ago, the case for free trade has been stated thousands of times, but perhaps never with more direct simplicity and force than it was stated in that volume. In general Smith rested his case on one fundamental proposition: “In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.” “The proposition is so very manifest,” Smith continued, “that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common-sense of mankind.”

From another point of view, free trade was considered as one aspect of the specialization of labor:

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.
The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.

But whatever led people to suppose that what was prudence in the conduct of every private family could be folly in that of a great kingdom? It was a whole network of fallacies, out of which mankind has still been unable to cut its way. And the chief of them was the central fallacy with which this book is concerned. It was that of considering merely the immediate effects of a tariff on special groups, and neglecting to consider its long run effects on the whole community.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

The Fetish of Full Employment

THE ECONOMIC GOAL of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck. It is for this reason that men used their ingenuity to develop a hundred thousand labor-saving inventions.

All this is so elementary that one would blush to state it if it were not being constantly forgotten by those who coin and circulate the new slogans. Translated into national terms, this first principle means that our real objective is to maximize production. In doing this, full employment—that is, the absence of involuntary idleness—becomes a necessary byproduct. But production is the end, employment merely the means. We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production.

Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment. China and India are incomparably poorer than ourselves, but the main trouble from which they suffer is primitive production methods (which are both a cause and a consequence of a shortage of capital) and not unemployment. Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. World War II provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment.

Yet our legislators do not present Full Production bills in Congress but Full Employment bills. Even committees of businessmen recommend “a President’s Commission on Full Employment,” not on Full Production, or even on Full Employment and Full Production. Everywhere the means is erected into the end, and the end itself is forgotten.

Wages and employment are discussed as if they had no relation to productivity and output. On the assumption that there is only a fixed amount of work to be done, the conclusion is drawn that a thirty-hour week will provide more jobs and will therefore be preferable to a forty-hour week. A hundred make-work practices of labor unions are confusedly tolerated. When a Petrillo threatens to put a radio station out of business unless it employs twice as many musicians as it needs, he is supported by part of the public because he is after all merely trying to create jobs. When we had our WPA, it was considered a mark of genius for the administrators to think of projects that employed the largest number of men in relation to the value of the work performed—in other words, in which labor was least efficient.

It would be far better, if that were the choice—which it isn’t—to have maximum production with part of the population supported in idleness by undisguised relief than to provide “full employment” by so many forms of disguised make-work that production is disorganized. The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs. A much smaller proportion of the American population needs to work than that, say, of China or of Russia. The real question is not how many millions of jobs there will be in America ten years from now, but how much shall we produce, and what, in consequence, will be our standard of living? The problem of distribution on which all the stress is being put today, is after all more easily solved the more there is to distribute.

We can clarify our thinking if we put our chief emphasis where it belongs—on policies that will maximize production.

Economics in One Lesson

“F” as in Fed - Sheldon Richman

“F” as in Fed

Sheldon Richman

The Federal Reserve, America’s fatally conceited monetary central planner, is not terribly popular these days—which is cause for hope—and now we have a report card on the entire Fed era that strongly supports the view that we’d be better off without it. At the very least, as the authors suggest, the burden of proof is squarely on those who would retain the central bank.
The report card comes in the form of a working paper from the Cato Institute: “Has the Fed Been a Failure?” by George A. Selgin, William D. Lastrapes, and Lawrence H. White.
The authors state in their abstract:

As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

In light of the Fed’s defined mission—monetary support for economic growth, stable prices, maximum employment—the authors use the following criteria to assess its record: “the relative extent of pre- and post-Federal Reserve Act price level changes, pre- and post-Federal Reserve Act output fluctuations and business recessions, and pre- and post-Federal Reserve Act financial crises.” The Fed has done poorly on every count. No one familiar with the Mises-Hayek critique of central planning will be surprised. Central banking is not equivalent to comprehensive planning of the economy, but money is the most pervasive good and monetary engineers suffer the same insurmountable ignorance as any central planner.
I can only hit the paper’s highlights here.

Inflation

Selgin et al. pronounce the Fed a dismal failure in controlling inflation. “[F]ar from achieving long-run price stability, it has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed’s creation from what it had been at the time of the dollar’s establishment as the official U.S. monetary unit, to fall dramatically.”
The value of the dollar was essentially stable from the late eighteenth century to the second decade of the twentieth century! “A consumer basket selling for $100 in 1790,” they write, “cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913.”
And since that time? “[T]hereafter the price soared, reaching $2,422 in 2008. . . . [M]ost of the decline in the dollar’s purchasing power has taken place since 1970, when the gold standard no longer placed any limits on the Fed’s powers of monetary control.”
The dollar has lost 95 percent of its value since the Fed came into existence.

Deflation

The authors say that since the Great Depression the Fed has rid the economy of deflation (defined as falling prices), which was a feature of the late nineteenth-century economic landscape. Economists, including Fed chairman Ben Bernanke, generally deem deflation as something to be avoided at almost all costs, so they would give the Fed kudos in this respect. But Selgin et al. point out (as have others, such as Steven Horwitz, in the January/February 2010 Freeman) that what matters is not deflation per se but the kind of deflation:

Harmful deflation—the sort that goes hand-in-hand with depression—results from a contraction in overall spending or aggregate demand for goods in a world of sticky prices. As people try to rebuild their money balances they spend less of their income on goods. Slack demand gives rise to unsold inventories, discouraging production as it depresses equilibrium prices. Benign deflation, by contrast, is driven by improvements in aggregate supply—that is, by general reductions in unit production costs—which allow more goods to be produced from any given quantity of factor and which are therefore much more likely to be quickly and fully reflected in corresponding adjustments to actual (and not just equilibrium) prices.
Historically, benign deflation has been the far more common type.

During roughly the last quarter of the nineteenth century, prices in the United States declined 37 percent—1.2 percent a year on average. That’s what the Fed has saved us from, thank you very much.

Frequency and Duration of Recessions

Again, the pre-Fed record is better than the Fed’s performance. Drawing on the latest research, the authors conclude:

[A]lthough contractions were indeed somewhat more frequent before the Fed’s establishment than after World War II (though not, it bears noting, more frequent than in the full Federal Reserve sample period), they were also almost three months shorter on average, and no more severe. Recoveries were also faster, with an average time from trough to previous peak of 7.7 months, as compared to 10.6 months. Allowing for the recent, 18-month-long contraction further strengthens these conclusions.

Moreover, the Fed has violated traditional standards by bailing out insolvent banks. Selgin et al. reject the “too big to fail” doctrine, arguing that the fear-mongering about “systemic risk” is unsubstantiated. Bailing out the creditors of insolvent institutions, as the Fed did during the current financial crisis, has increased the future exposure of the public by reinforcing moral hazard—encouraging excessively risky behavior by creating the expectation of government rescue. In the process the Fed has gone from lender of last resort to allocator of capital—an ominous move toward central planning.
The authors do not endorse the pre-Fed system, which was heavily regulated by the national and state governments. Indeed, for most of American history interstate and intrastate branch banking was illegal, producing an industry of uncompetitive and undiversified banks.
Nor do they explore the free-banking alternative, though Selgin and White are well-known advocates of it. Instead they confine their analysis to various rules that would take away the Fed’s discretionary power over the money supply. These would be improvements but a far distant second to free banking.
The authors leave no doubt that “the Fed’s poor record calls for seriously contemplating a genuine change of regime.”

Economics in One Lesson by Henry Hazlitt

Disbanding Troops and Bureaucrats

The same reasoning applies to civilian government officials whenever they are retained in excessive numbers and do not perform services for the community reasonably equivalent to the remuneration they receive. Yet whenever any effort is made to cut down the number of unnecessary officeholders the cry is certain to be raised that this action is “deflationary.” Would you remove the “purchasing power” from these officials? Would you injure the landlords and tradesmen who depend on that purchasing power? You are simply cutting down “the national income” and helping to bring about or intensify a depression.

Once again the fallacy comes from looking at the effects of this action only on the dismissed officeholders themselves and on the particular tradesmen who depend upon them. Once again it is forgotten that, if these bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken from them for the support of the bureaucrats. Once again it is forgotten that the taxpayers’ income and purchasing power go up by at least as much as the income and purchasing power of the former officeholders go down. If the particular shopkeepers who formerly got the business of these bureaucrats lose trade, other shopkeepers elsewhere gain at least as much. Washington is less prosperous, and can, perhaps, support fewer stores; but other towns can support more.

Once again, however, the matter does not end there. The country is not merely as well off without the superfluous officeholders as it would have been had it retained them. It is much better off. For the officeholders must now seek private jobs or set up private business. And the added purchasing power of the taxpayers, as we noted in the case of the soldiers, will encourage this. But the officeholders can take private jobs only by supplying equivalent services to those who provide the jobs—or, rather, to the customers of the employers who provide the jobs. Instead of being parasites, they become productive men and women.

I must insist again that in all this I am not talking of public officeholders whose services are really needed. Necessary policemen, firemen, street cleaners, health officers, judges, legislators and executives perform productive services as important as those of anyone in private industry. They make it possible for private industry to function in an atmosphere of law, order, freedom and peace. But their justification consists in the utility of their services. It does not consist in the “purchasing power” they possess by virtue of being on the public payroll.

This “purchasing power” argument is, when one considers it seriously, fantastic. It could just as well apply to a racketeer or a thief who robs you. After he takes your money he has more purchasing power. He supports with it bars, restaurants, night clubs, tailors, perhaps automobile workers. But for every job his spending provides, your own spending must provide one less, because you have that much less to spend. Just so the taxpayers provide one less job for every job supplied by the spending of officeholders. When your money is taken by a thief, you get nothing in return. When your money is taken through taxes to support needless bureaucrats, precisely the same situation exists. We are lucky, indeed, if the needless bureaucrats are mere easygoing loafers. They are more likely today to be energetic reformers busily discouraging and disrupting production.

When we can find no better argument for the retention of any group of officeholders than that of retaining their purchasing power it is a sign that the time has come to get rid of them.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

Who's “Protected” by Tariffs?

An American manufacturer of woolen sweaters goes to Congress or to the State Department and tells the committee or officials concerned that it would be a national disaster for them to remove or reduce the tariff on British sweaters. He now sells his sweaters for $30 each, but English manufacturers could sell their sweaters of the same quality for $25. A duty of $5, therefore, is needed to keep him in business. He is not thinking of himself, of course, but of the thousand men and women he employs, and of the people to whom their spending in turn gives employment. Throw them out of work, and you create unemployment and a fall in purchasing power, which would spread in ever-widening circles. And if he can prove that he really would be forced out of business if the tariff were removed or reduced, his argument against that action is regarded by Congress as conclusive.

But the fallacy comes from looking merely at this manufacturer and his employees, or merely at the American sweater industry. It comes from noticing only the results that are immediately seen, and neglecting the results that are not seen because they are prevented from coming into existence.

The lobbyists for tariff protection are continually putting forward arguments that are not factually correct. But let us assume that the facts in this case are precisely as the sweater manufacturer has stated them. Let us assume that a tariff of $5 a sweater is necessary for him to stay in business and provide employment at sweater-making for his workers.

We have deliberately chosen the most unfavorable example of any for the removal of a tariff. We have not taken an argument for the imposition of a new tariff in order to bring a new industry into existence, but an argument for the retention of a tariff that has already brought an industry into existence, and cannot be repealed without hurting somebody.

The tariff is repealed; the manufacturer goes out of business; a thousand workers are laid off; the particular tradesmen whom they patronized are hurt. This is the immediate result that is seen. But there are also results which, while much more difficult to trace, are no less immediate and no less real. For now sweaters that formerly cost retail $30 apiece can be bought for $25. Consumers can now buy the same quality of sweater for less money, or a much better one for the same money. If they buy the same quality of sweater, they not only get the sweater, but they have $5 left over, which they would not have had under the previous conditions, to buy something else. With the $25 that they pay for the imported sweater they help employment—as the American manufacturer no doubt predicted — in the sweater industry in England. With the $5 left over they help employment in any number of other industries in the United States.

But the results do not end there. By buying English sweaters they furnish the English with dollars to buy American goods here. This, in fact (if I may here disregard such complications as fluctuating exchange rates, loans, credits, etc.) is the only way in which the British can eventually make use of these dollars. Because we have permitted the British to sell more to us, they are now able to buy more from tis. They are, in fact, eventually forced to buy more from us if their dollar balances are not to remain perpetually unused. So as a result of letting in more British goods, we must export more American goods. And though fewer people are now employed in the American sweater industry, more people are employed—and much more efficiently employed—in, say, the American washing-machine or aircraft-building business. American employment on net balance has not gone down, but American and British production on net balance has gone up. Labor in each country is more fully employed in doing just those things that it does best, instead of being forced to do things that it does inefficiently or badly. Consumers in both countries are better off. They are able to buy what they want where they can get it cheapest. American consumers are better provided with sweaters, and British consumers are better provided with washing machines and aircraft.

Economics in One Lesson

Economics in One Lesson by Henry Hazlitt

The Curse of Machinery

AMONG THE MOST viable of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Whenever there is long-continued mass unemployment, machines get the blame anew. This fallacy is still the basis of many labor union practices. The public tolerates these practices because it either believes at bottom that the unions are right, or is too confused to see just why they are wrong.

The belief that machines cause unemployment, when held with any logical consistency, leads to preposterous conclusions. Not only must we be causing unemployment with every technological improvement we make today, but primitive man must have started causing it with the first efforts he made to save himself from needless toil and sweat.

To go no further back, let us turn to Adam Smith’s Wealth of Nations,published in 1776. The first chapter of this remarkable book is called “Of the Division of Labor,” and on the second page of this first chapter the author tells us that a workman unacquainted with the use of machinery employed in pin-making “could scarce make one pin a day, and certainly could not make twenty,” but with the use of this machinery he can make 4,800 pins a day. So already, alas, in Adam Smith’s time, machinery had thrown from 240 to 4,800 pin-makers out of work for every one it kept. In the pin-making industry there was already, if machines merely throw men out of jobs, 99.98 percent unemployment. Could things be blacker?

Things could be blacker, for the Industrial Revolution was just in its infancy. Let us look at some of the incidents and aspects of that revolution. Let us see, for example, what happened in the stocking industry. New stocking frames as they were introduced were destroyed by the handicraft workmen (over 1000 in a single riot), houses were burned, the inventors were threatened and obliged to flee for their lives, and order was not finally restored until the military had been called out and the leading rioters had been either transported or hanged.

Now it is important to bear in mind that insofar as the rioters were thinking of their own immediate or even longer futures their opposition to the machine was rational. For William Felkin, in his History of the Machine-Wrought Hosiery Manufactures (1867), tells us (though the statement seems implausible) that the larger part of the 50,000 English stocking knitters and their families did not fully emerge from the hunger and misery entailed by the introduction of the machine for the next forty years. But insofar as the rioters believed, as most of them undoubtedly did, that the machine was permanently displacing men, they were mistaken, for before the end of the nineteenth century the stocking industry was employing at least a hundred men for every man it employed at the beginning of the century.

Arkwright invented his cotton-spinning machinery in 1760. At that time it was estimated that there were in England 5,200 spinners using spinning wheels, and 2,700 weavers—in all, 7,900 persons engaged in the production of cotton textiles. The introduction of Arkwright’s invention was opposed on the ground that it threatened the livelihood of the workers, and the opposition had to be put down by force. Yet in 1787—twenty-seven years after the invention appeared—a parliamentary inquiry showed that the number of persons actually engaged in the spinning and weaving of cotton had risen from 7,900 to 320,000, an increase of 4,400 percent.

If the reader will consult such a book as Recent Economic Changes,by David A. Wells, published in 1889, he will find passages that, except for the dates and absolute amounts involved, might have been written by our technophobes of today. Let me quote a few:

During the ten years from 1870 to 1880, inclusive, the British mercantile marine increased its movement, in the matter of foreign entries and clearances alone, to the extent of 22,000,000 tons... yet the number of men who were employed in effecting this great movement had decreased in 1880, as compared with 1870, to the extent of about three thousand (2,990 exactly). What did it? The introduction of steam-hoisting machines and grain elevators upon the wharves and docks, the employment of steam power, etc....
In 1873 Bessemer steel in England, where its price had not been enhanced by protective duties, commanded $80 per ton; in 1886 it was profitably manufactured and sold in the same country for less than $20 per ton. Within the same time the annual production capacity of a Bessemer converter has been increased fourfold, with no increase but rather a diminution of the involved labor.
The power capacity already being exerted by the steam engines of the world in existence and working in the year 1887 has been estimated by the Bureau of Statistics at Berlin as equivalent to that of 200,000,000 horses, representing approximately 1,000,000,000 men; or at least three times the working population of the earth....

One would think that this last figure would have caused Mr. Wells to pause, and wonder why there was any employment left in the world of 1889 at all; but he merely concluded, with restrained pessimism, that “under such circumstances industrial overproduction . . . may become chronic.”

In the depression of 1932, the game of blaming unemployment on the machines started all over again. Within a few months the doctrines of a group calling themselves the Technocrats had spread through the country like a forest fire. I shall not weary the reader with a recital of the fantastic figures put forward by this group or with corrections to show what the real facts were. It is enough to say that the Technocrats returned to the error in all its native purity that machines permanently displace men—except that, in their ignorance, they presented this error as a new and revolutionary discovery of their own. It was simply one more illustration of Santayana’s aphorism that those who cannot remember the past are condemned to repeat it.

The Technocrats were finally laughed out of existence; but their doctrine, which preceded them, lingers on. It is reflected in hundreds of make-work rules and featherbed practices by labor unions; and these rules and practices are tolerated and even approved because of the confusion on this point in the public mind.

Testifying on behalf of the United States Department of Justice before the Temporary National Economic Committee (better known as the TNEC) in March 1941, Corwin Edwards cited innumerable examples of such practices. The electrical union in New York City was charged with refusal to install electrical equipment made outside of New York State unless the equipment was disassembled and reassembled at the job site. In Houston, Texas, master plumbers and the plumbing union agreed that piping prefabricated for installation would be installed by the union only if the thread were cut off one end of the pipe and new thread were cut at the job site. Various locals of the painters’ union imposed restrictions on the use of sprayguns, restrictions in many cases designed merely to make work by requiring the slower process of applying paint with a brush. A local of the teamsters’ union required that every truck entering the New York metropolitan area have a local driver in addition to the driver already employed. In various cities the electrical union required that if any temporary light or power was to be used on a construction job there must be a full-time maintenance electrician, who should not be permitted to do any electrical construction work. This rule, according to Mr. Edwards, “often involves the hiring of a man who spends his day reading or playing solitaire and does nothing except throw a switch at the beginning and end of the day.”

One could go on to cite such make-work practices in many other fields. In the railroad industry, the unions insist that firemen be employed on types of locomotives that do not need them. In the theaters unions insist on the use of scene shifters even in plays in which no scenery is used. The musicians’ union required so-called stand-in musicians or even whole orchestras to be employed in many cases where only phonograph records were needed.

By 1961 there was no sign that the fallacy had died. Not only union leaders but government officials talked solemnly of “automation” as a major cause of unemployment. Automation was discussed as if it were something entirely new in the world. It was in fact merely a new name for continued technological advance and further progress in labor-saving equipment.

Economics in One Lesson