This post is my attempt to condense the material of Henry Hazlitt’s Economics in One Lesson into an even shorter lesson.

• Chapter 1 – The Lesson
  • Economics suffers from many fallacies, largely for two reasons: first, those with selfish interests often promote plausibly sounding but false ideas for their own benefit. Secondly, people tend to look at immediate rather than long term consequences as well as consequences on a specific group rather than on society as a whole.

• Chapter 2 – The Broken Window
  • A baker’s window is destroyed. People celebrate the broken window because a job has now been created for the glazier. They fail to realize that the shopkeeper is now robbed of the goods or services he would have purchased otherwise, such as a suit from a tailor. The baker is forced to maintain his standard of living rather than be able to raise it.

• Chapter 3 – The Blessings of Destruction
  • Building on the broken window fallacy, any destruction of property is a net negative to society. Resources that could have been used to improve our standard of living are instead used to restore it. Measures of economic growth following periods of destruction are deceiving, given they don’t consider what existed before.

• Chapter 4 – Public Works Mean Taxes
  • Nothing is free. All government expenditures must be paid back eventually, whether by taxation or printing money. For every dollar spent, the taxpayers lose one dollar. The net gain of jobs created by the government is a net loss of jobs created by the private sector. The more wasteful the work, the less likely the project raises the standard of living to the degree that the taxpayers would have provided themselves. 

• Chapter 5 – Taxes Discourage Production
  • The larger the percentage of privately earned income taken by government through taxation, the larger the deterrent to private production. This is not to suggest complete abolition of income tax, but rather to question the utility of tax revenue that exceeds the cost of essential public spending.

• Chapter 6 – Credit Diverts Production
  • Government-issued credit defaults at a higher rate than privately issued loans, so the overall effect is not an increase in the nation’s wealth, but rather a decrease, as capital is allocated to less efficient borrowers. Successful private enterprise is therefore taxed to support unsuccessful private enterprise.
    
• Chapter 7 – The Curse of Machinery
  • The idea that machine use leads to net unemployment is incorrect. This perspective fails to consider the jobs that were created to make the machines in the first place, the increased standard of living resulting from productivity gains, and the increased income for both employer and laborer. This income will be spent elsewhere in the economy, increasing the need for greater employment to meet rising demand. 

• Chapter 8 – Spread the Work Schemes
  • Attempts to raise employment by spreading work among a higher number of people than necessary leads to arbitrary subdivisions of labor which raise production costs and reduce productivity. This reduced efficiency of labor is a drag on living standards. The same principle applies to proposals to shorten the work week.

• Chapter 9 – Disbanding Troops and Bureaucrats
  • Some fear that troops returning home from war will lead to greater unemployment because the private sector will not be able to absorb them. In reality, civilians that were supported by other civilians through taxation are now supported by them directly. The same is also true of any bureaucrat released from employment into the private sector. The subsequent savings in lower taxes means the private sector is able to expand operations.

• Chapter 10 – The Fetish of Full Employment
  • The economic goal of any nation is to achieve the greatest result with the least effort. Production is the end whereas employment is simply the means. Full employment does not by itself guarantee full production. It is far better to have maximum production with low unemployment than partial production and full employment.  

• Chapter 11 – Who’s “Protected” by Tariffs?
  • Tariff protection is typically argued for on the basis of preserving a certain industry, without which businesses would be out of business due to foreign competition. This idea ignores that it is in the best interest of any nation that its people buy what they want for the lowest price available. When tariffs are imposed on foreign goods, the cost is transferred to the consumer. In the long run, the consumer pays higher prices while a small cohort benefits.

• Chapter 12 – The Drive for Exports
  • A trade surplus is neither good nor bad. In the long run, the balance of payments between countries ensures imports equal exports and vice versa. When dollars leave the country they must be returned through the purchase of goods or services priced in dollars, invested in assets priced in dollars, or sold in the currency exchange market where others can then use those dollars.

• Chapter 13 – “Parity” Prices
  • There is no logical reason for why price relationships of the past must be maintained. When prices of one industry fall in relation to another, special interests might fight for government subsidy. They will argue that the price relationships of the past are “fair” or “normal” and should be defended. This is nothing more than one group lobbying for their benefit at society’s expense. 

• Chapter 14 – Saving the X Industry
  • The idea that any industry must be saved by government is an emotionally charged argument designed to sacrifice the taxpayer for special interests. Subsidizing industries to protect certain businesses reduces aggregate wealth. Sometimes industries are said to be “overcrowded,” and any new entrants would kill the industry. In reality, new entrants mean greater competition leading to lower prices that benefit society.

• Chapter 15 – How the Price System Works
  • How are society’s needs and wants satisfied? Through the constantly evolving interrelationships of costs of production, prices, and profits. In an individual’s quest to provide another individual that which he cannot provide himself more efficiently, the supplier profits. Because resources are scarce, anything produced is done so at the expense of foregoing something else. Ever-changing prices and profits help determine the most sought-after use cases for these resources. Attempts to intervene or “improve” the economic system through price fixing or forced allocation of resources interferes with the efficiency of the system and unsurprisingly lowers the standard of living.

• Chapter 16 – “Stabilizing” Commodities
  • In nearly every attempt by government to “stabilize” the price of a commodity, the interest of the producers is put first. Whatever excuse put forward by officials attempts to disguise the reality: a boost in prices for greater profit. When subsidy legislation is passed, the taxpayer foots the bill and now has less money for their needs and wants. 

• Chapter 17 – Government Price Fixing
  • During inflationary periods, officials often suggest holding prices below the fair market value. The effects of price ceilings are twofold: demand is driven higher by the artificially low price, and supply falls as producers are discouraged from providing the commodity. The net result of this imbalance is a shortage. Rather than return to a free market system, the government will look to install even more controls, such as rationing, cost-controls, and subsidies, causing more dislocations. Prices rise because of either scarcity or a surplus of money. Price controls cannot fix either.

• Chapter 18 – What Rent Control Does
  • A special kind of price fixing, called rent control, encourages wasteful use of space. Those with the most purchasing power accumulate this cheap property and hold until the price fixing is inevitably ended. For landlords who do rent out properties, maintenance and quality decline because, again, there is no profit incentive to keep buildings in top shape. New constructions halts. Shortages arise. Rather than create affordability, the eventual result is a housing crisis.

• Chapter 19 – Minimum Wage Laws
  • Minimum wage laws, presented as fair pay to the laborer, are fundamentally flawed. By imposing a wage floor above market rates, these laws ultimately create a surplus of labor (i.e. unemployment). Employers, faced with higher labor costs, are compelled to let workers go or simply hire less. Minimum wage laws block the less skilled from entry-level jobs to hone their skills and climb the economic ladder. The best way to raise wages is to raise marginal labor productivity. The more productive the laborer, the more valuable his services.

• Chapter 20 – Do Unions Really Raise Wages?
  • For the full working population, labor unions cannot substantially raise wages. The central function of the union is to improve working conditions and ensure true market value for services. In practice, union leaders often seek to fix wages above the market rate. The result is either an increase in prices as employers accommodate for rising costs of labor or rising unemployment driven by the employers needs to accommodate for rising costs of labor.

• Chapter 21 – “Enough to Buy Back the Product”
  • In an exchange economy, everyone’s income is someone else’s cost. Only an equivalent rise in productivity can offset this, but wage increases alone do not cause productivity gains. If attempts are made to artificially raise wages, costs will be borne by the consumer or unemployment will rise. If price controls are put in place, scarcity soon emerges. If money supply rises in an attempt to fight unemployment, inflation occurs. You cannot simply raise wages to achieve economic prosperity (the opposite will likely occur).

• Chapter 22 – The Function of Profits
  • Profits are a form of incentive that drive the economic machine. Profits in one industry reflect a broader need by consumers. Initial large profits may be earned in small industries where risk is high and one could lose everything. Any outsized profits are, in the long run, kept in check as new entrants fight for a piece of the pie, driving down prices by way of competition. Industries facing losses must acknowledge that their industry is no longer in demand to the degree it once was. This balance between profits and losses allows the economy to make the best use of scarce resources.

• Chapter 23 – The Mirage of Inflation
  • Money is often conflated with wealth due to its double function as a medium of exchange and store of value. Wealth is not determined by money, but rather by what you can consume. You cannot simply increase the money supply and make everyone wealthy. Where money supply is increased, you simultaneously raise demand. The increase in demand encourages suppliers to raise prices. They in turn earn more and the process continues until the rise in money supply has been absorbed. Those who were not able to capitalize on the monetary inflation are now significantly worse off. On net, the nation is no richer than before. In fact, the dislocation often makes things worse. Production must be scaled back to deal with falling demand. Or worse, a change in the psychology of the masses creates a positive feedback loop in which the expectation of higher prices causes demand for higher wages, which continues. Here the negative consequences are compounded in the form of an inflationary spiral.

• Chapter 24 – The Assault on Saving
  • The idea that consumption drives the economy and is negatively impacted by saving is false. While mass hoarding of cash outside of the banking system would be detrimental, this is a rare occurrence typically brought about by loss of faith in the banking sector. Otherwise, an individual wishing to delay consumption will typically deposit excess cash with a bank which in turn lends that money out for capital expenditure. In this sense, savings and investment represent the supply of and demand for new capital (equalized by interest rates). Saving becomes another form of spending.

• Chapter 25 – The Lesson Restated
  • The core tenet expressed herein is the necessity to consider the long-term effects of any economic policy on all groups, not just its immediate effects on a select few. Failing to understand and apply this lesson leads to short-sighted policies that may have popular appeal but end up causing more harm than good in the long run.