Archive for the ‘Economics in One Lesson’ Category

Fallacy of Tariffs as an Economic Advantage

December 3, 2007

Suppose that in our country we import woolen sweaters from country A, and the sweaters sell for $25.

The local sweater industry petitions the government to impose, say, a $5 tariff (duty) on the imported sweaters. They argue that they cannot produce woolen sweaters for $25 and need this tariff in order to compete with country A. So, the government imposes a tariff.

As a result, the local sweater industry is able to employ many people. However, the consumers now pay $30 for the same quality sweater. The consumers no longer have that $5 to spend on other things. Thus the local sweater industry thrives, but a hundred other industries shrink.

You can see the sweater employees going to and from the factory each day, and you think, “The tariff was a good idea, it has given employment to people in our country.” But you don’t see the hundred other industries that have shrunk and all the lost jobs from that.

— Extracted from Economics in One Lesson by Henry Hazlitt

We see this cognitive error recurring over and over: humans focusing on what they can immediately see, and failing to consider those things that are not immediately or easily visible. See Cognitive error: acting on only what is immediately visible

Cognitive error: acting on only what is immediately visible

November 29, 2007

Managers, consultants, gurus, the press, and just about everyone else gives individuals too much credit and and blame for organizational performance. This misguided faith in the omnipotence of saviors and villains is due largely to a cognitive error made by most people in Western countries. This fundamental attribution error was uncovered decades ago by psychologist Lee Ross. He noted that people place excessive weight on individual personality, preferences, and efforts when trying to explain what people (and groups and organizations) do and why they do it, and underplay the setting, culture, or system. This occurs partly because of how human perception operates. When we look at a situation, like a company, we see individuals — individuals acting, making decisions, doing great or awful things. The context in which this happens, the industry and general economic environment, the actions of all those people we don’t see, are less obvious and vivid. So it is not surprising that we overattribute actions and consequences to individuals rather than to the constraints under which they operate. [Hard Facts by Jeffrey Pfeffer and Robert I. Sutton]

In the book Economics in One Lesson Henry Hazlitt shows how this cognitive error crops up in economic decision making. People make economic decisions based on what they immediately see (e.g. “adding a tariff will result in these — visible — people keeping their jobs, so let’s add a tariff”), and they fail to consider the unseen possibilities and things that could be (e.g. by adding a tariff some people keep their job, but the rest of the population — the unseen individuals — subsidizes them by paying higher prices at the market).

This cognitive error — focusing only on what is visible and seen — rears its head in many ways, resulting in many missteps.

A related blog: Organizations: focus on creating a great system, not finding great talent

The progress of a civilization has meant the reduction of employment, not its increase

October 18, 2007

The progress of a 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.

Politicians are always asking, “How do we legislate to have Full Employment in the next ten years?”  Wrong question.  The real question is not how many millions of jobs will there will be 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.

Focus on maximizing production; employment will follow.

Economics in One Lesson by Henry Hazlitt

Fallacy of Massive Unemployment after a War

September 16, 2007

Fallacy: after a war, as many thousands of men and women are released into civilian life, there will be much unemployment.

It is true that when many thousands of soldiers are suddenly reintroduced into civilian life, it may take time for private industry to reabsorb them.

However, since the government will cease to support the soldiers, the taxpayers will be allowed to retain the funds that were previously taken from them in order to support the war.  Consequently, taxpayers will then have additional funds to buy additional goods, and this results in a greater number of jobs in private industry.

— Extracted from Economics in One Lesson by Henry Hazlitt