Archive for the ‘Henry Hazlitt’ 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

The Most Persistent of all Economic Delusions is the Belief that Machines Create Unemployment

August 14, 2007

“Among the most persistent of all economic delusions is the belief that machines on net balance create unemployment.

The belief that machines cause unemployment leads to preposterous conclusions. Every technological improvement must cause unemployment. The logical conclusion would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible.

Let us see exactly what happens when technological and labor-saving machinery is introduced.

Example: a clothing manufacturer learns of a machine that will make men’s and women’s overcoats for half as much labor as previously. He installs the machines and drops half his labor force.

This looks at first glance like a clear loss of employment. But the machine itself required labor to make it; so here, as one offset, are jobs that would not otherwise have existed.

It is likely the labor employed to build the machines is less than the labor cut by the manufacturer. So there is still a net loss of employment to be accounted for.

The machine was a large investment, so it takes several years for the machine to pay for itself. After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before.

The manufacturer must use these extra profits in at least one of three ways:

  1. He will use the extra profits to expand his operations by buying more machines to make more overcoats; or
  2. He will invest the extra profits in some other industry; or
  3. He will spend the extra profits on buying things for himself, e.g. buy a new house or a new car.

Whichever of these three courses he takes, he will increase employment.

The manufacturer, as a result of improved production has profits that he did not have before. Every dollar of the amount he has saved in direct wages to former overcoat-makers, he now is able to pay out in indirect wages to the makers of the new machines, or workers in another industry, or to the makers of a new house or car. In any case, he gives indirectly as many jobs as he ceased to give directly.

But the matter does not rest at this stage. The manufacturer competes with others. Due to competition the price of overcoats drops. The savings are passed along to the consumers. The consumers now have more money to spend on other things, which results in more employment.

In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.

The central lesson is that we should try to see all the consequences of any economic policy – the immediate effects on special groups, and the long-run effects on all groups.”

Economics in One Lesson by Henry Hazlitt

P.S. It is fascinating to see how interconnected things are, how a change has an effect that ripples outward to things that you cannot anticipate, i.e. unanticipated consequences.

Economics in Three Words

August 3, 2007

No Free Lunch

— Henry Hazlitt

Fallacy of Public Works for “Providing Employment”

July 20, 2007

Suppose the government decides to build a bridge.   There can be no objection to building the bridge if it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money if it had not been taxed away from them.But a bridge built primarily to “provide employment” is a different kind of bridge.  When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented.  Instead of thinking only of where bridges must be built, the government spenders begin to ask themselves where bridges can be built.

Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed.  The first argument is that it will provide employment.  It will provide, say, 500 jobs for a year.  The implication is that these are jobs that would not otherwise have come into existence.

This is what is immediately seen.  A different picture presents itself if we have trained ourselves to look beyond the immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected.  It is true that a particular group of bridgeworkers may receive more employment than otherwise.  But the bridge has to be paid for out of taxes.  For every dollar that is spent on the bridge a dollar will be taken away from taxpayers.  If the bridge costs $10 million the taxpayers will lose $10 million.  They will have that much taken away from them which they would otherwise have spent on things they need most.

For every public job created by the bridge project a private job has been destroyed somewhere else.

We can see the men employed on the bridge.  We can watch them at work.  The employment argument of the government spenders becomes vivid, and probably for most people convincing.  But there are other things that we do not see, because, alas, they have never been permitted to come into existence.  They are jobs destroyed by the $10 million taken away from the taxpayers.  All that has happened, at best, is that there has been a diversion of jobs because of the project.  More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

But then we come to the second argument.  The bridge exists.  It is, let us suppose, a beautiful and not ugly bridge.  It has come into being through the magic of government spending.  The country is richer.

Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes.  They can see the bridge.  But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of the imagination the possibilities that have never been allowed to come into existence.  They can see the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs.

What has happened is merely that one (unnecessary) thing has been created instead of other (necessary) thingss.

— Economics in One Lesson by Henry Hazlitt

Fallacy of Destruction as an Economic Advantage

July 16, 2007

A young hoodlum heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.

After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier (window maker).

As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles.

The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has to replace a window, he will have to go without the suit (or some equivalent luxury or need). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit.

If we think of the baker as part of a community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain in business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten about the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Thus we see the fallacy of destruction as an economic advantage. Anybody, one would think, would be able to avoid this fallacy after a few moment’s thought. Yet this fallacy, under a hundred different disguises, is the most persistent in the history of economics. It is solemly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio and television commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities.

— Economics in One Lesson by Henry Hazlitt