Economics in One Lesson by Henry Hazlitt has become one of the foundational books for the Austrian economic school of economic thought. Hazlitt wrote this book while he was an editorialist at the New York Times as a way to reduce the teaching of economics to a few basic principles and express them in a rememberable way. Essentially, Hazlitt explains why certain fiscal policies and their reasonings are actually fallacies and have become dogma due to their being repeated for decades. The book is composed of two parts. Part one consists of a statement and short explanation of the “one lesson” that is alluded to in the title. Part two gives over 20 examples of the lesson at play and exposes them as economic fallacies.
The Lesson
How do you explain the concept of economics in only one lesson? As Hazlitt states,
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.[1]
As Hazlitt explains in his description of the lesson above, there are two main factors or reasons for these fallacies, and they are essentially stated in the lesson itself. The first reason explains why both the immediate and long-term effects of a certain policy are scrutinized. The second reason is the fact that only a policy’s effect on one or a few groups is investigated, and not the population as a whole. These effects remind me of a quote from Hazlitt that is written on a post-it note and taped to my laptop: “The answer already lies in the statement of the problem.” If this weren’t true, how could we answer a question?
Self-interests
Capitalism is driven by the self-interests of a person. A person must start a business to solve a problem by selling a good or service and are compensated for that by customers paying for that good or service. This is Adam Smith’s invisible hand that is used to explain economics in basic middle and high school history and economics classes, at least it was in mine. Now self-interests can be the lifeblood of a prosperous society, however, they also destroy prosperity at the same time. This is what sets economics apart from other sciences like physics or mathematics: the intrinsic abundance of selfish interests in a society.
The selfish interests of a business owner are typically of the benevolent kind. These are the interests that drive an economy. A business owner needs to make a profit, so they create a good or service and sell it. The reason people actually buy their good or service is because they value the good or service more than the money in their pocket. Conversely, the business owner values the customers money more than the good or service they provide. The point here is that it is a MUTUALLY beneficial relationship. You really don’t have to give your money to Amazon or Walmart, you might just think you do because of whatever reason, but you don’t truly have too.
Malicious interests
Now, the more malevolent selfish interests come from a relationship that is not mutually beneficial. This typically comes from the regulation of the business relationships that were described in the paragraph above. These regulations come from a government entity most of the time, and these government entities are driven by different self-interests. When an economic policy is enacted, there are some groups that will be directly affected, and others will be indirectly affected.
An example that comes to mind for me is oil companies up in Alaska and orange farmers down in Florida. If the government heavily regulates the oil companies up in Alaska to the point that they are negatively affected, the Florida orange farmers will not be directly affected as the oil companies are, but they will be affected by the increase in oil prices and will not be able to transport their oranges as efficiently. The oil companies were directly affected, and the orange farmers indirectly. However, are the effects of the policy on the orange farmers discussed before the policy is enacted? Typically, not. Now, this is just a theoretical example, but it might be a bit different because I used oil in the example but insert any other industry and ask the same question.
Example of Malicious self-interests
So where are the self-interests of the politicians coming from since they aren’t hired in the oil or orange industry in this case? Lobbyists. Representatives of an industry or company will do many things to stay in favor of certain politicians. They will call, visit, or sometimes even give generous campaign donations in order to have a politician vote a certain way. Through this lobbying, a politician or business regulator would directly benefit from certain economic policies and will therefore argue voraciously for that policy, even if it doesn’t benefit the majority of their constituents.
These are the types of selfish interest that, when acted upon in scale, can be extremely detrimental to an economy. Whereas if free market competition was allowed to compete without these interests being applicable, it can be argued that with time any economic problem would be solved.
Immediate validation
The second reason for these economic fallacies is that people tend to only look at the immediate consequences of a given policy and sometimes even for only a specific group.
The problem with this is that there is no regard for long term consequences or the population as a whole. We are seeing this play out as of this writing (mid December 2021) almost all over the world. Governments are making the money printer go brrrrr and it is manifesting as consumer price inflation, supply shortages, and energy prices going to the moon. Now, this money printing isn’t the only factor at play for these events, there are an unbelievable number of crosscurrents pulling in all directions. I am just giving an example of something that is currently being done with no regard for the long-term consequences.
Immediate AND Long-term consequences considered
This isn’t to say that looking at the immediate consequences is bad because they need to be factored into the policy decision. However, you also cannot only look at the long-term consequences as this leads to callousness towards specific groups that can be disproportionately affected by a policy. Both are very important, and both need to be analyzed to make an educated decision about a certain policy. The problem is that this takes a long line of logical thought to come to an educated opinion and see most of the effects and sides of a given policy. This is a problem because most people will not spend the time to think about a policy to this depth, let alone from an objective viewpoint.
Who can blame them? Honestly, your average Joe and Jane have many better things to do, that is what lawyers and politicians are for. However, this is where the self-interests of regulators come into play as discussed above. Ultimately, this creates an incentive for politicians to present half-truths and cherry-picked data to fit a narrative to argue a point that is in their favor.
Conclusions
When trying to answer economic questions, try not to get trapped in dogma. Ask why. Ask what happens next. Unfortunately, not many people do. Think about both the immediate and long-term consequences of a policy and how it will affect a large number of groups. Act in your own self-interests that is mutually beneficial to you AND the person you are doing business with. It is okay if you want a lot of money, just make that money by providing value for others and serving them by fixing a problem of theirs (that’s essentially what goods and services are for). If you acting in your own self-interests doesn’t provide value for other people in some way, then it probably isn’t a very moral option (let alone profitable as it would most likely fail as a business).
To your wealth and future,
James Forsythe
For more fundamental theories
https://jamesdforsythe.com/category/major-theories/
To find the book (its only $10)
You may also be able to find a PDF version online for free, I like to mark up my books so I always get the physical version. Either way works, as long as you read Economics in One Lesson. It really does explain the basics of economics without getting into anything complex that could be confusing. Its a great book for a beginner.
https://www.amazon.com/Economics-One-Lesson-Shortest-Understand/dp/0517548232
[1] Henry Hazlitt, Economics in One lesson pg. 17
