Tuesday, January 08, 2008

Economics in One Lesson, part 1

While this book, Henry Hazlitt's Economics in One Lesson has been on my "want to read" list (the vague one that exists only in the foggy corners of my brain) for a long time, I was motivated by Cindy's schedule at DominionFamily to move the book from the foggy list to the concrete schedule, and it does fit nicely into my plan of reading two non-fiction books per month.

It's nice of Cindy to admit that economics is a weak area for her, since it certainly is for me as well. I have a much more difficult time comprehending economics on a large scale than I do comprehending economics on the small scale of home and family, although I have occasionally made observations comparing the two.

Hazlitt has really done a wonderful job of making large economic principles very comprehensible, and I am finding this book very readable. I already wrote one long post about what I've learned, Soviet-era refrigerators, and the economics of destruction, but that post got itself lost forever when my internet browser crashed.

So, I'll spare you the rants contained in that post, and focus on the one idea that impressed me the most so far. Hazlitt is basically saying that you need a really good imagination to see the big picture of economics, because part of evaluating the effectiveness of an economic policy is being able to see what is not there--that is, to see 'what might have been.'

For example, if you spend $50 to replace a broken window, the glazier is benefited by your expenditure, and you have a nice, new window. What no one can see is who would have benefited if your window hadn't been broken, and what you might have had (in addition to an intact window) if you had been able to spend your $50 elsewhere. No economic policy can be adequately evaluated only by looking at who was benefited, because some group will be benefited by any given policy. You have to use your imagination and see who was not-benefited (and perhaps even harmed) by the same policy.

As the scale gets bigger, I suspect it demands even more imagination. If tax-payer money is poured into a depressed region, and make-work jobs are created just for the sake of employing some people, then that region will be prosperous, and anyone may point to it as a success story (most likely for the sake of doing the same thing somewhere else, thus demanding more tax-payer funds). What no one can see is the way other regions were affected by having that money diverted elsewhere. Individuals in those regions, deprived of their spending power because of the taxes, didn't buy cars, build houses, invest in business, and didn't do other things they might have done if they had been able to keep their own money. It reminds me of a bridge project I recall--to build a bridge to an island off Alaska, where only 50 people resided (and they already had an adequate ferry system). Those 50 people would certainly have benefited from the multi-million dollar bridge construction, but those millions of dollars would not have been used somewhere else, and so thousands of people would have non-benefited from its construction

I have a hard time believing that makers of economic policy do not know this, but perhaps they are merely lacking in imagination.

I am a big-picture kind of person, and so I'm liking the way Hazlitt thinks so far. I'm looking forward to what the other participants have to say about these chapters, and I expect them to contribute greatly to my own understanding.


At 3:07 PM , Blogger Stefanie said...

This sounds really interesting. I don't know much about economics either. I can see though how a lack of imagination could be harmful to a lot of people.

At 4:26 PM , Blogger Dana said...

Makers of economic policy in the US do know these principles and soundly reject them.

That is the rub.

It is all about control. They dont want to leave the market up to the uninhibited forces of supply and demand....

Sorry you lost your first post.

Dana in GA

At 5:06 PM , Blogger Dominion Family said...

I am very curious about the Soviet fridges.

I like what you said about imagination because that is something that I have noticed. People don't seem to have imaginations anymore. You literally have to spell everything out for them. It makes conversation difficult.

At 3:09 PM , Blogger Angela said...

You're right, it is about imagination. I was thinking of it only in terms of "understanding", but that is not enough.


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