Economics in One Lesson

Hazlitt presents several arguments against the implementation of tariffs on imports, which he believes to have a negative effect on the economy in the long run. He claims it is misleading to believe that protecting local producers by taxing foreign products (in other words, prioritizing the interests of a special group) is a net positive for the larger economy.

Hazlitt supports his argument by once again quoting economist Adam Smith’s work The Wealth of Nations. In it, Smith argues that a person’s goal is always to buy the cheapest product available to them. Thus, if it is cheaper to purchase a product than to make it at home, then every prudent man would prefer the first option, as it costs him the least amount of money. Similarly, if imported goods can be fabricated cheaper overseas, then it is always preferable to consume that imported product at the expense of local producers.

For example, if a sweater produced in England can be sold for $10 in the US, but local producers can only produce the same for $15, then they may petition the government to impose a $5 tariff on the English import to remain competitive. While this will certainly benefit the American sweater industry, the $5 spent to support every sweater they sell is taken away from potentially being invested in another industry. This opportunity cost is often not taken into account because it is invisible until it is invested, whereas the benefit to the sweater industry can clearly be seen.

Hazlitt argues further that even if the $5 tariff encouraged more Americans to enter the sweater business, this additional production would be accomplished at the expense of the taxpayer, who is forced to subsidize this endeavor. For every sweater they purchase, it would be the same as paying $5 in tax. Even if more people are employed by this growing sweater industry, this would be at the expense of the taxes consumers have to pay, which could very well have been invested elsewhere. It follows from this logic that there would be no increase in American wages and productivity overall, because what was poured into the sweater industry at the cost of $5 in tax could have easily been saved by creating a new, more lucrative business.

Suppose that there is no tariff instead. Then, people in the US can save $5 on every sweater they purchase by prioritizing the English import. With this extra $5, they can support other industries by making additional purchases. Under a free trade market, the English economy has now gained money from their US clients, and this money they may in turn reinvest into purchasing American goods, helping the US export industry. Hazlitt concludes that while tariffs can help the protected sweater industry, it does so at the expense of the net economic balance. When all occupations are considered, he argues that tariffs reduce real wages by imposing a tax on the consumer without increasing productivity. Thus, in the long run, tariffs do not affect employment rates and actually reduce real wages.

Hazlitt cautions that he is not arguing against absolutely all tariffs: Some are necessary to keep industries alive, such as during wartime. His goal in this chapter is simply to show that tariffs do not inherently raise wages, provide employment, or protect the local standard of living.

Hazlitt finds it curious that people who are sensible about investment in domestic trade often make the mistake of supporting bad loaning practices in foreign trade. He argues that there is a rampant belief that the American government ought to make huge loans to foreign countries for the sake of enriching them and increasing American exports. Even if only half the loans are repaid, it is still worth it because it encouraged the purchase of American products abroad. Hazlitt finds this idea fallacious because a bad investment, whether in the private or public sphere, remains a bad investment when considering the economy as a whole.

For example, if an automobile business lends a foreigner $1,000 to buy their car and are not repaid, then it would be obvious they are no better off for having sold one more car. However, this same outcome becomes much harder to see when applied to the national level because specific export industries do benefit from this subsidy, and this increase in sales is visible. However, what they gain was accomplished at the cost of other industries. For every dollar foreign buyers are loaned to buy American goods, domestic buyers will have the equal amount deducted from their purchasing power. In other words, one group may make visible gains, but the rest must take harder-to-see losses.

Hazlitt therefore argues that wishing to subsidize the export industry without considering the risk of not being repaid will, in the long run, hurt America’s ability to import, as every taxpayer’s dollar invested on exporting must be deducted out of their ability to purchase imports. Ultimately, exports and imports must equal each other: Without importing to the US, foreigners will have no capital to buy American goods, which in turn will prevent Americans from exporting their own goods. Hazlitt concludes that, while it is not always unwise to make foreign loans, they must not be made without any consideration of risks, because a bad loan is a bad loan, whether foreign or domestic, private or public.

Hazlitt asserts that requests for “parity” prices are in most cases the object of special solicitude by a particular group, which in the long run will hurt the rest of the people. To further explore this point, Hazlitt employs the example of farmers requesting parity prices for their agricultural goods.

Farmers argue that agriculture must be preserved at all costs, since it produces the most important and basic consumer goods. If the price of crops drops but the price of industrial products does not, then the farmer will not be able to sustain a proper living: They will earn less and thus not be able to spend or produce as much. People, especially city dwellers, will see an increase in price and scarcity of agricultural products, and Hazlitt believes that this discrepancy in price is what prevented Americans from enjoying a speedy recovery from the 1929 economic collapse. Farmers believe that raising the price of crops back to “parity” with that of industrial goods will remedy the situation, and this price relationship must be maintained to balance the economy.

Hazlitt questions this point-of-view. First, there are no price relationships between goods in different sectors that remain immutable over time: With technological advancement and ever more productive workers, the price of goods across industries necessarily fluctuates. For example, a Chevrolet touring car costs $2,150 in 1912, but only $907 in 1942, even though the newer model is infinitely improved compared to the old one. This is because production has become streamlined as new technologies were adopted. Maintaining some arbitrary parity price regardless of these innovations would mean that the Chevrolet of 1942 would actually cost $3,270, making it much less affordable to everyone than it actually would be without parity prices. This is why the author believes that raising the price of a specific type of goods is actually detrimental to the rest of the industry and consumers.

Hazlitt argues that higher prices can be brought about without negative effects on the rest of the people if there is a general increase in prosperity in other fields as well. If, due to an increase in efficiency, city dwellers produce more and earn more, then a raise in the prices of crops is perfectly acceptable. However, when prices of a specific product are artificially raised through government intervention, then it will necessarily hurt everybody else.

Parity prices can be maintained either by government subsidies, enforcing restrictions to how many crops are grown, or helping farmers hold off crops during peak season where prices drop, so that they can sell them later at parity when prices rise again. In the first case, government subsidies are taxpayers’ money, implying that people are once again the ones shouldering the cost. In the second and third cases, a farmer that earns 50 cents more on their crop from limiting their quantities means a city worker paying 50 cents more, and thus the economy as a whole has gained nothing. Even worse, since farmers are artificially limiting production, sometimes even burning excess crops, the economy is actually worse off.

Finally, at the end of the chapter, Hazlitt explores a central reason for farmers decrying parity prices: They feel that the increase in price of industrial goods is a result of the government’s imposing tariffs on imported goods. With a decrease in imports, America cannot export as many goods either, chief of which are its agricultural products. Farmers asking for parity prices believe that the tariffs unfairly affected their industry. Hazlitt sees reason behind this argument, but still believes it to be fundamentally mistaken: He argues that there is no possible way to subsidize and protect everyone fairly, and losses happen occasionally. Rather than trying to use tariffs to remedy the situation—since he believes that tariffs actually worsen the economy—he urges instead for the end of the import tariffs.

Hazlitt argues that it is in most cases unnecessary to save certain industries in danger of collapsing through government intervention. Here, he uses the same argument as in the previous chapter: Subsidizing a special group not only does not increase the net economic balance of the whole, but actually hurts it. Just as parity prices are meant to help “save” the farming industry, subsidies and loans are given to industries to prevent them from collapsing, but both ultimately serve to decrease the standard of living for everyone in the long run.

In the previous chapter, the “X” industry was the farming industry, but Hazlitt also finds a similar faulty reasoning applied to the coal and silver industries, which the government tried to save by pouring a large quantity of resources into them. For example, the government bought silver in foreign markets at an increased price point, even though that same investment (or less) could have produced similar results by subsidizing local mine owners and workers. Similarly, the Guffrey Act compelled coal mine owners to conspire to raise the price of coal above market value, forcing consumers to resort to other sources of power or heat, such as natural gas or oil. Hazlitt argues that the result of specially treating one industry above all others is the same as in the previous chapter on “parity” prices: It will hurt everyone in the long run.

Advocates for saving a dying industry when it can no longer compete in a free market often point out that unemployment rates will rise when the firms close down, and by producing less, the general economy will also be dragged down. They find that there are two ways to remedy this: by reducing competition and preventing companies from entering already overcrowded markets, and by asking for direct governmental subsidies.

Regarding the first point, Hazlitt argues that no governmental intervention is necessary, as smart business owners do not volunteer to enter oversaturated markets. Even if new capital were to try, that would be their prerogative in a free market: Governments should not make the decision for them, as this would run the risk of forcing these people into even less productive industries that they did not want to go into in the first place. As to the second point, Hazlitt argues that government subsidies are, fundamentally, the same as subsidies by the taxpayer. What was gained in X industry was taken from the pockets of everyone else.

Finally, Hazlitt points out that not every industry must be expanding simultaneously: In order for some more relevant industry to grow, those that lag behind should be allowed to shrink. In other words, healthy economies that progress are dynamic rather than stagnant in nature.

This chapter expands on an idea mentioned but not developed in detail in the previous section: Industries that grow should be allowed to do so while industries that die should also be let go. Hazlitt believes there is a simple reason for letting things happen without intervention: The rise and fall of an industry should be considered as being part of a network of all industries who affect each other. If a business is no longer efficient enough to stay afloat, it means its remaining resources are better used to support a growing business elsewhere.

This opportunity cost is most easily understood with a simple analogy. A man that finds himself stranded on an island has many needs, such as finding food and water, building a shelter, finding tools for self-protection, building a fire for heat, etc. All of these needs cannot be fulfilled at once: If the man gathers firewood, he cannot at the same time be hunting for food. If he is looking for water, he will have to delay constructing his shelter until later. This means that for every task he takes on, he gives up, at least for the duration, the opportunity to do something else. He has to constantly weigh which of the multitude of tasks is the most urgent and productive for his current needs. This is the nature of opportunity costs.

If he had his family with him, the same opportunity costs apply, even if he can now practice a division and specialization of labor. His wife could be in charge of cooking while he hunts and his children collect firewood. However, once they have enough firewood, there would be little incentive for his children to continue at the task, as a more urgent or necessary job might open up to them, such as going to fetch water. The specialization and division of labor thus faces the same problem of alternative choices, among which they are naturally inclined to do the most urgent and necessary one.

Similar to this analogy, when an industry has run the course of its utility, there should be no reason to force it to stay around, just as there are no reasons for forcing the man’s children to continue gathering firewood once they have enough stockpiled. Not having more firewood is not a decrease in overall production, since the kids’ efforts are being used to produce elsewhere. Similarly, ceasing the production of one industry is not necessarily a shrinkage in total production, as the resources will be reappropriated elsewhere to make something else.

In society, the price system dictates what tasks are urgent and necessary. The more people desire a product, the higher they are willing to pay for it, especially if there is a limited quantity. The price of that article goes up, which incentivizes firms to produce more of it, since they will make a larger profit for every unit sold. However, as they produce more of that article, it becomes easier for consumers to acquire it, which means they no longer need to pay exorbitant prices to attempt to get one. Prices will once again decrease to equalize with demand, and the least productive firms may then find themselves out of business. Supply and demand therefore determine what is desirable to produce at any given moment.

Hazlitt thus concludes that a company stays afloat if it makes a profit after deducting its costs. It can only make a profit by selling enough of its goods. How much it sells depends on the price of its goods and the size of demand. Since the price of goods is not determined by the costs of production but by demand, demand dictates which industries are desirable at a particular time in history, and balancing demand and supply for those goods helps reach an equilibrium. This relationship is only visible when economists consider not only particular interests but the economy as a whole; when they look not merely at the primary, but also the secondary consequences of policies; and when they consider the long-term results rather than just the short-term.

This chapters explores what Hazlitt regards as the disastrous outcomes of a government policy designed to keep the prices of commodities above their market value in an attempt to “stabilize” price fluctuations. Proponents of this practice argue that prices will inevitably fluctuate under specific circumstances, and the government should not allow this volatility to hurt producers. Hazlitt argues that the government’s involvement in a free market should be kept at a minimum, leaving market forces and private actors to self-regulate.

Hazlitt begins by using a specific example of natural price fluctuation: At harvest time, the price of that crop will drop significantly because all supply will be dumped on the market at once, creating a surplus. Farmers therefore are incentivized to practice deliberately holding a certain quantity of that crop off-market during high seasons to sell them at an increased price later (this has been briefly discussed in Chapter 13, but its consequences are explored in greater depth here).

There are two solutions to mitigate this undesirable price fluctuation: The first, proposed by farmers, is to receive government aid to help them hold their crops off the market. The second is to let private actors invest in the business of crop speculation. In other words, it is to allow people to buy the crops at their lowered price, hold them off using their own methods, and re-release them in the market at a later time and at an increased price for a small profit.

Hazlitt infinitely prefers to rely on the private speculator, because, as a private actor, he potentially has something to lose. There is an opportunity of making a profit just as there is a risk of losing the initial investment, depending on how accurately the speculator can estimate the future price of the crop. They will keep buying until they can see no opportunity for future profits, and they would sell anything that might incur a future loss. Statistically, on a national scale, Hazlitt finds they indeed help stabilize the price of crops: For example, the price of wheat and other nonperishable crops does not fluctuate much over the course of the year.

Hazlitt argues that subsidizing farmers is far riskier, as not only does government aid have to come from taxpayers’ pockets, farmers also have little to lose by withholding more crops than strictly necessary. Although the price is temporarily raised above market price, it forces consumers to find alternatives and risks the later price drop to be much below market price. He believes that what is even more egregious is when excess of the crop could be sold overseas: In the case of the American cotton restriction program, stockpiling excessively destroys the foreign market for American cotton and encourages other countries to produce their own to replace American imports. In the long run, this practice hurts everyone for the sake of a temporary increase in profit for a specialized group.

Finally, Hazlitt argues that what he regards as a “natural” market regulation is useful in driving out the least productive farmers in favor of those more productive. A government-imposed restriction across the board prevents the more productive farmers from additional profit while keeping in business those at the margins. Hazlitt argues this is the same as paying people to remain idle. The author maintains that on every front, a self-regulated market relying on private actors and “natural” forces is infinitely better than government intervention.

This chapter explores the same themes as the previous, this time focusing on the outcomes of a government policy artificially holding the prices of goods below the “natural” market value. This is commonly the case during wartime, but given the special circumstances of war, Hazlitt will not explore the consequences of price-fixing in wartime. Instead, he will explore it in times of normal market operation where the state does not have inflated power.

The argument for government price-fixing a product below the market rate usually attempts to prove that the higher market rate only benefits the rich. For example, if the price of beef increases, then regular people will no longer be able to consume the portion they need but only what they can afford, whereas the rich are not affected. Hazlitt does not agree with this position, pointing out that, as long as beef costs anything at all, it will always be beyond the reach of some person’s needs; as a result, seeking to price goods at a level that fits everyone’s needs is impossible unless that thing is infinitely given away for free.

Hazlitt believes that holding the price of a good below its market rate for a long period of time will cause two consequences: It will increase the demand, and reduce the supply of that commodity. The lower price will attract more consumers, but since stocks are so quickly used up and the ask price might not adequately cover the costs of production, marginal producers are driven out of business for not being able to shoulder the reduced or negative profit margins. This is the case during WWI, when the US Office of Price Administration purchased slaughterhouses and sold beef at a rate that did not cover production costs of raising cows.

Hazlitt concludes that fixing prices below market rate will quickly cause a shortage of the good in question, even though the original intention in keeping prices down was to make that good more readily available and affordable. Attempting to ration the good by limiting how many of the goods can be purchased by an individual or household might temporarily curb demand and prevent speculators from buying it in bulk. However, it does not stimulate any more supply, as producers are still not operating at a reasonable profit margin.

To remedy the profit margin situation and stimulate supply, the government might look to reduce the cost of production. For example, it might attempt to control the price of wheat, which is necessary to the production of beef; it may try to hold down the wholesale price of beef to reduce their retail price; and it may try to fix the wages of farmhands. Hazlitt finds this type of government intervention to be dangerous because it is limitless: The more the government attempts to control, the more it will find additional things to regulate since industries are interrelated.

Hazlitt warns that the more perfect and persistent price control becomes, the quicker it leads to a totalitarian state, as keeping down the price of one good will affect the price of others, including close substitutes. To combat this and control the price of substitutes, the government will need to expand its control ever more until, he argues, over time it micromanages every aspect of the economy.

Although price-fixing may appear on the surface to work for a short period of time, one long-term disadvantage it creates is to force well-established firms out of business, replacing them with government-subsidized (taxpayer-subsidized) green horns that Hazlitt argues will have little experience and are more likely to be inefficient and produce goods of inferior quality. Hazlitt finds this practice, done under the guise of social justice, to, in fact, be discriminatory, as they give political power to those already politically powerful, those who spin the best story while putting out of business honest firms, increasing unemployment, and shrinking production and living standards.

Hazlitt argues that the real cause of rising prices is either a scarcity of supply or a surplus of money, which is why implementing an artificial price ceiling cannot remedy the situation. It can only cause greater shortages and limit a country’s overall purchasing power.