Hazlitt expands on his previous point by exploring a real, persistent, and widespread belief among economists: That destruction resulting from warfare is ultimately beneficial for driving greater economic production and demand. Hazlitt explains that this belief stems from the idea that destruction on a large scale allows for old things to be replaced, which generates growth. People who support this position often argue that post-war demand is greater for products like houses and commodities, and national income figures are higher in monetary terms. However, this line of reasoning ultimately falls victim to the same beliefs presented in the hypothetical scenario of Chapter 2.

Hazlitt highlights what he regards as two fallacious aspects to the belief that warfare generates greater economic growth. First, he points out that the argument conflates demand with need. With housing destroyed in the war, people must imperatively find a new place to live; thus, the increase in “demand” is actually created by first impoverishing people. Similarly to the case of the broken window (explained in Chapter 2), people see the increase in demand for commodities such as radios, refrigerators, and automobiles, but fail to consider that their scarcity was first caused by the wartime need to divert production into making missiles and tanks. In sum, when there is an increase in business in one direction, it is imperative to consider that this causes a reduction in another. Warfare therefore did not create greater demand, but merely shifted the direction of the production effort.

Second, Hazlitt points out that higher demand does not equate to higher purchasing power; in fact, warfare often shrinks the total amount of demand and supply. Post-war economies often see an inflation in wages, and people are often sidetracked by this higher number, failing to consider that prices of commodities have increased accordingly. Post-war Germany and Japan are two extreme cases of this: Though workers might earn a higher wage than at an earlier stage, their overall purchasing power has decreased due to a shrinking supply, driving up the cost of commodities and raising their scarcity.

Hazlitt points out that post-war purchasing power is almost always lower than in the earlier peacetime, and people are conflating inflationary forces with real demand. In other words, larger national income figures are but the result of inflation, rather than a net positive economic gain. These “positives” are also erroneously attributed to wartime destruction: As inflation can be reproduced in peacetime, warfare and destruction are not in themselves drivers of economic growth.

Hazlitt concludes that people are distracted by the quantitative numbers generated by money and often fail to see that, at its core, the economy is driven by the exchange of goods and the division of labor. Supply and demand are the different sides of the same coin: An engineer creates an automobile to earn a wage to buy food, while a farmer grows crops to earn money for a new tractor. People create products of value so they can trade them in exchange for other products; money is merely the modern tool used to accomplish this fundamental task.

The chapter ends with one concession: Technological advances made during the war can increase national productivity and increase overall supply and demand. Similarly, diverting efforts into new channels could potentially lead to the discovery of more productive industries. However, the act of destroying things to create “replacement demand” does not bring about a genuine increase in prosperity, as it fails to account for all the invisible productions that could have sprung, had the destruction not taken place.

This chapter explores the idea that all the world’s economic woes can be solved with government spending. Hazlitt argues that some public works are essential to the well-being of society and government investments in those projects are worth it: These include, for example, the building of roads, tunnels, and houses. However, some public work projects are funded by the government not because they are necessary to improve standards of living for the people, but because those in charge think they can provide employment or add wealth to the community.

Hazlitt believes that this is fallacious because all government spending must eventually be repaid in tax dollars, which means that spending $1,000,000 on building a bridge that few people will use is the equivalent of sinking $1,000,000 on a meaningless project. Even though it will temporarily create jobs for bridge builders, that same money could have been spent funding other, more productive projects. The belief of public spending is rampant because people can see the bridge being built, but they cannot see all the invisible opportunities they lost.

Hazlitt uses the example of the Tennessee Valley Authority project to illustrate how people will only see the positive impact of public works without ever calculating its opportunity cost. Journalists present the merits of the TVA as a miracle, a net economic gain without offsets. They argue that the region has grown incredibly wealthy thanks to this great public work, which could not have been achieved by private capital. However, they fail to mention how this inevitably means that other areas of the country are comparatively poorer, since all the funds they could have received from the government were poured into the TVA project.

Additionally, the capital used for the TVA project has to be paid by taxes, which means it is in fact private capital. Hazlitt concludes that public spending must not be seen as a panacea to all social woes; they each incur strong opportunity costs that must be taken into consideration.

Hazlitt expands upon what he regards as another negative consequence of government spending: The more the government spends, the more it must tax its citizens to make up for it. High taxes, in turn, affect the actions of people who run businesses. It disincentivizes taking risks, because a loss of profit must be completely shouldered by the business, but a gain must be shared in part with the government in the form of income taxes. Over time, if the company cannot offset its losses, it will be less likely to attempt to expand its operations, such as through investing in new equipment or raising wages. The same happens when personal income is taxed: People have less capital to risk.

Hazlitt concludes the chapter by conceding that while some taxing is necessary to fund public works, which can also be essential, when the tax burden grows too large, it will disrupt production and discourage risk-taking.

Hazlitt argues that direct grant of government credit can often lead to a net loss to the community. He prefaces this by saying that any government loan can potentially cause inflation, but for the sake of simplicity, he will assume, in this chapter only, that the credits lent are non-inflationary. He still maintains that, with or without inflation, government credit is often a bad investment because it is given more freely to people. In other words, it is often used to subsidize projects that are refused by private lenders, taking away opportunities from more productive tasks to fund a special interest group.

He uses the example of the farming industry to defend this point. Government programs fund the farming industry and give out loans to people who cannot obtain the same from private lenders. This is because people often claim that only the rich and well-established are granted capital. Similarly, they argue that this kind of loan is “self-liquidating” because the farmer who was granted the funds to buy a better tractor will become more productive. However, Hazlitt warns that this policy should be questioned for two reasons: It is neglectful of long-term impacts, and it forgets that government spending must be repaid with taxpayer money.

Exploring his example in more detail, Hazlitt presents a case scenario: There are two farmers, A and B, who are looking for funds to purchase a tractor to increase their yield. Farmer A is an honest man and his neighbors and local banker know him. Farmer B has no such reputation of being an impressive worker and no credit history, and thus has trouble getting loans from private lenders. In every scenario, the private lender will choose to entrust their funds to Farmer A, because they are investing their private capital in the avenue most likely to yield a repayment. Government lending, if it operated the same way as a private lender, would simply not accomplish anything differently, in which case it would not need to exist. In other words, government funding is meant to subsidize people like Farmer B: They inherently incur a high-risk. In Hazlitt’s words, they “take risks with other people’s money (the taxpayers’) that private lenders will not take with their own money” (27).

The author argues that government loans will be more clearly seen as risky, possibly even detrimental, if people stop thinking about what they lend as “capital” and instead see it as a “tractor.” If the same tractor could be lent to a farmer with a good record or to a farmer without such credentials, it becomes evident that picking the latter invites more possibilities of failure. This is why Hazlitt concludes that, although in individual cases it could very well turn out that Farmer B only needed to prove himself, in the grand scheme of things, the net result of government loans is likely to reduce the amount of wealth produced by the community.

People often see the purpose of government lending as a means to take risks that are too great for private lenders. However, to the author, this is the same as permitting the bureaucrats to risk taxpayers’ money in cases where no one is willing to risk their own. He fears that this could lead to favoritism, such as lending to friends; recriminations, in cases where the endeavor fails; and could increase the possibility of socialism, because the government can very well request that they keep the profit of the risks they bear when lending. In the long run, Hazlitt believes that government loans invite a waste of capital and a reduction in production, which ultimately impoverishes the community.

The central claim of this chapter is that machinery and technological advancement do not create unemployment, despite the outcry made by labor union circles. Hazlitt argues against the idea of increased unemployment with a simple supposition: Had it been true, then mankind’s first mistake would have been creating tools out of stones or metals to save itself from toiling. He further uses an analogy taken from economist Adam Smith’s The Wealth of Nations (1776) to support this point: At the start of the Industrial Revolution, a pin maker could only make less than 20 pins per day, whereas with the proper machinery, he could make 4,800. If machines created unemployment, the textile and clothing industry would have seen a 99.98% unemployment rate. This is of course not the case. In another example, the adoption of machines in the cotton-spinning industry has seen it grow from employing 7,900 people to 320,000 between 1760 and 1787.

Hazlitt explains that although machines can temporarily put people out of work, its greater effect is to improve efficiency for the collective good. People who are put out of work by the machine are offset by people being employed in a booming new industry: the machine-making industry. Even if fewer people are employed in the machine-making industry than people whose jobs were replaced by machines, this is still offset in the long-run by an increase in productive efficiency: To reprise the example of the clothing industry above, the business owner who has gained the ability to produce more goods can use his extra profits by expanding his operations, investing in another industry, or by increasing his own consumption. All of these options create more employment opportunities elsewhere.

Then, his competitors, seeing his increased output, might also want to invest in machines to increase their own production. All of this generates greater supply, which forces down the price of their goods, a benefit enjoyed by consumers. Finally, if consumers see this drop in price and end up purchasing more of their products, then this increased demand will encourage employers to hire more workers back into the industry.

Hazlitt argues that even if demand for the product does not increase, the drop in price alone means consumers have extra dollars to purchase something else, which is an investment in other industries. In sum, the increase in production through the use of machinery and other technological improvements does not cause greater unemployment in the long run.

Hazlitt cautions, however, that it would be wrong to say machines have never caused a net decrease in employment, as this could very well be true in specific industries. Nevertheless, his goal is to dispel the persistent idea purported by skeptics that machines are detrimental to industries at large.

There is a misconception from proponents of technology that machines create jobs, but this is just a byproduct. They might also mistakenly believe that technological advancement should push society toward full employment. Hazlitt argues that full employment is not necessarily desirable—poorer nations are almost always close to fully employed, yet their standards of living are not by any means higher—and machines do not directly affect job-creation. Rather, they increase production and economic welfare, by either driving the price of goods down or increasing wages (due to an increase in productivity from the workers), which ultimately raises the standard of living.

Hazlitt challenges the idea, frequently purported by labor unions, that it is desirable to subdivide labor to increase or protect employment rates. Supporters of this scheme will, for instance, seek to protect stonemasons by preventing bricklayers from using stones to fix a chimney. The belief that these types of practices are beneficial to employment is, Hazlitt believes, fallacious, because it always raises production costs and results in less work done and fewer goods produced. The house owner has to pay double the price to hire not only a bricklayer, but also a stonemason to fix his chimney, and this extra cost will prevent him from spending elsewhere.

In another example, Hazlitt explores how this belief also applies to the argument of shortening the work week to increase employment rates. According to this scheme, for any additional hour of work completed beyond 40 per week, the employer must pay their employees a bonus 50% of their normal wage. This practice’s purpose is to encourage the business to expand their workforce and hire additional employees to avoid overworking and having to pay extra to their existing labor force. This, ultimately, reduces unemployment rates.

However, Hazlitt questions whether reaching full employment is desirable at all. Suppose that employees who used to work 40 hours per week now see their hours reduced to 30 without an increase in pay. They now earn less than before. Therefore, although more people will be hired, there is no net increase in hours worked, which will not likely increase production. The total purchasing power for everyone involved will remain the same (the wage lost by the employee who saw their hours reduced is distributed to somebody else, but this does not, Hazlitt argues, generate new wealth), which means there is no increase in standard of living across the board.

Knowing this, unions often fight for not only the shortened workweek but an increase in wages by 33% to compensate for the 10 hours lost. This, however, increases the costs of production by the same amount, since workers are not likely to be more productive. On one hand, if the cost of their labor, in addition to other production costs, is less than what the business can earn in profit, then the most optimal decision would be to increase their wages without decreasing their work hour. On the other hand, if the cost of their labor, in addition to other production costs, is equal to profit, then raising their wages without an increase in production is detrimental to the business as a whole and forces an increase in the price of their goods. This hurts employees’ ability to consume. Hazlitt concludes that spreading the work to increase employment rates is actually detrimental to the economy as a whole.

People often fear, at the end of wartime, that there will not be enough jobs to give to returning soldiers. Hazlitt believes this fear of demobilization to be unfounded: If the government ceases to support their soldiers, they will no longer need taxpayer funds to pay for soldiers’ wages, which means civilians will have more leftover to spend, and this increase in demand will in turn encourage industries to expand their workforce. Soldiers returning to society will become self-supporting civilians, as they will earn a wage in exchange for producing goods; on the other hand, if they remained in the army in peacetime, they would have been unproductive and a burden on the taxpayer.

Hazlitt then turns to examine bureaucrats: He argues that, barring those whose public functions are essential, bureaucrats who stay in office for the purpose of maintaining their purchasing power rather than being productive are a waste of capital. They leech off taxpayer money without contributing in production. The best course of action in this instance is to lay them off so they may seek work in the private sector.