Monday, January 14, 2008

One Economic Lesson and the Man Who Proposes It

Henry Hazlitt was rather a remarkable man, according to this article A Man for Many Seasons. His father died when he was a baby and he had to drop out of college when his stepfather died so that he could support his mother. He could only find low-paying menial jobs at first, but went to secretarial school and eventually was hired as a reporter by the Wall Street Journal. Not satisfied with that, he took over his own education, reading Shakespeare and Herbert Spencer and then focusing his efforts on economics through reading The Wall Street Journal. When he was only 21 he wrote a book called Thinking as a Science; it was published when he was 22. Apparently he was the American who introduced the famous Austrian economists Ludwig von Mises and Friedrich Hayek to the American public, after their books had been translated into English.

Sometime later, when he and Mises had become good friends, he wrote the book called Economics in One Lesson which has become his most enduring book for the public at least. So this part of the book, the part describing the "most ambitious of us", certainly evokes for me his own personality:

Each of us is trying to save his own labor, to economize the means required to achieve his ends. Every employer, small as well as large, seeks constantly to gain his results more economically and efficiently— that is, by saving labor. Every intelligent workman tries to cut down the effort necessary to accomplish his assigned job. The most ambitious of us try tirelessly to increase the results we can achieve in a given number of hours. The technophobes, if they were logical and consistent, would have to dismiss all this progress and ingenuity as not only useless but vicious.

The One Lesson

The main thesis of the book is probably well known by now to anyone following the book discussion:

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.

Here are the examples from this week's readings, with my paraphrase of Hazlitt's point of view --

  • Machinery -- technological progress -- is NOT a bad thing. If that were true it would lead to the ridiculous conclusion that the less efficient we are as a country or as individuals, the better off we will be. Let's all go back to the slave economy of Egypt where people spend every hour in the day lugging huge stone blocks to make pyramids for the tombs of the Pharoah . There you will have as much low-tech full employment as you could ever wish for.
  • It is the same with "spread the work schemes" and "full employment". The end goal in mind ought to be productivity which will help everyone in the country. Employment ought to be a result not the main goal. He points out that the amount of work to be done is pretty much indefinitely expansible. As long as there are needs or desires to be met that people are willing to pay for, there will be more jobs for people meeting those needs or wants. For example, the computer game industry did not exist a bit over a quarter century ago when my husband (who is a freelance game programmer) was in high school. The reason was very simple -- microchips hadn't been invented, so no personal computers existed. The examples could be multiplied.
  • Production and technological efficiency are GOOD things, he says. People can buy things more cheaply; they have more choices. While these things are good, the following things hamper efficiency and do not benefit the country as a whole:
  • One is employing bureaucrats who are doing unnecessary work. This seems too often to be the result of a well-intentioned government program which is doing something that can perfectly well be done as a private industry. It becomes invaded with inertia and a desire to keep the status quo (and the funding).
  • Another is subsidizing exports. Would you pay someone to buy your product? No? Then why does our country give loans to other countries to allow them to buy our exports? How can that help the economy?
  • It is the same with tariffs. If a country can make things more cheaply than we can why not take advantage of that? He says that Mill says the reason a country exports ought to be so it can import.

Foundations of the One Lesson

After he wrote Economics in One Lesson, Hazlitt wrote a book called The Foundations of Morality -- his position is at least evoked by these quotes from the book (I looked at this article on the utilitarianism of Mises, Hayek and Rothbard in order to find the quotes)

...Bentham has left us an illuminating simile: 'Legislation is a circle with the same center as moral philosophy, but its circumference is smaller.' And Jellinek in 1878 subsumed law under morals in the same way by declaring that law was a minimum ethics. It was only a part of morals--the part that had to do with the indispensable conditions of the social order.

There is no way, in fact, to adopt or frame moral rules except by considering the consequences of acting on those rules and the desirability or undesirability of those consequences.

The chief function that the common morality serves is to reduce social conflict and to promote social cooperation.

The writer of the article I linked to goes on to say:

As legislation is a subset of morality (for Hazlitt), so market exchange is a subset of "social cooperation."....

Hazlitt concludes that, because "social cooperation" is indisputably beneficial to human life, it serves as an appropriate foundation for both moral rules and legislation.

Since "social cooperation" includes institutions that constitute the market system (such as specialization and division of labor, and money) or make it possible (such as property rights and attitudes of respect for them), Hazlitt's standard provides a consequentialist foundation for property rights and the implied freedom of exchange.

If you wonder what all this has to do with his book on economics and the discussion, here is my try at answering.

My Own Thoughts on This:

When I read the book I found myself with a slightly claustrophobic feeling. I could see and agree with his premise that what is plain folly for a small business does not necessarily translate into good common sense on a huge scale.

You can see there are a few things he does not address. I am no expert on economics, for sure. But I can think of a few things where he traces back the consequences partway but perhaps not all the way. With the tariffs -- supposing we as a country don't want to become overly dependent on a foreign country (foreign oil comes right to mind)? With the government employees -- how do you define "necessary"? No doubt all of us can imagine or have met some fat-cat bureaucrat who is entrenched in secure incompetence. But what about a niche like my father's -- he is a retired but first rate physician who spent his life working for the Indian Health Service (it probably has another name now...)? He did important work that the private market likely would not provide for of its own. How about the idea that "technological progress is good"? Yes, it generally improves production, and that does bring prosperity which is valuable to human well being, but isn't there a side effect in the meaningfulness of human life in our society? We all know of a point where specialization becomes dehumanizing, surely.

This is where I think his focus is intentionally not all-comprehensive. His point would be that while the free market isn't all-sufficient -- it is meant to be a subset of society's workings --- bureaucratic intervention in economics is worse. There is a reason for that, and it is that there are human limitations to seeing the big picture. His friend Ludwig von Mises pointed this out as a failure of the socialist "planned economy". No one can plan what is going to be needed by a complex organic society.

His argument for his free market perspective is that it is more efficient. Efficient towards what end? This became a big question, and that was why I went looking for his moral outlook, piecing it out from what he says indirectly in the book, and then going online to do a bit of researching to better understand his point of view.

As you can see from the quotes, it appears to be utilitarian but not crassly so at all. Utilitarianism seems to be the default position for the reasonable secular empiricist nowadays because.... well, really... it is difficult to imagine any other position that doesn't depend on "a priori" assumptions which are usually founded on shaky grounds when they are not bolstered by some solid religious/philosophical underpinnings. And if you have those underpinnings you will be something more than a secular empiricist. That's a side point, but I wanted to make sure it was clear that I see limitations in this position but do not dismiss the value of Hazlitt's work on those grounds.

So, his thinking seems to go this way:

  • The requirements of morality should be a "wider circle" than the laws that are put into place by the State.
  • Laws ought to promote social cooperation.
  • The economic system should work the same way.
  • The benefit of "social cooperation" is that it fosters individual well being on a wider scale.
  • The government should not micro-manage -- in other words the principle of "subsidiarity" applies -- the larger organizations should not do for the smaller ones what the smaller ones ought to do for themselves.
  • This promotes the freedom and liberty of the individual person to make good choices.

Aquinas would agree with all that from what I've read, but disagree that morality is purely functional and ought to be measured in terms of "consequences". This measurement by consequences inevitably begs the question. One individual choice is basically as good as another, objectively, though subjectively you might have a preference. It leads to a flattening out of quality standards, which most thoughtful empiricists usually realize but don't know quite how to address within their premises; and of course, this is what we tend to see in our society right now. Say I like to watch Britney Spears shows, while you like to read economics books -- is there a real difference? We are both happy and exercising our freedom of choice. This may be the best possible way to operate a secular state but it is hardly the best way to think about life.

(I am not saying that Hazlitt himself flattens out quality standards. I haven't read his book on morality. But I do think that it is difficult to work through if you stick to individualistic consequentialism even within a framework of "social cooperation" as the means to happiness).

Right now, we have a mixture in our country -- the flattening out of quality and meaning which is seen in consumerism, and the micro-management of a government that imposes micro-rules on families and individuals, and penalizes small businesses in favor of powerful special interest groups.

It may be the best we can do. Certainly I'd rather live here and now than in Pharoah's Egypt. On the other hand, Joseph as governor for the Pharoah RAISED the taxes to only twenty percent, and that was only to provide for the coming famine. There is certainly room, I think, for a bit of tweaking and reshaping. Reading this book in the context of the upcoming elections certainly gives the subject of economics quite a bit of immediacy.

Finally, as if this hadn't gone on long enough, I wanted to quote Hazlitt from his chapter on machinery because I thought it well expressed the theme of his book and also his purposeful limitation of subject -- the circle within the wider circle. It also shows the stylistically lucid manner in which he writes:

Joe Smith is thrown out of a job by the introduction of some new machine. “Keep your eye on Joe Smith,” these writers insist. “Never lose track of Joe Smith.” But what they then proceed to do is to keep their eyes only on Joe Smith, and to forget Tom Jones, who has just got a new job in making the new machine, and Ted Brown, who has just got a job operating one, and Daisy Miller, who can now buy a coat for half what it used to cost her. And because they think only of Joe Smith, they end by advocating reactionary and nonsensical policies.

Yes, we should keep at least one eye on Joe Smith. He has been thrown out of a job by the new machine. Perhaps he can soon get another job, even a better one. But perhaps, also, he has devoted many years of his life to acquiring and improving a special skill for which the market no longer has any use. He has lost this investment in himself, in his old skill, just as his former employer, perhaps, has lost his investment in old machines or processes suddenly rendered obsolete. He was a skilled workman, and paid as a skilled workman. Now he has become overnight an unskilled workman again, and can hope, for the present, only for the wages of an unskilled workman, because the one skill he had is no longer needed. We cannot and must not forget Joe Smith. His is one of the personal tragedies that, as we shall see, are incident to nearly all industrial and economic progress.

To ask precisely what course we should follow with Joe Smith —whether we should let him make his own adjustment, give him separation pay or unemployment compensation, put him on relief, or train him at government expense for a new job—would carry us beyond the point that we are here trying to illustrate. The central lesson is that we should try to see all the main consequences of any economic policy or development—the immediate effects on special groups, and the long-run effects on all groups.

In other words, he acknowledges that the temporary or sometimes permanent problem of Joe Smith needs to be considered and addressed, but not by distorting economic mechanisms in such a way that Daisy Miller and Tom Jones are hurt and the whole system is damaged and made less useful.

So there you go. I hope that now that I got all that background out of my system that I can do a more streamlined post next time. Off to add my post to Cindy's Mr Linky and read what others have to say. I am learning a lot by thinking through this but of course, that means looong posts, unfortunately ;-)


Jacqueline said...

I love reading your posts, long or not. They give me so much to think about.

Dominion Family said...

Thank-you for this. I did have to swallow hard to accept Hazlitt's deferring the problem for another day in the quote on Joe Smith. But it is a valid point. We are called to be the uplifters of Joe Smith but we are so burdened down by our government we cannot lift a finger to help him.
I think you did a beautiful job of explaining the dichotomy and I hope to reread this post again in a couple of days.

As another friend of mine pointed out on immigration, we have a Gordian knot and it is hard to separate the intersecting strands of reason.

Brandy said...

I am jumping through Cindy's Mr. Linky and thoroughly enjoyed your post. There is so much to think about with this book....

Thank you most of all for all the background information on Hazlitt. I will have to check into his moral writings at a later date.

Dana said...

I, too, enjoyed your commentary.

But I do believe we (US citizens) can do better. We are called to do better.

Our government is a reflection of the moral values of the voters. They voted for the politicians/legislation that brought us to this point of economic tsunami.

That is the most disheartening thing to me, especially when most voters do not understand the Constitution.

Dana said...

I also like it that Mr Hazlitt *lost* jobs repeatedly..... but never seemed to need *assistance*.

Willa said...

Thanks very much for the comments.

Cindy-- "We are called to be the uplifters of Joe Smith but we are so burdened down by our government we cannot lift a finger to help him" -- yes, so true, and it seems to me that in addition we are trained to passiveness and detachment since the government has taken over personal and community responsibilities in this regard. That reminds me of public education.

Dana, I noticed that too with Hazlitt. He certainly lived out what he proclaimed. It might be different for a man with a large family who wasn't as intelligent and energetic as Hazlitt was (my daughter just read North and South....). But perhaps then that goes back to the moral mandate for personal charity that Cindy brings up.

About the moral choices of the voters -- it sounds like Hazlitt would say the government problems are caused by thinking errors of the public as much as moral errors. That is what he is trying to address so we don't vote in harmful measures because of misguided compassion.

I think it was Brandy that used the example "For the children..." last week in her post-- the emotional fallacy. My state spends 40 percent of its budget on public education. Yikes. I do it for a tiny fraction of the cost at home. But if you criticize education spending you are not only against the children, but against education : (.

magistramater said...


Wow. I'll still be chewing on this tomorrow and the next day.

Thank you for taking the time to work through this.

Carol in Oregon