Economics In One Lesson: With Apologies To Henry Hazlitt

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A talk to
the Shaftesbury Conference at the John Locke Foundation, August
28, 2006.

Welcome Shaftesburyites
to the Dismal Science that doesn't have to be dismal. And hear a
probably apocryphal story on what makes man tick. And when I say
man, I of course embrace woman. Why? Because women are, ahem, so

For think:
Where would we men be without women? Would we men not become scarce,
very scarce? In that case, where then would women be? Ah, also very
scarce. For today we meet and talk of the root cause of economic
science in the first place, i.e. scarcity — on how to think about
it, and cope with it.

Cope? That
story I mentioned above tells of dazzling Hollywood film star Za
Za Gabor. Za Za had six marriages in which she learned good housekeeping,
thanks to each ex-husband. How so? Well, think, in each divorce
she got to keep the house.

So Ticker No.
1 in our one lesson in economics is the law of self-interest, how
it copes with scarcity, such as keeping the houses in Za Za's case.
Yet many people wrongly tie such interest to greed or materialism,
if such excesses may, yes, get into play.

So, Shaftesburyites,
see how self-interest drives the entire economy, and gets each of
us to tick, behave — or, heaven forbid, misbehave — as each of us
call the shots on ourself, as each of us privately wields our individual
and very powerful free will. Free as long as you don’t violate the
equal freedom of others.

So interest
covers the full moral-immoral spectrum: Selfishness and evil, yes,
but also charity, altruism, religion, kindness, goodness, honesty,
love, compassion, civility, etc. Nobody is without it. So you run
you, with a near-absolute monopoly over yourself, with a DNA — that
double-helix thing — unlike anybody else in the world before or

So it follows
that you are a most unique individual — no one like you before or
since — that you define yourself, that you are in charge, that you
set or reset your disposition, along with your insight-outlook on
life, with your very own ongoing raison d’tre. For doesn’t this
sweeping self-interest good-to-evil spectrum explain the maybe divinely-sparked
yet still self-directed ways of Mother Teresa as it does your own
unique ways?

For, Shaftesburyites,
bear in mind that society can’t think, feel, choose, or act. Only
the individual can think, feel, choose, act, though he/she can act
in concert with others. For consider: Due to scarcity, is not his
or her every action, without exception, based on gain, as that person
perceives gain? Yet many people frown on gain, even on self-interest
itself. Yet think: Isn’t a selfless act an oxymoron? An impossibility?
Oh, yes!

Take a homely
example: Your nose itches, yet you alone get to scratch it and gain
relief. So gain, broadly viewed, rules human behavior. Which makes
incongruous the rife animus against profit, including personal and,
more so, corporate profit.

For ask, relatedly,
what does being a dentist mean? It means, right? Drilling, filling
and, ah-ha, billing.

So in my book
self-interest and true self-government are one. Per the answers
to three queries: 1. Are you not a sort of one-person state? 2.
Don’t you fully govern yourself? And 3. Don’t you apply self-control,
self-management, self-care, self-direction, and even self-creation
in terms of philosophy and personality?

To all three
questions, Shaftesburyites, I say, Yes, adding that deep-down in
every mind, if often untapped, is self-help. Or as Ben Franklin
put the matter in his Poor Richard’s Almanac: “God helps them that
help themselves.” Yes, if I still add: Caveat emptor.

All while each
of you follow Thomas Jefferson’s "pursuit of happiness"
— happiness more often nonmonetary than monetary. Yet hear Adam
Smith on self-interest in 1776 in his The
Wealth of Nations
: "It is not from the benevolence
of the butcher, the brewer, or the baker that we expect our dinner,
but from their regard to their own interest."

So Ticker No.
1 is self-interest — or maybe self-enlightenment is a better term.
So interest serves as each individual's driving directive force,
so it serves as our central social driving force. Force against
what? What else but scarcity. Ticker No. 2 then in our one lesson
in economics is the law of scarcity itself.

Recall the
parable of how the Lord Jehovah thundered down on terrified Adam
and Eve fleeing the timeless scarcity-free Garden of Eden, with
an angry Lord proclaiming, per Genesis: “In the sweat of thy face
shalt thou eat bread.”

Recall why
the miscreant couple and their myriad untold generations of offspring,
including you and me, got banished to a world of scarcity: They
had partaken of the Forbidden Fruit. Alas for Adam and Eve, if less
alas for you and me. We Shaftesburyites never knew any Garden of
Eden. Nor, safe to say, will we.

For aside from
inhaling free life-saving oxygen, as you are doing right now, or
watching beautiful sunsets, don’t you see that virtually every thing
you need to stay alive is scarce, as often measured by price — that
key economic rate of exchange?

So water is
very cheap, diamonds very dear. Think of scarce food, clothing and
shelter — those three basics of existence. Think of scarce communications
such as email or a telephone. Note scarce transport such as a car/bus,
train/plane. Note scarce medicine from an aspirin to a heart transplant.

Or see a bank
then for your financial scarcity, a beauty salon or barbershop for
your hair style scarcity, a law firm for your legal scarcity, and
so on. Or see farmers raising scarce potatoes, cucumbers and lettuce
for your potato salad. Scarcity, scarcity everywhere, even including
precious life itself, yours and mine. Sorry about that.

Yet watch your
peers in our market society trade daily, if not avidly. See them
practice division of labor or specialization not only to ease scarcity
but to advance what my great mentor at New York University, Ludwig
Mises, called "social cooperation."

Mises — who
was he? He was a Jewish escapee from Nazi Europe, a champion of
limited government, an author of a truly transcendental economics
book entitled Human
(1949), a giant who professionally predicted in 1920
the implosion of socialism la the Soviet Union for its lack of
“economic calculation.” Bull’s eye prediction, as you know.

And social
cooperation was his name for society — a voluntary social order
in which each of you plays a key role. Indeed, Mises hailed you
as the "sovereign consumer." Together with other sovereign
consumers, all holding the lethal economic power of the purse, you
run our big free enterprise show — if imperfectly, given some business

Yet entrepreneurs
still work for you — and your dollar — and ease your scarcity by
cutting cost, improving quality, building variety, and inventing
amazing things like, say, a cell phone with TV, radio, internet,
movie, and photo transmission power. Wow.

Thomas Alva Edison is a case-in-point. So are John D. Rockefeller,
Andrew Carnegie, and inventive Sam Walton, founder of Wal-Mart.
But scarcity presses on, as seen by Pres. Harry Truman on scarce
friends. Said shrewd Pres. Truman: "If you ever need a friend
in Washington, ah-ha, buy a dog."

Ticker No.
3 in this economics in one lesson is the law of opportunity cost,
also known as the law of trade-offs. This is the idea that no matter
what you do, for business or pleasure, Shaftesburyites, it is ever
at the expense of something else.

It's the idea
that whenever you choose one thing/person, you must give up the
benefit of whatever or whoever was your second-ranked option. It’s
the idea that you can't have your cake and eat it too. It’s the
idea that the National Organization of Women put its case artlessly,
saying “Have It All” — an impossibility in our scarce, scarce world.

So opportunity
cost gets down to three words: No Free Lunch, a law cutting the
lure of state largesse: the lure that the state can somehow give
anything without taking something away — e.g., forcing up taxes
and making mistakes la Hurricane Katrina-hit FEMA and the inept
levee-building Corps of Engineers in New Orleans last year.

government bloats as seen in our federal red-ink $2.7 trillion 2007
budget, a national debt veering toward the $9 trillion mark, both
overlarded with pork per a record 15,000-plus budget earmarks in
2005 — or an annual average of 30 bring-home-the-bacon pet projects
per member of Congress. No wonder incumbents win elections. Oink,

bloat bespeaks of the wit and wisdom of English poet Robert Browning
and Dutch architect Mies van der Rohe, each saying, “Less is more.”
Less bloat means less taxes, less waste, more self-government —
more liberty.

So this opportunity
cost ticker casts the Welfare State system of transfer payments
as a coercive zero-sum game, but our market democracy of willing
buyers and sellers as a voluntary positive-sum game, as both parties
in any trade see profit — or no deal.

Doesn’t this
situation make a case for capitalism, our inherent meritocracy,
as free individuals help each other in the market or out, as voluntary
forward-looking private charities beat coercive “entitlement” government
welfare? Or hear wit George Bernard Shaw on the contrasting welfare
scheme: "When the state robs Peter to pay Paul, it can always
count on the support of Paul."

Ticker No.
4 is business, Main Street–Wall Street, i.e. the law of trade
mutuality, of two-way gainful trade. Such gain spurs buying and
selling, supply and demand, competition and entrepreneurship, all
reflecting a market democracy promoting trade to ease scarcity here
and abroad. Free trade means no regulation, no controls, no protection.

So see world
trade today accelerate, spread, globalize, as you can gather from
the title of N.Y. Times writer Thomas Friedman's best-seller,

The World Is Flat
. So, Mr./Ms. Shaftesburyite, is globalization
good or bad, a boon or bane in easing scarcity?

Well, did you
catch my phrase earlier, "market democracy"? F. A. Hayek,
a student of Mises and a Nobel Prize economist, thought highly of
scarcity-easing trade, of market democracy, domestic and foreign.
He said the market not only tends to make people better off by easing
scarcity, but tends to makes them more socially responsible.

How so? Well,
take savers: individuals and firms building national capital creation
and so helping others, including the poor, inadvertently — as if
by an “invisible hand” in Adam Smith’s keen phrase. That was the
idea of Pres. John F. Kennedy in 1962 in proposing a tax cut and
saying: “A rising tide lifts all boats,” Including those of the

Or take today’s
high-priced gasoline as a case of rising scarcity. At once the invisible
hand spurs oil firms to explore and discover new oil sources, while
spurring consumers to slow down purchases of gasoline.

So the market
presses both producers and consumers to do the right thing, the
socially responsible thing. So market democracy — producers and
consumers daily voting their pocketbook — becomes a self-adjusting-self-directing
economy without the state or anybody else lifting a finger.

So private
everyday market democracy is most unlike those public every-other-year
political elections. Market democracy runs an endless plebiscite
24 hours a day, 7 days a week, as you and many others seek to impede
scarcity. Market spontaneity amazed Hayek, who called it a "marvel."
I do too.

Thus does trade
mutuality support if not, as I think, create society. It made sense
to Robinson Crusoe and Friday on their desert island to trade with
each other, each thinking smart, after checking comparative cost
and division of labor between them.

Mutuality makes
sense to us to ease scarcity by trading daily — using division of
labor, checking out comparative costs, buying freely from producers
sharper than ourselves such as Google, Verizon, Merrill Lynch, General
Electric, Macy’s, Metropolitan Life — as trading parties get ahead
via mutual gain.

Gain? So Robinson
Crusoe gave us the 5-day work-week, for didn't he get his work done
by Friday? Hey!

Or think of
a green high-school graduate from Jersey City, me, arriving as a
mail clerk in 1939 at 590 Madison Ave., N.Y., IBM headquarters,
and getting a lesson not on trade's scarcity-easing productivity
but on its power to wage peace. For on an outside wall was a huge
30-foot-high sign, painted in black and gold, reading "World
Peace Through World Trade."

That thought
was the idea of Thomas J. Watson, founder and head of IBM, who wondered
about the dubious outcome of World War I and the League of Nations,
who saw how trade lifts living standards and benefits people directly,
who prodded them to see the folly of war when armed forces shoot/bomb
customers and investors, actual or potential.

And last but
not least in this one economic lesson, Shaftesburyites, is the gross
Ticker No. 5, Gresham’s law on inflation. It is named after Sir
Thomas Gresham, 16th century English financier and advisor to Queen
Elizabeth I. Gresham saw that in money circulation "bad money
drives out good," as people unload their bad money and hoard
the good.

Thus does debased
coinage or irredeemable paper currency or unrestrained bank credit
swell and replace money of higher value in terms of gold or silver.
To put Gresham’s Law into modern lingo, inflation stems from too
much money chasing too few goods. As our hardly good-as-gold U.S.
dollar falls and falls.

I attest personally
to how far the dollar has fallen since I was a boy. In 1930, when
I was 9 years old, the price of a 1st-class stamp was 2 cents; today
it is soon 42 cents, or 21 times more. In 1930 a doctor charged
$2 for an office visit and $3 for a home visit; today he’s up around
$80 for an office visit, or 40 times more, and home visits are as
dead as a do-do. In 1930 a ride on a New York City subway cost a
nickle; today it’s $2 — again 40 times more.

So inflation
goes, so money rots. Rotting is bad enough but it also causes rotten
recessions as well. I leave it to you on just when the next recession
strikes, as it most certainly will.

No surprise:
The root of monetary rot is politics: a power-corrupting statist
anything-goes majoritarian amorality, as government counterfeits
money legally. Note Roman Emperor Diocletian in 301 A.D. blaming
inflation not on his debasing Roman coinage but on “the greed of
merchants.” Thus did Diocletian pass the buck in his day and set
wage and price controls, which soon failed. As they always do.

I close listing
those five scarcity-coping tickers in my one lesson in economics
as: 1. the law of self-interest, 2. the law of scarcity, 3. the
law of opportunity cost, 4. the law of trade mutuality, and that
miscoping 5. Gresham’s law on inflation.

So there, dear
Shaftesburyites. And I can too chew gum and walk at the same time.

6, 2006

Peterson [send him mail]
is an adjunct scholar at the Ludwig von Mises Institute.

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