• Henry Hazlitt on the Bailout

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    Treasury Secretary Henry Paulson needs
    to read this book.


    Treasury Secretary
    Henry Paulson needs to change his reading list. Instead of reading
    the balance sheets and income statements of the failing banking
    industry, he needs to read Henry Hazlitt’s classic book Economics
    in One Lesson
    . It will cost Paulson far less than the $700
    billion that he is spending on the bailout, and he might just learn
    a little economics in the process.

    Hazlitt delivers
    his "one lesson"
    in chapter 1, and proceeds to spend the rest of the book giving
    examples. His lesson, based on the work of Frédéric
    Bastiat, is that "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."

    For example,
    in chapter 2, Hazlitt delivers the well-known "broken
    window fallacy
    " in which a hoodlum breaks a shopkeeper’s
    window with a rock. The common folk see it as a tragedy, but an
    astute Washington bureaucrat could argue that it creates new jobs
    for glaziers. As Hazlitt points out, though, any resources that
    the shopkeeper spends on the new window would have been used elsewhere,
    perhaps for a new suit. So while the glazier gets new business,
    the tailor loses the same amount of business. There is no net benefit;
    in fact there is a net loss. Absent the hoodlum, the shopkeeper
    would have had both a window and a new suit; given the hoodlum,
    the shopkeeper has a window but no suit. Even though the damage
    was to the window, it is the suit that is lost to the shopkeeper
    and, hence, to society.


    Read by Jeff Riggenbach



    In chapter
    6, entitled "Credit Diverts Production," Hazlitt discusses
    government lending policies, such as additional credit to farmers
    or business owners. However, he points out, the recipients of such
    programs are rarely the more-productive farmers and business owners.
    After all, the more-productive people are able to borrow their money
    from private lenders. It is only the less-productive individuals
    and firms, unable to get funds on the free market, that must turn
    to government.

    For example,
    suppose that there is a farm for sale. A private lender would normally
    be willing to lend money to farmer A who has proven his abilities
    in the past, rather than to farmer B, who has demonstrated a lower
    level of productivity than has A. However, because government taxes
    citizens or borrows money itself in capital markets, private lenders
    have fewer funds available to lend to A. Instead, government lends
    the money to B on the grounds that B is underprivileged, in need
    of a hand, or some other politically based argument. The more productive
    borrower, A, loses out on the scarce land while the less productive
    borrower, B, gains the resources. Because the less-productive individual
    acquires the scarce resource, there will be less total production,
    and the entire society is worse off.

    the rest of the article

    16, 2008

    A. Kjar teaches economics at Baldwin-Wallace College.

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