If you read only one economics book, read this | Economics in One Lesson: The Shortest and Surest Way to...

An extraordinary book | Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics | Henry Hazlitt

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	• Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics Henry Hazlitt Three Rivers Press, 1988 - 218 pages average customer review:based on 111 reviews view larger image
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highly recommended

3.5 Stars-A useful supplementary text for lower division microeconomic principles courses only

This book is useful for teaching lower division undergraduate students the principles of microeconomics.It can be used as a supplementary book.Hazlitt emphasizes the important concept of opportunity cost,but neglects to incorporate any discussion of spillover effects and externalities(positive and negative,depletable and undepletable),market failure,public goods,the theory of second best,adverse selection,moral hazard, the principal-agent problem,etc.It is interesting that all these missing topics were originally covered by Adam Smith in The Wealth of Nations(1776),especially in Part V.

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If you read only one economics book, read this

This book, first published in 1946, explains common fallacies (a false or mistaken idea) that are particularly common in the field of economics and public policy. At the very start of the book Mr. Hazlitt explains:

Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine -- the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

At first it seems as though not much has changed since the end of World War II. What has changed, though, is the scope of the dangers Mr. Hazlitt identifies. That's because government is much expanded and more assertive today than when this book was written. In 1946 the New Deal was not very old, and the tremendous expansion of government social programs was still in the future. We should take these lessons as even more important today.

It is the overlooked consequences that cause harm. They are overlooked sometimes because they are difficult to see, as in the broken window fallacy explained by Frederic Bastiat and also in this book. They are also "overlooked" because, as Mr. Hazlitt tells us, one group wants special favors from the government, and although there is no way to grant these favors without harming some other group, the favor-seeking group will seek to hide, obfuscate, muddle, or minimize the bad effects. At the same time they promote the policy as good for everyone. This is largely the job that lobbyists perform, and billions are spent on it each year. That's because a powerful government has the ability to bestow valuable favors, those favors being paid for by someone else, someone often not easily seen.

An example of overlooked secondary consequences is government spending. When government spends, it means it must tax or borrow. What government spends is not available for individuals to spend. When we see magnificent public works (say a new downtown arena in Wichita), we don't see all the things that would have been bought had the government not taxed to build the public work. We see the jobs created by the public work -- all the construction workers that will be building the new arena -- but we don't see the jobs destroyed because people had to reduce their spending elsewhere.

Foreign trade is a case where people often fail to grasp the complete picture. We often see exports as something good for our economy, while imports are seen as bad. Imported things are things that American workers can't compete with, and so American jobs are lost, it is often said. But as Mr. Hazlitt says: "It is exports that pay for imports. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have to funds with which to buy our goods." So those wanting restrictions on imports are also -- although they do not say this, either because they do not recognize it or it doesn't matter to them -- calling for fewer exports.

In recent years we have been told that our is a "consumer-driven" economy, fueled by people tapping their home equity that accumulated from increased home values, or spending by going into debt. It is as though if consumers started saving rather then spending on immediate consumption, the American economy would collapse. But Mr. Hazlitt tells us that "saving is only another form of spending." After all, what is done with money that is saved? Today, few put their savings under the mattress. Instead, it is loaned to a bank or invested. Then it is spent on capital goods, which businesses use to increase their productive capability. The key fact is that businesses spend it. And, they spend it on capital goods that either expand their capacity to produce, or decease their present costs of production. Either way, that is good for everyone. It means more jobs, and better jobs. But this saving is derided as not being "productive."

As a conclusion Mr. Hazlitt tells us:

And this is our lesson in its most generalized form. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than producer, are considered.

To see the problem as a whole, and not in fragments: that is the goal of economic science.

This is a very valuable book, which while dated a bit, cuts through the fog and haze of economics and public policy and lets us understand the effects of our government's policies.

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An extraordinary book

Hazlitt's short book outlines a simple, yet devastating case for voluntary co-operation and the free market. This is a classic expansion of Bastiat's "what is seen and what is not seen" analysis applied to a modern industrial economy. Should be the introductory text for anyone interested in economics and govt.

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How to Learn Opportunity Cost

Economics in One Lesson is a clear and concise explanation of opportunity cost and price incentives. This book is extremely useful as a supplemental text. The reason why is that most modern economics textbooks pass over opportunity cost too quickly. The basic idea of opportunity cost is easy, but students need to see how the opportunity cost concept applies universally.

One way to learn opportunity cost is to read Cost and Choice, by JM Buchanan. Cost and Choice is a great little book, but it does not work well for an intro class. Bastiat wrote some classic essays on opportunity cost, but his work could be seen as a little dated. Of course, opportunity cost is itself timeless, but Bastiat aimed at explaining the general applicability of opportunity cost reasoning to a nineteenth century audience.

Economics in One Lesson is a modern restatement of Bastiat's essays. Hazlitt writes to counter mid twentieth century Keynesian fallacies. This is an important aim. All to many of us believe that disasters like 9-11 and Katrina created jobs. Too many of us fail to see that the labor and capital that goes into reconstruction has forgone alternative uses. Too many of us believe that capital itself causes unemployment by replacing labor. Labor saved by capital has alternative uses. Even some economists can benefit from reading this book (if they have an open mind) because too few of us see how government spending and credit expansion can displace and distort private sector spending. This is not to say that the free markets never have any slack or are perfect, but the Old Keynesian belief that activist fiscal and monetary policy can permanently increase real GDP is not well founded. Any New Keynesian will tell you that Hazlitt was right about the Old Keynesian economic program.

Hazlitt also does fine explaining the basics of price incentives and price and wage controls. Many people will object to what Hazlitt writes about wage and price controls on ideological grounds, but his reasoning is sound. Even pro-minimum wage economists like David Card and Alan Kreuger admit that large increases minimum wage rates must cause increased unemployment. This is a basic lesson of economic theory.

The critics of this book generally do not know what they are talking about. Sure Hazlitt does not discuss externalities or asymmetric information, but EIOL is not a comprehensive text, it's a primer on opportunity cost and price/wage controls. Keynesian critics will find fault in its discussions of unemployment, but the fact of the matter is that virtually all economists now reject the Keynesian paradigm that Hazlitt attacked in 1946, including contemporary self described Keynesians. Hazlitt is second only to Bastiat in explaining the general applicability of opportunity cost reasoning in an entertaining fashion, and his book is more up to date. All first year economics students should read Economics in One Lesson.

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A simple, straightforward analysis of economic fallacies that are so prevalent they have almost become a new orthodoxy.