Economics in One Lesson

Economics in One Lesson

Explaining economics in just one lesson...

Sounds like an ambitious project, doesn't it? Probably also a presumptuous one...

But this is not the case (!!!) "Economics in One Lesson" is a manual you need to have on your desk whenever an electoral campaign starts (nowadays, this means that you always bring it with you, as politicians seem to be on a permanent campaign.)

It's a manual of sound economics that you'll read and use to debunk all political programs.

What does it really mean to aim for "full employment"? Or to "create jobs through public investments and public works"? What does it economically mean that we're going to "wage a war against AI"?

The goal of the book is to demonstrate how very basic and mainstream political slogans are politically resonant but economically disruptive.

"Tax the rich" is an alluring slogan and will probably help you win the next elections, but in the long run, everyone will suffer from this policy.

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Hazlitt basically says: BEWARE OF GOVERNMENT INTERVENTION IN THE MARKET. PLEASE CONSIDER BOTH THE SHORT AND THE LONG RUN!

He wants you to understand that there are two facets of the same coin in economics: short and long run.

In the short run, effects of political intervention in the market seem beneficial – what F. Bastiat calls that which is seen.

In the long run, these effects reveal to be detrimental – what Bastiat calls that which is not seen.

The problem is that short-run effects are much easier to identify, measure, and attribute accountability to. Therefore, those are the ones we tend to remember most vividly.

Conversely, the long-run effects of disruptive policies are more nuanced, difficult to pinpoint in time, and challenging to attribute directly to a specific politician or party. As the debate about long-run drawbacks becomes more complex and nuanced, the long-run effects are the ones that people tend to remember the least.

Hazlitt guides us through over 20 examples of disruptive political interventions in the market. He does so very succinctly, and reading each chapter is a pleasure.

5 Lessons Applied

  1. Public works mean taxes

The idea is that it might appear as if you have blind faith in allowing the government to construct bridges, highways, and parks, but you must not forget that every dollar spent by the government comes from your pocket. You could have used that amount to purchase things that would provide you with much greater benefits, instead of a public park they built miles away from your home, which you'll probably never visit in your entire life.

Hazlitt warns the reader not to be blindly accepting and indifferent when faced with anything labeled as "public." Anything deemed "public" does not equate to "free." What is considered public stems from private funds raised through taxes—nothing more and nothing less.

In this case, that which is seen is a public work (hopefully completed!) like a bridge or a park; that which is not seen is the actual taxes raised to finance it.

  1. Taxes discourage production

Usually, when politicians raise taxes on you, they tend to enumerate all the benefits that accrue to other people thanks to your taxes. If they increase taxes for rich people, they'll extensively discuss how these funds will benefit the poor in terms of healthcare, education, or public works. This is a sounding argument.

However, they often overlook the consequences that this taxation will have on the rich, in the long run. It's as if the percentage of tax imposed wouldn't significantly impact their future economic decisions. Taxes truly affect industries and entrepreneurs' strategic choices. For instance, this can be observed in terms of hiring employees, increasing productivity, and maximizing profits. After all, if profits are subjected to a tax rate of 50, 60, or 70%, what's the incentive to work six, seven, or eight months a year for the state, leaving only six, five, or four months for one's family?

In this case, that which is seen is just an "innocent tax" raised to give poorer people benefits in the short run; that which is not seen is discouragement of production in the long run.

  1. The curse of machinery

We often hear politicians saying that machines and AI will render many unskilled workers unemployed, and therefore we need to prevent their use.

What's wrong with this perspective? Machines don't simply replace workers; they enhance productivity. This leads to an increase in supply, lower prices, and improved quality for consumers. Consumers will have more money to spend at the grocery store or they'll be able to purchase a new car sooner. The owners of the grocery store and the car dealership will have more resources to hire new workers.

Far from reducing jobs and merely replacing people (the short run effect, that which is seen), machines will boost productivity, lower consumer prices, and create jobs (the long run effect, that which is not seen.)

  1. The fetish of full employment

Have you ever heard politicians sanctifying policies that aim for "full employment"?

Undoubtedly, you have.

And you continue to do so.

It's not just a distant recollection from the past; it remains a current theme.

What's the problem here?

"Full employment" per se doesn’t mean anything, and it's probably not even desirable. If we had full employment but a scarcity of supply, we would consequently have higher prices. The mere fact that someone is employed doesn't necessarily make their life better or more affordable.

The crux of the matter is that politicians should not solely focus on achieving full employment; rather, their aim should be directed towards "full productivity."

Higher productivity translates to a greater supply of goods, resulting in lower prices. With reduced prices, even those who are unemployed could afford to purchase goods.

Full employment doesn't automatically mean higher productivity, that is key for lower prices.

If full employment were the primary goal, it would suffice to cease using trains or cargo systems to transport goods and instead employ individuals to manually transport them between cities.

VoilĂ : full employment achieved!

However, this approach would entail higher wages to be paid (to those manually transporting goods), and the costs of these wages would inevitably be reflected in the final price of goods. Consequently, a product that has been transported by manual labor would end up being considerably more expensive than one transported by train.

Full employment must not come at the expenses of the more important goal of lowering production costs.

Again, that which is seen is that in the short run everyone is employed – good! That which is not seen is lower productivity, higher final costs of goods, and less economic welfare, in the long run.

  1. Minimum wage laws

What happens when a law is enacted that sets wages at a higher level than market wages? Employees are no longer exploited, they'll experience an improved quality of life, and we might feel like we've struck back against the capitalist conspiracy!

Well, it's not so simple.

If a business is compelled to raise its wages, the cost of labor increases, consequently leading to higher prices for goods produced by that business. The salary increase will simply be passed on through elevated prices in the final products. Ultimately, it's the consumer who bears the brunt of these elevated prices.

However, it's important to note that the impact isn't limited to just the consumer. With the employer being obliged to pay higher wages, they will have less disposable income to hire new workers.

As a result, wages for the existing employees will increase in the short run (that which is seen.) Yet, in the long run, prices will have risen, and many potential workers won't be hired (that which is not seen.)


My Take Today

The fact that politics and economics respond to different incentives leads to distinct approaches in addressing poverty and increasing national wealth.

Politics is driven by electoral incentives, typically evaluated over a four-year period, which aligns with the duration of a political term.

In contrast, economics is influenced by market incentives and long-term investment strategies that require a forward-looking perspective. Investors must plan and anticipate economic fluctuations.

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Research presented in the book Democracy for Realists reveals that voters tend to be responsive only to economic trends in the six months preceding elections. This implies that government policies prioritize even shorter term gains, with a horizon as narrow as six months.

Hazlitt identifies 3 economic personalities that influence our choices at the ballot box:

  1. As consumers, we favor policies that result in lower prices (and if the government wants to keep prices low, we like it!)
  2. Aa producers, we benefit from reduced costs of raw materials and labor (and we also like subsidies and government incentives!)
  3. As taxpayers, we resist supporting policies that require subsidies, as we prioritize lower tax burdens.

Which personality guides your voting choice?

Are you ready to vote for the long run policy (that which is not seen)?