Economics in One Lesson
"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."
Preface
Based on:
- Bastiat
- Philip
Wicksteed
- Ludwig von Mises
Part 1: The Lesson
Chapter 1
The Lesson
I
“Economics is haunted by more fallacies than any other study known to man.”
I
“Economics is haunted by more fallacies than any other study known to man.”
- Because every economic group has different interests (those that benefit them).
- Because these groups over look secondary consequences.
"Today is already tomorrow."
II
Error of classical economists:
concentrate only on the long-term results to the community as a whole.
Most frequent fallacy today:
concentrate on short term effects of policies on special groups.
III
To show all of the effects of a proposed course is boring, long and complicated. The audience finds it hard to follow. And bad economists take advantage of this.
II
Error of classical economists:
concentrate only on the long-term results to the community as a whole.
Most frequent fallacy today:
concentrate on short term effects of policies on special groups.
III
To show all of the effects of a proposed course is boring, long and complicated. The audience finds it hard to follow. And bad economists take advantage of this.
Part 2: The Lesson Applied
Chapter 2
The Broken Window
When the glass is broken, everyone gets benefitted. The Baker spends on glass, with this money the glass-maker spends on something else, and so on. The guy who broke the window becomes a benefactor.
But really the baker was going to use that money on something else. Now “no new employment has been added”.
The crowd only sees what is immediately visible to the eye.
When the glass is broken, everyone gets benefitted. The Baker spends on glass, with this money the glass-maker spends on something else, and so on. The guy who broke the window becomes a benefactor.
But really the baker was going to use that money on something else. Now “no new employment has been added”.
The crowd only sees what is immediately visible to the eye.
Chapter 3
The Blessings of Destruction
“The broken-window fallacy is the most persistent in the history of economics.”
Many people see benefits in these acts of destruction. (ex: war and its miraculous production).
But really, “the more war destroys, the more it impoverishes, the greater the post-war need.”
Need is not demand. Demand = need + purchasing power.
Half-truth of war:
It does bring up demand; but only for certain products, not an increase in total demand.
“The war, in short, changed the postwar direction of effort; it changed the balance of industries: it changed the structure of industry.”
Supply and demand are the same thing seen from different points. “Supply creates demand because at the bottom it is demand.”
“We should not let ourselves be deceived or confused on this point by the effects of monetary inflation in raising prices or ‘national income’ in monetary terms.”
“The conclusion that it is never an advantage to have one’s plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence.”
No man would burn down his own houses to rebuild them. There is an optimum time for replacements.
“The broken-window fallacy is the most persistent in the history of economics.”
Many people see benefits in these acts of destruction. (ex: war and its miraculous production).
But really, “the more war destroys, the more it impoverishes, the greater the post-war need.”
Need is not demand. Demand = need + purchasing power.
Half-truth of war:
It does bring up demand; but only for certain products, not an increase in total demand.
“The war, in short, changed the postwar direction of effort; it changed the balance of industries: it changed the structure of industry.”
Supply and demand are the same thing seen from different points. “Supply creates demand because at the bottom it is demand.”
“We should not let ourselves be deceived or confused on this point by the effects of monetary inflation in raising prices or ‘national income’ in monetary terms.”
“The conclusion that it is never an advantage to have one’s plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence.”
No man would burn down his own houses to rebuild them. There is an optimum time for replacements.
Chapter 4
Public Works Mean Taxes
IEconomic spending is presented as a savior for economic troubles.
Another fallacy: “All that is necessary is for the government to spend enough to make up the ‘deficiency’.”
“Everything we get, outside of the free gifts of nature, must in some way be paid for.” Government expenditures are paid out of taxation.
“Ultimately every dollar of government spending must be raised through a dollar of taxation.”
Government building roads, bridges, legislature buildings, police stations is not the problem. The problem is government’s public works meant to provide employment or add wealth to the community.
If a bridge is built to provide employment it is true that bridge-builders will get jobs. But then the tax payers will have their taxes taken away, instead of using them on what they needed.
“For every public job created by the bridge project a private job has been destroyed somewhere else.”
II
The same happens for public housing: tax payers are taken more money away from them.
Private capital, through taxes, ends up paying for these government projects.
IEconomic spending is presented as a savior for economic troubles.
Another fallacy: “All that is necessary is for the government to spend enough to make up the ‘deficiency’.”
“Everything we get, outside of the free gifts of nature, must in some way be paid for.” Government expenditures are paid out of taxation.
“Ultimately every dollar of government spending must be raised through a dollar of taxation.”
Government building roads, bridges, legislature buildings, police stations is not the problem. The problem is government’s public works meant to provide employment or add wealth to the community.
If a bridge is built to provide employment it is true that bridge-builders will get jobs. But then the tax payers will have their taxes taken away, instead of using them on what they needed.
“For every public job created by the bridge project a private job has been destroyed somewhere else.”
II
The same happens for public housing: tax payers are taken more money away from them.
Private capital, through taxes, ends up paying for these government projects.
Chapter 5
Taxes Discourage Production
Many people think of taxes as a pool of resources.
“In our modern world there is never the same percentage of income tax levied on everybody.” The tax is imposed on a minor percentage of the nation’s income.
These taxes effect the actions and incentives of those being taxed:
“The government spenders create the very problem of unemployment that they profess to solve.”
Many people think of taxes as a pool of resources.
“In our modern world there is never the same percentage of income tax levied on everybody.” The tax is imposed on a minor percentage of the nation’s income.
These taxes effect the actions and incentives of those being taxed:
- Less companies expand
- The companies hire less people
- Improvements on machinery take more time.
“The government spenders create the very problem of unemployment that they profess to solve.”
Chapter 6
Credit Diverts Production
I
Government encouragement to do business, is government credit or a guarantee of private loans.
“Congress is always finding new gaps that are not filled by existing leading institutions, no matter how many of these it has itself already brought into existence.”
“Proposals for an increased volume of credit are merely another name for proposals for an increased burden of debt.”
I
Government encouragement to do business, is government credit or a guarantee of private loans.
“Congress is always finding new gaps that are not filled by existing leading institutions, no matter how many of these it has itself already brought into existence.”
“Proposals for an increased volume of credit are merely another name for proposals for an increased burden of debt.”
When private people loan money, they take the risk with their money. But when the government lends money, they risk the taxpayer’s money.
The percentages of losses from government lent money are higher because usually government lends money to those who couldn't get help privately.
What is really being lent is capital.
II
People usually think that government should assume the risks that are too big for the private industry.
If it were up to the people, not the government:
III
“The government never lends or gives anything to business that it does not take away from business.”
The percentages of losses from government lent money are higher because usually government lends money to those who couldn't get help privately.
What is really being lent is capital.
II
People usually think that government should assume the risks that are too big for the private industry.
- This usually leads to favoritism.
- The capital will go to people who are less competent.
- They reduce production.
If it were up to the people, not the government:
- They are cautious of where to invest.
- They weigh profits against losses.
- They make fewer mistakes than government.
- They have been selected by a “survival of the fittest”.
III
“The government never lends or gives anything to business that it does not take away from business.”
Chapter 7
The Curse of Machinery
I
There is a belief that machines cause unemployment.
“Not only must we be causing unemployment with every technological improvement we make today, but primitive man must have started causing it with the first efforts he made to save himself from needless toil and wear.”
II
“For statistics and history are useless in economics unless accompanied by a basic deductive understanding of the facts."
If it were true that machinery caused unemployment:
“In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.”
III
Inventions and discoveries:
“The real result of the machines is to increase production, to raise the standard of loving, to increase economic welfare.”
I
There is a belief that machines cause unemployment.
“Not only must we be causing unemployment with every technological improvement we make today, but primitive man must have started causing it with the first efforts he made to save himself from needless toil and wear.”
II
“For statistics and history are useless in economics unless accompanied by a basic deductive understanding of the facts."
If it were true that machinery caused unemployment:
- Technical progress would be calamity.
- We wouldn't want to economize the means required to reach our ends. We wouldn't want more effort.
- The jobs created by building the machinery would’ve never been invented.
“In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.”
III
Inventions and discoveries:
- Labor saving machines.
- Improve the quality of the products.
- Perform generations that human labor cant.
- Brings objects into existence.
“The real result of the machines is to increase production, to raise the standard of loving, to increase economic welfare.”
IV
The results of machinery really is to increase production, raise the standard of living and improve the economic wellbeing. Even though people loose their jobs the owners get more purchasing power and are able to buy more, so indirectly they invest in other industries. Plus machines create new jobs that pay more. Example: you create a maintenance for machines and more employees in the machine industry.
“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."
The results of machinery really is to increase production, raise the standard of living and improve the economic wellbeing. Even though people loose their jobs the owners get more purchasing power and are able to buy more, so indirectly they invest in other industries. Plus machines create new jobs that pay more. Example: you create a maintenance for machines and more employees in the machine industry.
“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."
Chapter VIII
Spread-the-Work-Schemes
Union make-work and featherbed practices are based on the belief that a more efficient way of doing things destroys jobs, and it is necessary to have a less efficient way to create them.
With this fallacy come that if we cant create less efficient ways, then we should think of devices for spreading it among a large number of people.
Dividing labor as “specialists” without doing anything outside your field causes a raise in production costs.
“The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their effect would be on everybody.”
Union make-work and featherbed practices are based on the belief that a more efficient way of doing things destroys jobs, and it is necessary to have a less efficient way to create them.
With this fallacy come that if we cant create less efficient ways, then we should think of devices for spreading it among a large number of people.
Dividing labor as “specialists” without doing anything outside your field causes a raise in production costs.
“The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their effect would be on everybody.”
Chapter IX
Disbanding Troops and Bureaucrats
I
When a war ends, people believe that the soldiers wont get employed because there aren’t enough jobs. This happens because people only look at one side of the process.
Assuming that the public budget is balances, the government stops supporting the troops, the civilians can retain the part of the taxes that are used to support the soldier. The civilian demands will increase and will give unemployment.
IIIf unnecessary government officials or soldiers were not retained, the taxpayers will and should be able to keep their money that was being used to support them.
I
When a war ends, people believe that the soldiers wont get employed because there aren’t enough jobs. This happens because people only look at one side of the process.
Assuming that the public budget is balances, the government stops supporting the troops, the civilians can retain the part of the taxes that are used to support the soldier. The civilian demands will increase and will give unemployment.
IIIf unnecessary government officials or soldiers were not retained, the taxpayers will and should be able to keep their money that was being used to support them.
Chapter X
The Fetish of Full Employment
“The economic goal of any nation, as of any individual, is to get the greatest results with the least effort.”
Economic progress: getting more production with the same labor.
“We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production.”
“Everywhere the means is erected into the end, and the end itself, is forgotten.”
The problem is focusing on having many jobs not on the amount of production.
“The economic goal of any nation, as of any individual, is to get the greatest results with the least effort.”
Economic progress: getting more production with the same labor.
“We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production.”
“Everywhere the means is erected into the end, and the end itself, is forgotten.”
The problem is focusing on having many jobs not on the amount of production.
Chapter XI
Who's "Protected" by Tariffs?
Tariff and trade policies are even worst off now than in the 17th century.
The problem with tariffs is that they also only considered the effects on special groups, and not the effects on the whole community.
“For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages.”
The money that is used in paying tariffs can then be used to pay something else.
“Only minds corrupted by generations of misleading propaganda can regard this confusion as paradoxical.”
The effect of the tariff is to change the structure of production.
But… tariff does benefit special interests at the expense of everyone else.
Tariff on net balance doesn't:
Tariff and trade policies are even worst off now than in the 17th century.
The problem with tariffs is that they also only considered the effects on special groups, and not the effects on the whole community.
“For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages.”
The money that is used in paying tariffs can then be used to pay something else.
“Only minds corrupted by generations of misleading propaganda can regard this confusion as paradoxical.”
The effect of the tariff is to change the structure of production.
- It changes the number of occupations.
- It changes the efficiency.
But… tariff does benefit special interests at the expense of everyone else.
Tariff on net balance doesn't:
- Provide employment.
- Raise wages.
- Protect the standard of living.
Chapter XII
The Drive for Exports
We have a yearning for exports. But exports and imports must equal one another. The greater our exports, the greater our imports should be, and the less, less.
Foreign exchange is a clearing transaction in which the same kind of money is cancelled with the same kind of money.
“The real reason a country needs exports is to pay for its imports.”
We have a yearning for exports. But exports and imports must equal one another. The greater our exports, the greater our imports should be, and the less, less.
Foreign exchange is a clearing transaction in which the same kind of money is cancelled with the same kind of money.
“The real reason a country needs exports is to pay for its imports.”
Chapter XIII
"Parity" Prices
“Special interests can think of the most ingenious reasons why they should be objects of special solicitude.”
Parity: bringing prices up to the process of the things that special groups buy. In other words, subsidizing special interests.
This is a raise brought about by government intervention. But as much as you give away to one side of the parity, you take from another side.
“Special interests can think of the most ingenious reasons why they should be objects of special solicitude.”
Parity: bringing prices up to the process of the things that special groups buy. In other words, subsidizing special interests.
This is a raise brought about by government intervention. But as much as you give away to one side of the parity, you take from another side.
Chapter XIV
Saving X Industry
The government always tries to save X industry, and it gets the same results as each time.
Aim of the chapter: race some of the results that necessarily follow from trying to save an industry.
Governments usually think that by keeping a certain industry alive it will help everyone else.
Schemes for saving X:
These deprive capital and labor of liberty of choice.
What this would actually do is transfer wealth to X industry.
“The taxpayers would lose precisely as much as the people in the X industry gained.” And as a consequence other industries will lose what X gains.
Also capital and labor are driven out of the industries in which they are more effectively employed. As a result, less wealth is created.
“In order that new industries may grow fast enough it is usually necessary that some old industries should be allowed to shrink or die.” This helps release the necessary capital and labor for new industries.
The government always tries to save X industry, and it gets the same results as each time.
Aim of the chapter: race some of the results that necessarily follow from trying to save an industry.
Governments usually think that by keeping a certain industry alive it will help everyone else.
Schemes for saving X:
- X industry is “overcrowded” so it need to prevent other firms of workers getting into it.
- X industry need to be supported by a direct subsidy from the government.
These deprive capital and labor of liberty of choice.
What this would actually do is transfer wealth to X industry.
“The taxpayers would lose precisely as much as the people in the X industry gained.” And as a consequence other industries will lose what X gains.
Also capital and labor are driven out of the industries in which they are more effectively employed. As a result, less wealth is created.
“In order that new industries may grow fast enough it is usually necessary that some old industries should be allowed to shrink or die.” This helps release the necessary capital and labor for new industries.
Chapter XV
How the Price System Works
“In studying the effects of any given economic proposal we must trace not merely the immediate results but the results in the long run, not merely the primary consequences, but the secondary consequences, and not merely the effects on some special group but the effects on everyone.”
Fallacy of isolation:
When businessmen don't see a profit in making something, the wicked businessmen stop making it, even if people still want it and they are unsatisfied.
We look at all industries as if they exist in isolation, but they really exist in relation to all others.
“One occupation can expand only at the expense of all other occupations.”
Price system:
Changing interrelationships of costs of production, prices and profits. They are set through the relationship of price and demand.
But people believe that prices are determined by the costs of production.
“Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it.”
“When people want more of a commodity, their competitive bidding raises the price.”
This increases profits of the producers, and increases production.
A shrinkage of production in one line, does not mean a shrinkage of total production.
“Everything is produced at the expense of forgoing something else.”
“In studying the effects of any given economic proposal we must trace not merely the immediate results but the results in the long run, not merely the primary consequences, but the secondary consequences, and not merely the effects on some special group but the effects on everyone.”
Fallacy of isolation:
When businessmen don't see a profit in making something, the wicked businessmen stop making it, even if people still want it and they are unsatisfied.
We look at all industries as if they exist in isolation, but they really exist in relation to all others.
“One occupation can expand only at the expense of all other occupations.”
Price system:
Changing interrelationships of costs of production, prices and profits. They are set through the relationship of price and demand.
But people believe that prices are determined by the costs of production.
“Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it.”
“When people want more of a commodity, their competitive bidding raises the price.”
This increases profits of the producers, and increases production.
A shrinkage of production in one line, does not mean a shrinkage of total production.
“Everything is produced at the expense of forgoing something else.”
Chapter XVI
"Stabilizing" Commodities
Attempts to lift prices of particular commodities permanently above their natural market level must fail.
Methods:
“For the loan policy is usually accompanied by, or inevitably leads to, a policy of restricting production – i.e., a policy of scarcity.”
“The plan that started out so bravely to ‘stabilize’ process and conditions brings incomparably greater instability than the free forces of the market could have ever brought."
Attempts to lift prices of particular commodities permanently above their natural market level must fail.
Methods:
- Government loans to farmers in order to enable them to hold their crops off the market, and thus maintain high prices.
“For the loan policy is usually accompanied by, or inevitably leads to, a policy of restricting production – i.e., a policy of scarcity.”
“The plan that started out so bravely to ‘stabilize’ process and conditions brings incomparably greater instability than the free forces of the market could have ever brought."
Chapter XVII
Government Price Fixing
Results of government attempts to hold the prices of commodities below their natural market levels.
Usually wartime inflation causes price fixing. Government usually chooses basic necessities to fix maximum prices for “allowing the poor to obtain them”.
Holding a commodity below its market level brings two consequences:
When people see the consequences, they try to avert them by:
“What is forgotten is that subsidies are paid by someone, and that no method has been discovered by which the community gets something for nothing.”
Price-fixing might seem successful at the beginning, since price-fixing creates demand in excess of supply. People have the purchasing power for the commodity, but cant find one, so they look for a substitute.
“The rationing of each commodity as it grows scarce, in other words, puts more pressure on the unrationed commodities that remain.” The result will lead to a totalitarian economy.
“The result of this policy is to drive the least profitable concerns out of business altogether and to discourage or stop the production of certain items. This means unemployment, a shrinkage in production and a decline in living standards.”
People base their effort to fix maximum prices on what is really a scarcity of goods or a surplus of money. And price-fixing can’t cure these.
“Each one of us has a multiple economic personality. Each one of us is a producer, a tax payer, consumer.” And we want different things (conflicting ones) for each personality. As a producer you want inflation. As a taxpayer you want no subsidies. As a consumer you want price-ceilings.
Results of government attempts to hold the prices of commodities below their natural market levels.
Usually wartime inflation causes price fixing. Government usually chooses basic necessities to fix maximum prices for “allowing the poor to obtain them”.
Holding a commodity below its market level brings two consequences:
- Increase demand of that commodity
- Reduce the supply of the commodity
When people see the consequences, they try to avert them by:
- Rationing: each consumer can have only a certain maximum supply, no matter how much he is willing to pay for more.
- Subsidies: men, in their role of taxpayers, end up subsidizing themselves in their role as consumers.
- Cost-control: controlling the costs of production. It created shortages of factord that enter the production.
- Universal price fixing
“What is forgotten is that subsidies are paid by someone, and that no method has been discovered by which the community gets something for nothing.”
Price-fixing might seem successful at the beginning, since price-fixing creates demand in excess of supply. People have the purchasing power for the commodity, but cant find one, so they look for a substitute.
“The rationing of each commodity as it grows scarce, in other words, puts more pressure on the unrationed commodities that remain.” The result will lead to a totalitarian economy.
“The result of this policy is to drive the least profitable concerns out of business altogether and to discourage or stop the production of certain items. This means unemployment, a shrinkage in production and a decline in living standards.”
People base their effort to fix maximum prices on what is really a scarcity of goods or a surplus of money. And price-fixing can’t cure these.
“Each one of us has a multiple economic personality. Each one of us is a producer, a tax payer, consumer.” And we want different things (conflicting ones) for each personality. As a producer you want inflation. As a taxpayer you want no subsidies. As a consumer you want price-ceilings.
Chapter XVIII
What Rent Control Does
Control of rent is a special form of price control, and most of its consequences are the same.
The lower the rent ceilings are, the more scarcity of rental houses or apartments.
Control of rent is a special form of price control, and most of its consequences are the same.
- Rent control is imposed on the argument that the supply of housing is not elastic.
- Rent control encourages wasteful use of space.
- “The more unrealistic and unjust the rent control is, the harder it is politically to get rid or it.”
The lower the rent ceilings are, the more scarcity of rental houses or apartments.
Chapter XIX
Minimum Wage Laws
A wage is a price.
The same principles that govern regular prices are also those of labor prices.
Minimum wage laws:
People think that when wages are raised, the industry will still be able to pay these by raising the prices. But this will only make consumers look for substitutes for this product of it will cause them to buy less of the product.
Minimum wages ignore the fat that the industries have workers because they preferred the work there.
“There is no escape from the conclusion that the minimum wage will increase unemployment.”
Minimum wage and relief programs:
“We know as a matter of experience that it is the big companies – those most often accused of being monopolies - that pay the highest wages and offer the most attractive working conditions.”
Raising wages by government fiat is not the only way to raise wages, but it is the worst way. In order to find the best way, we must consider these truisms:
The best way to raise wages is to raise marginal labor productivity, by:
“The more the individual worker produces, the more he increases he wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to employers, the more he will be paid.”
“Real wages come out of production, not out of government decrees.”
“So government should be directed, not to imposing more burdensome requirements on employers, but to following policies that encourage profits, that encourage employers to expand, to invest un newer and better machines to increase the productivity of workers – in brief, to encourage capital accumulation, instead of discouraging it – and to increase both employment and wage rates.”
A wage is a price.
The same principles that govern regular prices are also those of labor prices.
Minimum wage laws:
- “The more ambitious such a law is, the larger the number of workers it attempts to cover, and the more it attempts to raise their wages, the more certain are its harmful effects to exceed any possible good effects.”
- When you pass a minimum wage law, a consequence is that those workers that are not worth the minimum wage will be fired. For a low wage you substitute unemployment.
- It only helps when a group of workers is actually receiving a wage below its market’s worth.
People think that when wages are raised, the industry will still be able to pay these by raising the prices. But this will only make consumers look for substitutes for this product of it will cause them to buy less of the product.
Minimum wages ignore the fat that the industries have workers because they preferred the work there.
“There is no escape from the conclusion that the minimum wage will increase unemployment.”
Minimum wage and relief programs:
- “We have deprived society of the value of his services. We have deprived the man of the independence and self-respect that come from self-support, even at a low level, and from performing wanted work, at the same time as we have lowered what the man could have received by his own efforts.”
“We know as a matter of experience that it is the big companies – those most often accused of being monopolies - that pay the highest wages and offer the most attractive working conditions.”
Raising wages by government fiat is not the only way to raise wages, but it is the worst way. In order to find the best way, we must consider these truisms:
- We cant distribute more wealth than is created.
- We cant in the long run pay labor as a whole, more than it produces.
The best way to raise wages is to raise marginal labor productivity, by:
- An increase in capital accumulation (increase in machines, inventions and improvements, efficient management, efficiency of workers, training and education).
“The more the individual worker produces, the more he increases he wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to employers, the more he will be paid.”
“Real wages come out of production, not out of government decrees.”
“So government should be directed, not to imposing more burdensome requirements on employers, but to following policies that encourage profits, that encourage employers to expand, to invest un newer and better machines to increase the productivity of workers – in brief, to encourage capital accumulation, instead of discouraging it – and to increase both employment and wage rates.”
Chapter XX
Do Unions Really Raise Wages?
One of the greatest delusions: that labor unions can raise wages. This is caused because people don't realize that wages are determined by labor productivity.
This rests on the assumption that the individual employers are out to increase their profits to the maximum.
But labor unions are not all bad. A central function could be to improve local working conditions and assure that all its members get the market value of their services.
A strike is used as a form of intimidation and force, used to keep the wages of a particular union above market worth.
This strike could be used as a last resort, but shouldn't use violence and intimidation.
False theories:
It hurts the workers by making products more expensive, if no one is fired. In the short run unions can gain at the expense of the employers.
“Thus we are driven to the conclusions that unions, though they may be for a time able to secure an increase in money wages for their members, partly at the expense of employers and more at the expense of nonunionized workers, cannot, in the long-run and for the whole body of workers, increase real wages at all.”
One of the greatest delusions: that labor unions can raise wages. This is caused because people don't realize that wages are determined by labor productivity.
This rests on the assumption that the individual employers are out to increase their profits to the maximum.
But labor unions are not all bad. A central function could be to improve local working conditions and assure that all its members get the market value of their services.
A strike is used as a form of intimidation and force, used to keep the wages of a particular union above market worth.
This strike could be used as a last resort, but shouldn't use violence and intimidation.
False theories:
- Labor is generally being underpaid.
- If one union's wages go up, it helps all other workers
It hurts the workers by making products more expensive, if no one is fired. In the short run unions can gain at the expense of the employers.
“Thus we are driven to the conclusions that unions, though they may be for a time able to secure an increase in money wages for their members, partly at the expense of employers and more at the expense of nonunionized workers, cannot, in the long-run and for the whole body of workers, increase real wages at all.”
Chapter XXI
"Enough to Buy Back the Product"
Functional prices: encourage the largest volume of production and the largest volume of sales.
Functional wages: tend to bring about the highest volume of employment and the largest real payrolls.
But Marxism took over this concept by saying that the only concepts that work are those that enable labor to buy back the product it creates (buy the particular product they make).
They never get the wages to be high enough.This doesn’t make sense, the people who make cheap products will only be able to buy cheap products and the expensive will just be wealthier, no matter if the job is the same.
That labor should receive enough to buy their own product is the same as the “purchasing power” argument.
Income = purchasing power for what others sell labor services and someone purchases them.
“In an exchange economy everybody’s money income is someone else’s cost.”
“If wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly wages.”
Fallacies:
Looking only at direct labor costs of a particular firm and assume that these represent all the labor costs involved. Here you mistake a part for the whole (you would miss costs of raw material, purchased parts, transitions charges, etc.)
Equilibrium:
“Equilibrium wages and prices are wages and prices that equalize supply and demand.”
Best prices: prices that encourage the largest volume of production and the largest volume of sales.
Best wages: wage rates that permit full production, full employment and the largest sustained payrolls.
Best profits: profits that encourage the most people to become employers or to provide more employment that before.
Functional prices: encourage the largest volume of production and the largest volume of sales.
Functional wages: tend to bring about the highest volume of employment and the largest real payrolls.
But Marxism took over this concept by saying that the only concepts that work are those that enable labor to buy back the product it creates (buy the particular product they make).
They never get the wages to be high enough.This doesn’t make sense, the people who make cheap products will only be able to buy cheap products and the expensive will just be wealthier, no matter if the job is the same.
That labor should receive enough to buy their own product is the same as the “purchasing power” argument.
Income = purchasing power for what others sell labor services and someone purchases them.
“In an exchange economy everybody’s money income is someone else’s cost.”
“If wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly wages.”
Fallacies:
Looking only at direct labor costs of a particular firm and assume that these represent all the labor costs involved. Here you mistake a part for the whole (you would miss costs of raw material, purchased parts, transitions charges, etc.)
Equilibrium:
“Equilibrium wages and prices are wages and prices that equalize supply and demand.”
- If process are raised above their equilibrium level: demand is reduced; production is reduced.
- If prices are pushed below the equilibrium level: reduction of profits; falling off of new production or supply.
Best prices: prices that encourage the largest volume of production and the largest volume of sales.
Best wages: wage rates that permit full production, full employment and the largest sustained payrolls.
Best profits: profits that encourage the most people to become employers or to provide more employment that before.
Chapter XXII
The Function of Profits
“Profits are the form of income toward which there is the most hostility.”
Functions of profits:
“Arbitrarily fixed prices and arbitrarily limited profits can only prolong shortages and reduce production and unemployment.”
“Profits are achieved not by raising prices, but by introducing economies and efficiencies that cut costs of production.”
From the relationship of costs to prices we can know what good is the most economical to make and what it the most economical way to make it.
“Profits are the form of income toward which there is the most hostility.”
Functions of profits:
- To guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand.
- In a free economy, where wages, costs and price play in a competitive market, profits decide what articles are made and in what quantities and what articles are not made at all
- Make businesses more competitive.
“Arbitrarily fixed prices and arbitrarily limited profits can only prolong shortages and reduce production and unemployment.”
“Profits are achieved not by raising prices, but by introducing economies and efficiencies that cut costs of production.”
From the relationship of costs to prices we can know what good is the most economical to make and what it the most economical way to make it.
Chapter XXIII
The Mirage of Inflation
Errors that cause inflation to be appealing:
When there is an increase in the quantity of money there is a reduction of purchasing power of each individual monetary unit – commodity prices increase. An increase of money affects the prices.
“Multiply the quantity of money N times and you must multiply the prices of the goods N times.”
Inflation is another example of the central lesson, bringing benefits for a short time to a certain group but at the expense of others, and in the long run bringing disasters.
Inflation:
The real purchasing power of goods consists of other goods. You can’t increase it by printing paper called dollars. Inflation changes the relationships of prices and costs.
Fallacy: thinking of paper money as if it were a form of wealth, that can be created at will on the printing press.
“Inflation throws a veil of illusion over every economic process. It confuses and deceives almost everyone, including even those who suffer by it.”
“Inflation is the opium of the people.”
“Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seed of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter delusion and collapse.”
“It would almost seem as if no country is capable of profiting from the experience of another and no generation of learning from the sufferings of its fore bears. Each generation and country follows the same mirage. Each grasps for the same Dead Sea fruit that turns to dust and ashes in its mouth. For it is the nature of inflation to give birth to a thousand illusions.”
Errors that cause inflation to be appealing:
- Confusing money with wealth. (real money consists of what is produced (houses, food, clothes))
- Social credits, to make good for missing payments; printing enough money to make up a deficiency.
When there is an increase in the quantity of money there is a reduction of purchasing power of each individual monetary unit – commodity prices increase. An increase of money affects the prices.
“Multiply the quantity of money N times and you must multiply the prices of the goods N times.”
Inflation is another example of the central lesson, bringing benefits for a short time to a certain group but at the expense of others, and in the long run bringing disasters.
Inflation:
- It is impossible to bring inflation to a halt.
- It is impossible to control the value of money under inflation.
The real purchasing power of goods consists of other goods. You can’t increase it by printing paper called dollars. Inflation changes the relationships of prices and costs.
Fallacy: thinking of paper money as if it were a form of wealth, that can be created at will on the printing press.
“Inflation throws a veil of illusion over every economic process. It confuses and deceives almost everyone, including even those who suffer by it.”
“Inflation is the opium of the people.”
“Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seed of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter delusion and collapse.”
“It would almost seem as if no country is capable of profiting from the experience of another and no generation of learning from the sufferings of its fore bears. Each generation and country follows the same mirage. Each grasps for the same Dead Sea fruit that turns to dust and ashes in its mouth. For it is the nature of inflation to give birth to a thousand illusions.”
Chapter XXIV
The Assault on Saving
Classical economists believe that the saving policy is in best interest for the individual and the nation. The rational saver helps the whole community.
These theories are under attack.
Saving is just another form of spending: you invest or put your money ion banks and this creates more jobs.
When you invest your money, it doesn’t become idle funds; banks are eager to invest it and lend it.
Many fallacies about saving come from the confusion of the term saving, which people use as hoarding money on as investment.
Another fallacy about saving:
There is a fixed limit to the amount of new capital that can be absorbed.
But we are always in need of more.
Proper Capital: tools of production (axes, ploughs, etc.)
But as long as we need to improve things there will always be indefinite room for more capital.
“There is no assignable limit to the amount of new capital that can be absorbed.”
Classical economists believe that the saving policy is in best interest for the individual and the nation. The rational saver helps the whole community.
These theories are under attack.
Saving is just another form of spending: you invest or put your money ion banks and this creates more jobs.
When you invest your money, it doesn’t become idle funds; banks are eager to invest it and lend it.
Many fallacies about saving come from the confusion of the term saving, which people use as hoarding money on as investment.
Another fallacy about saving:
There is a fixed limit to the amount of new capital that can be absorbed.
But we are always in need of more.
Proper Capital: tools of production (axes, ploughs, etc.)
But as long as we need to improve things there will always be indefinite room for more capital.
“There is no assignable limit to the amount of new capital that can be absorbed.”
Chapter XXV
The Lesson Restated
Economics is the science of tracing the effects of some proposed or existing policy on the general interest and in the long-run. It is a science of recognizing implications.
Other lessons:
The lesson in a 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 consumers no less than producers, are considered.”
“To see the problem as a whole, and not in fragments: that is the goal of economic science."
Economics is the science of tracing the effects of some proposed or existing policy on the general interest and in the long-run. It is a science of recognizing implications.
Other lessons:
- “The economist, assigned a practical problem, must know both the essential facts of that problem and the valid deductions to be drawn from those facts.”
- When we study the effects of various proposals on all groups on the long-run, the conclusions we arrive at usually correspond with those of common sense.
- Usually C, a party we don’t see, pays for the things done. C = the forgotten man.
- Economic progress doesn’t happen uniformly. It happens first in one branch of production, then in another; and on the way, this process might hurt many.
The lesson in a 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 consumers no less than producers, are considered.”
“To see the problem as a whole, and not in fragments: that is the goal of economic science."
Part Three: The Lesson After Thirty Years
Chapter XXVI
The Lesson After Thirty Years
32 years after the book was written, how much of it has been learned? Almost nothing.
It seems that the policies discussed in the last chapters are even more deeply established. They are mostly seen in inflations.
“These inflations, themselves the cause of so much human misery, were in turn in large part of the consequence of other policies of government economic intervention.”
“Practically all these interventions unintentionally illustrate and underline the basic lesson of this book.”
“The main problem we face today is not economic, but political.”
“It is the proper sphere of government to create and enforce a framework of law that prohibits force and fraud. But it must refrain from specific economic interventions. But government’s main economic function is to encourage and preserve a free market.”
32 years after the book was written, how much of it has been learned? Almost nothing.
It seems that the policies discussed in the last chapters are even more deeply established. They are mostly seen in inflations.
“These inflations, themselves the cause of so much human misery, were in turn in large part of the consequence of other policies of government economic intervention.”
“Practically all these interventions unintentionally illustrate and underline the basic lesson of this book.”
“The main problem we face today is not economic, but political.”
“It is the proper sphere of government to create and enforce a framework of law that prohibits force and fraud. But it must refrain from specific economic interventions. But government’s main economic function is to encourage and preserve a free market.”