Originally published: 1946
214 pages
Chapter 24


Henry Hazlitt
Henry Hazlitt wrote Economics in One Lesson at the end of World War II because he was disturbed about the course of economic discussion inside and outside of government. What he knew to be economic fallacies were then so accepted they were skewing policy debates from the outset, thus making it virtually impossible to arrive at a rational and productive free-market paradigm. In his description of what he observed in 1946, Hazlitt uses phrases such as "false premises," "fantastic conclusions," and "economic absurdities." He so effectively, and timelessly, exposes the wrong-headed notions then prevalent in economic thinking that Economics in One Lesson has been in print for more than half a century and has sold millions of copies in more than half a dozen languages. His lessons are well worth revisiting.
     Hazlitt takes the economic mis-assumptions of his era (which often exist in their mistaken glory yet today) to their logical conclusions to see if they make sense. In so doing, he pays close attention to the law of unintended consequences. He proceeds to lay bare the nonsense, unfairness, destructiveness, and even silliness of what often passes for sophisticated economic thinking. His observations, coming close on the heels of Friedrich von Hayek's The Road to Serfdom (Chapter 13), provided Main Street substance to Hayek's academic and psychological acumen. Hazlitt contends "the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence":


              The art of economics consists in looking not merely at the immediate
               but at the larger effects of any act or policy: it consists in tracing the
               consequences of that policy not merely for one group but for all groups.

                                                                                            [Emphasis in original]

     The question becomes: why do so many bad policies seem to have so much traction with both the public and political/governmental functionaries? Hazlitt observes: "The reason is that the demagogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right." He notes that in the bigger picture, when bad logic is applied to all times and all groups it creates worse policy-which then causes economic distortion, if not disaster.
     The beauty and readability of Hazlitt's prose lies in the commonsense simplicity of his explanations and examples. Hazlitt's purpose in investigating small-scale economics by means of these examples was to provide a frame of reference, to set the stage so the reader could consciously make the transition to large-scale considerations. What Hazlitt ultimately demonstrates is the loss to the economy through government intervention-by means of taxes, laws, and regulations-that cause distorted and reduced economic activity. The funds that might have been created if the economy was allowed the freedom under which it was designed to operate are lost to the citizen and ultimately to the government because the pie from which both can gain their
resources is smaller. (George Gilder expands on this relationship in Wealth and Poverty [Chapter 27]).
     Obviously some government is both necessary and valuable and if government controlled its spread and reach, as James Madison in particular designed it to do, the system would work to society's benefit. What Hazlitt comments on is that government not only does not effect self-control, it does pretty much the opposite. (To review the everyday realities of how and why this happens recall Bertrand de Jouvenel's five-step circular political process in On Power [Chapter 15]).
     When Hazlitt expands his investigation to macroeconomics he begins with an observation he considers primary in then current circumstances: "There is no more persistent and influential faith in the world today than the faith in government spending." Such thinking, inspired by economist John Maynard Keynes, Hazlitt calls the


most fundamental fallacy of his time. This judgment remains as apt today as when Hazlitt first expressed it. While Americans watch tax receipts continuously fall short of government spending the federal debt lurches toward one hundred ten trillion dollars. As this spending seems not to have had a substantial effect on the underlying problems toward which, decade after decade, trillion after trillion, these funds are directed, Hazlitt's commentary on the dangers of over-sized government remain more than topical.
     For Hazlitt, the negative economic consequences of any government's interventions in the marketplace-whether through government spending or regulation or taxation, etc.,-are cumulative and self-perpetuating. The progression is thus: first, government procures its funds through taxation. Hazlitt observes that the value of those funds diminishes when they pass through the collecting bureaucracy because of the expense of the bureaucracy itself. This cost, which Hazlitt calls friction, significantly lessens the economic benefit to society of whatever government purpose is afoot. Then government uses the remaining tax dollars to set up an additional bureaucracy for each program it creates. All of these actions have a negative impact on both the freedom experienced by the public (it is less at liberty to dispose of its own wealth) and the free market's ability to perform its magic (it is less able to take advantage of the multiplier effect of ordinary economic activity because there are fewer resources with which to multiply). Of course, if the government simply spends money it has not collected in taxes, by means of deficit spending, the negative effects already described by Hazlitt are merely compounded by the inflation such spending causes and the additional interest cost thus created.
     Economic dampening is the far more important consequence of intrusive government activity; the money diverted from the people by taxation precludes them from using those funds as they would have had they not been taken in the first place. But, based simply on the math, he further explains that

               for every public job created . . . a private job has been destroyed….

These financial diversions directly skew the economy in a relatively straightforward manner. Since the people who act to create private enterprise end up paying more to achieve their goals-because they have to support the cost of their efforts and pay the cost of government


endeavors simultaneously-the amount they produce decreases and the concomitant multiplier effect of their private effort is reduced. Because there is now less economic activity to tax government revenues decrease as well. In the worst case scenario the entrepreneur abandons his goals altogether
because too many of the funds that would have served his private purposes have been taken for some public one. Taxation can actually eliminate a new wing on a factory or a new line of production or a new research effort and all the jobs (and additional tax revenues) that would have been created by either effort.
     The cascade of negative effects caused by this cycle continues unabated. Hazlitt observes that public employment, which was a tool of choice and a substantial part of government enterprise in Hazlitt's time, does not bring to the economy what an entrepreneur might. In the aftermath of the government's failed efforts to combat the effects of the Great Depression of the 1930s it became clear that public largesse suppresses the economic initiative and even the capability of those who receive it. Such spending creates a perverse public dependency almost equal in proportion to the amount of benevolence it theoretically dispenses.
     In Hazlitt's opinion it is also important to consider the bureaucracy itself. It is not benign-merely a conduit that extracts a fee for its service. It is created as an infant but grows into a behemoth for two simple reasons: first, because it can, and second, because it must. In the first instance a bureaucracy grows as it finds more and more clients who "need" additional assistance. These new avenues are ubiquitous and are also a form of job security for the administrators. The administrative entity begins to swell-because it can be more helpful than was initially thought, at least in the minds of the bureaucrats. It also serves a dual purpose of the legislators who seek to please the public through political entrepreneurship; not only do their bureaucratic efforts satisfy myriad constituencies, but of more value, the politician obtains re-election in the bargain because he appears to be doing so much that is good.
     Later the bureaucracy grows because it obtains sanctified or even holy status-its job is no longer just to assist, but to deliver that to which the people have become "entitled." Thus it must be given more authority and money because it too does so much that is good. Once entitlement status is achieved then the protections offered by the originally benevolent agency are changed in character from help to obligations. Obligations create rights that are protected by further


layers of bureaucratic or even judicial oversight. The cycle has become fully self-perpetuating at that point.
     In order to learn how what he was experiencing in 1946 had come to pass Hazlitt goes back a generation; he explores and then explains why President Franklin Roosevelt was not able to tax and spend the United States out of the Great Depression. Indeed, as Hazlitt (and many others since then) makes clear, Roosevelt's policies extended the Depression's effects far beyond what was necessary. It was frequently stated that the country was "spared" (if one dares to voice that result considering the price paid for such an exemption) another decade of economic failure only by the advent of World War II and its massive calls for military production and national employment. His exposition vis-à-vis the Depression is one of the core lessons of Hazlitt's study. His explanation of the true cost of government's forced transfer of economic resources is a straightforward and commonsense approach to comprehending the negative effect and substantial expense-economic and human-of government intervention in the marketplace.
     Hazlitt was especially disturbed by the notion that only government is large enough to tackle major projects, projects that private industry supposedly cannot afford or does not have the will to undertake because of the potential complications beyond financial woes. What the theorists and pundits often either miss or ignore, muses Hazlitt, is that the government has no money except what the private sector creates. It is an old saw that bears repeating as a mantra, "We, the people, are
the government; the money of the government is our money." The necessary conclusion is that if the private sector cannot afford a project, the government cannot either. It is the coercive ability of government to force such efforts that allows them to happen. Whether that results in good or bad choices is usually a matter for posterity to determine.
     Hazlitt brings forth at several points this core lesson: each dollar taken for a governmental purpose is one dollar less that is available for a private effort; and each private effort thus foiled has a cumulative negative impact on the whole economy. If the government has no money save what it takes from the citizens, Hazlitt inquires, why can't the citizens simply use their fiscal resources for any worthy purpose-and circumvent the added burden of government inefficiency and growth or claimed omnipotence?
     It was just a question. Hazlitt, however, does not take these possibilities to the extreme conclusion that we need no government any more than do other conservative thinkers. But he does want to consider re-


drawing the arena in which government is primarily responsible-to make it smaller and more reasonable in all possible ways. Concomitantly, Hazlitt seeks to enlarge avenues open to the private sector by removing government monopolies and impediments to private activity.
     In following economic fallacies through to their logical conclusions Hazlitt exposes some of the negative consequences of large government enterprises such as public housing and federal lending. He refutes the bizarre claim that there are purported economic benefits of such program's inefficiencies-that somehow inefficiency has a positive economic multiplier effect resulting in more jobs being created to do the same amount of work. Obviously, inefficiency is inefficiency. Government inefficiency is doubly insulting because it is the taxpayer's money being taken and those funds are being collected to allow more government and more government waste, which then requires more resources, ad nauseum.
     In his analysis Hazlitt also explains the destructiveness of tariffs, price supports, rent control, and minimum wage laws among other legislative adventures. He clearly defines the risks we incur when we naively ask or allow government to take our wealth for ostensibly noble purposes. Government is no more capable than the people in this arena and, unfortunately, no less venal on occasion as legislators and bureaucrats serve their own purposes.
     Hazlitt reserves his harshest criticism for the inflationary consequences of many of these government actions. In his view, inflation is the most dangerous repercussion of fallacious economic thinking. Hazlitt uses Depression-era Germany as an example of the extreme case. Germany could not both support itself and pay the war reparations forced on it at the end of World War I.  (Germany's debt to Britain and France alone was set at $2.4 trillion in 2012 dollars). This crushing economic burden was resolvable only through the German government spending money it did not have and could not raise. Eventually the country's currency became worthless-at one point it took a wheelbarrow full of paper money to buy a loaf of bread. It was then Germany threw off its guilt and became once again belligerent. The few steps from outrage to arms were easily taken in the hands of the demagogic Adolph Hitler. Hazlitt's comprehension and explanation of why all these things happen within any nation, not just the U.S., is not just instructive, it is literally a call to action.
     Through Hazlitt's exposition it becomes clear that if each citizen does not personally engage in economic and governmental processes


entirely predictable consequences will result. He concludes that our problems stem not so much from a lack of understanding of basic economics but rather from our society's political inability to own up to basic tasks. High-level government officials should
not be ignorant when they come into office. Their experience and education should not allow them to act as they do, but their fealty to noblesse oblige (literally the "obligation of the nobility") or their own agenda seems to overwhelm what they should know to be true. The schemes they develop for the redistribution of wealth tend to smother incentive and foster a culture of dependence (as common understanding dictates they should realize) and these results lead to impoverishment at every level of society. That this happens again and again is the ubiquitous human condition in full flower.
     It is this human element that Hazlitt brings to the forefront by emphasizing the inability of politicians to see both sides of the coin-not just the pain of the less able, but the dignity of the self-sufficient. Rather than using the lowest common denominator approach to bring the successful down in a futile attempt to create economic equality, Hazlitt proposes increasing and improving the available opportunities for the less prosperous. This would occur by removing government impediments in the marketplace, often disguised as government assistance programs, or more accurately, "entitlements." His views and methods bear repeating in each generation, and the simplicity of his investigation makes his exposition the most useful point at which to begin.

About the Author
Henry Hazlitt was a journalist, literary critic, economist, philosopher, and author. Born in 1894, his life spanned the American Century and his interests mirrored our sometimes-fractured history. He lived to be 98, dying in 1993, and was still amazed at the end of his life that of all his works Economics in One Lesson was his most successful. His personal favorite was The Foundations of Morality in which he investigates why ethical behavior is so fundamental to human interaction.
     Hazlitt received no training as an economist and did not graduate from either college or high school. Obviously self-taught, he demonstrates what can be done with a sound intellect and a commonsense approach to the facts. He was more inclined toward the fields of ethics and philosophy than economics but he profoundly affected world-wide economic practice through his straightforward attack on economic


illiteracy. Hazlitt was probably the person most responsible for the fame of Ludwig von Mises and Friedrich von Hayek by means of his reviews of their books. (The works of both Hayek and Mises are presented elsewhere in this volume.)
     Hazlitt published his first book before he reached the age of 20 and landed a job as a stenographer at the Wall Street Journal shortly thereafter. He traveled within literary and newspaper circles most of his career. His penchant for standing on principle earned him a reputation for integrity but cost him some of his more lucrative employments when his philosophy was faced with economic absurdities he could not allow to pass without comment, or even argument. Hazlitt wrote a score of books and millions of words in editorials, reviews, articles, and commentary pieces. His indefatigable devotion to freedom made his presence on the American scene a thorn in the side of statists and a boon to rationality in economic and political pursuits.

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