Economics In One Lesson

[enders-shadow.livejournal.com]

Awhile back a member here sent me a book. Free of charge. He thought it was so important that I read it that he wasn't concerned with the cost to himself. I, out of a feeling of obligation, read the whole book [minus chapter 7, which he shall forgive me for, I suspect]

The book he sent me was: Economics in One Lesson by Henry Hazlitt

Now, the book is a little dated--copyright 1946, so yeah.

The "one lesson" which Hazlitt says is the whole purpose of the book 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. -p5

Now, I consider that to be something of an admirable goal. As a Cosmopolitian I agree--we shouldn't be looking out for one group over another group. All humans are in need of equal consideration. Sure, Hazlitt only means in the economic sense, but economics and morals are connected. After all, money buys food.

Now, the lesson itself isn't too bad; but Hazlitt goes on to some odd points.

In chapter 2 Hazlitt discusses the example by Bastait of a broken window pane destroyed by a hoodlum. The hoolum throws a brick through a window of a bakery; now the baker must spend [let's say] $50 on fixing that window. This creates business for the window maker--and thus we should rejoice--the hoodlum created employment! But wait, says Hazlitt: "the shopkeeper will be out $50 that he was planning to spend for a new suit. because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window"

The conclusion Hazlitt draws is that the tailor is out of business because of the hoodlum, while the window-maker is in business; thus the loss of business for one man (the suit-maker) is a gain in business for the other man (the window-maker).

What Hazlitt ignores is two-fold:

A) Maybe the window-maker will buy a suit with the money he just made (and thus the tailor need not suffer at all)
B) Maybe the baker wasn't going to spend that $50 at all, maybe he was gonna stuff it in his mattress and wait for Armageddon, we don't know
[having said that, I am not suggesting we throw bricks through windows to create employment, I am merely detailing that his analysis is lacking]

Chapter 3:
"....demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. n this sense the farmers' supply of wheat constitutes their demand for automobiles and other goods. The supply of motor cars constitutes the demand of the people in the automobile industry for wheat and other goods. All this is inherent in the modern division of labor and in an exchange economy." -p15 [emphasis added, cause WTF?]

Can someone explain that to me? I tried re-reading it. And again and again, it makes no sense.

Supply does not create demand. If I have 3000 of product X, it can either sell like hotcakes OR it can sit on the shelves and not move. My supply does not create demand. I am thoroughly confused by the above.

now, here's a quote I agree with, and I think we might *all* agree with:

"A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works--of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police, and fire departments--is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on this ground alone, I am not here concerned." -p18

Everyone agrees there are basic services that the govt ought to perform for it's citizens and that to fund such basic services, we *MUST* tax our citizens. The question, it seems, is where should the line be drawn [on what govt should do for it's citizens]? It's clearly not nothing, and equally clearly (IMO) it's not everything.

At this point I skip ahead to chapter 19: Do Unions Really Raise Wages?

"If people are willing to work for less than they are really worth to him, why should he [the employer] not take the fullest advantage of this?" p-121
This is essentially his position: let the employer exploit the workers. It's OK. I mean, if the worker is willing to work for less than their full worth, the onus isn't on the employer to pay them what they are worth; the employer is just trying to make profit.

He does admit unions have *some* legit purposes.

"All this does not mean that unions can serve no useful or legitimate function. The central function they can serve is to assure that all of their members get the true market value of their services." p122

My problem is with the idea of workers getting the market value for their services. This goes into territory I'm not *too* familiar with; I've sadly been slacking on my reading of Marx. But, iirc, surplus value must come from squeezing the worker; *if* workers were to get their market value *then* wouldn't the goods sold either have to be sold at a higher price than their value (to get the employer some profit) or goods would be sold at exactly their value and thus the employer would simply break even without making profit. Doesn't profit, for the boss, necessarily come from squeezing the worker? Where else can it come from? If the good is priced above it's real value, and this happened across the board, than the profit made by employer Z by over-charging for his products would be [in effect] useless cause employer X over-charges for his products too!

Like I said, I'm not too familiar with that; maybe someone can help me sort that out.

An interesting point Hazlitt makes is that in regards to workers striking:

"the pickets are really being used, not primarily against the employer, but against other workers. These other workers are willing to take the jobs that the old employees have vacated, and at the wages that the old employees now reject."

That's a point I can agree with; while I encourage people to do what is best for them, no person has the right to deny *another person* to work; thus the picketing workers don't have the right to stop another worker from taking their place. Perhaps that is why Wal-Mart would never have a union--too many easily replaceable workers.

But if you are a skilled worker--a union doesn't need to forcibly keep others out; it just needs to convince those with the skills to join the union.

And this line made me crack up; it was a real LOL moment.

"Thus the explotation of capital by labor can at best be merely temporary." -p128

And he is probably right; capital has the power, labor merely has numbers. Yet Capital will play labor against itself and, generally, win. But the fact that Hazlitt seems *concerned* with labor exploiting capital, but NOT concerned with capital exploiting labor...why, I don't know, it made me laugh.

Then there was this awesome line:

"There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces." p131 [emphasis added]

That seems odd, given that the author is against 'unnecessary govt projects' which would seem to be work--which, according to his own words, would create other work. Even if it's ditch-digging--it's work, and apparently, work creates work...[ok, I'm not in favor of govt ditch-digging work, but I'm just showing how absurd his statement is]

So, this may be a bit scattered and a bit jumbled, my apologies.

For disclosure: brucenstein was the one who sent me the book. And I thank him for it; while I disagree with much of what the author said, it was an interesting look at free-market economics from the 40's. It even has a few things I can agree with; it's also got some absurdly stupid things to say. But ain't nothin perfect--we are all but human.
To err is human....

And in case this doesn't interest you...everybody likes puppies!:

Comments

[malasadas.livejournal.com]

[enders-shadow.livejournal.com]

I cannot tell, is that macro one of approval?

Am I to assume you expected this to be a good show?

[jerseycajun.livejournal.com]

"A) Maybe the window-maker will buy a suit with the money he just made (and thus the tailor need not suffer at all)
B) Maybe the baker wasn't going to spend that $50 at all, maybe he was gonna stuff it in his mattress and wait for Armageddon, we don't know
[having said that, I am not suggesting we throw bricks through windows to create employment, I am merely detailing that his analysis is lacking]".

That's not the point. The point is that the money would have been used for something the baker deemed as enhancing or maintaining varioius aspects of his life (even saving it in a mattress - I'll disregard the Armageddon part to keep us somewhat plausible - shows an expressed priority, that of offsetting current desires for future one, that is not unimportant and shouldn't be dismissed in the least). The priority of millions is measured in the free market to allocate and manage everyone's priorities. Theses things cannot be foretold in advance, and so when there are 'stimulus' packages, it pushes priorities away from where they would otherwise be, which is why when cash for clunkers ended, so did the 'stimulating' effect. Money circulated, to be sure, but in an area which was not necessarily a priority for society, and the rub is that the money which was spent can only be spent once and then has to be replenished. These are not the indicators of a stable recovery.

[ygrii-blop.livejournal.com]

Will someone explain this to me?

I think what he's saying is the farmer wants a car. He doesn't have a car, but he has wheat. So he trades the wheat for money, which he trades for a car. When we want material goods, we can't just wait for the fairy godmother to stuff them under our pillows. We have to choke up the money for it, which most often involves trading our time or our production for money, which will buy us what we want.

How's that?

[a-new-machine.livejournal.com]

I think more clearly it can be stated that all supply creates demand for the inputs of that supply. Cars demand steel, steel demands iron, iron demands mining equipment, which demands manufacturing, which demands power, which demands oil, which demands shipping containers, which demands aluminum, which demands foundries, which demand employees, who demand food, which demands. . .

You get the point. Everything that is supplied has inputs which are demanded. Here, the idea is that the generation of supply generates further demand, not that a given supply of X creates a magical demand for X.

[torpidai.livejournal.com]

Build it and they will come?

There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces."

Only I'd guess if B produces consumables for A's products, or is B a Marketing man, producing nothing but "Desire" for A's products?

[rasilio.livejournal.com]

'Desire' is a good like any other.

[eracerhead.livejournal.com]

[Supply does not create demand. If I have 3000 of product X, it can either sell like hotcakes OR it can sit on the shelves and not move. My supply does not create demand. I am thoroughly confused by the above.]

Supply is created by demand in the sense that the reason for anyone to produce (supply) something is because of that producer's demand for other goods.

[the-rukh.livejournal.com]

Supply can be created by demand- if it's feasible. If Microsoft sends their Vikings to burn down any newcomers, it's not feasible. Hence the term Monopoly.

[rasilio.livejournal.com]

"The conclusion Hazlitt draws is that the tailor is out of business because of the hoodlum, while the window-maker is in business; thus the loss of business for one man (the suit-maker) is a gain in business for the other man (the window-maker).

What Hazlitt ignores is two-fold:

A) Maybe the window-maker will buy a suit with the money he just made (and thus the tailor need not suffer at all)
B) Maybe the baker wasn't going to spend that $50 at all, maybe he was gonna stuff it in his mattress and wait for Armageddon, we don't know
[having said that, I am not suggesting we throw bricks through windows to create employment, I am merely detailing that his analysis is lacking]"

Even if you were correct, the cost to replace the window is not merely the labor cost but the materials cost and time cost. The Material and time costs are consumed in the process of replacing the window and all that remains is the excess that the window maker kept for his profit. So in the end there isn't $50 for the window maker to buy a suit but rather $5 or $10. The difference is lost for ever.

"Can someone explain that to me? I tried re-reading it. And again and again, it makes no sense.

Supply does not create demand. If I have 3000 of product X, it can either sell like hotcakes OR it can sit on the shelves and not move. My supply does not create demand. I am thoroughly confused by the above."

If you had no intent on profiting (and by profit one must use the economic definition of the term and not the financial one) from your supply of X why would you continue to produce it? In other words what he is referring to is not stock on hand but continuing production, that is to say people only make that which they can effectively use to acquire that which they cannot or do not wish to make for themselves.

"This is essentially his position: let the employer exploit the workers. It's OK. I mean, if the worker is willing to work for less than their full worth, the onus isn't on the employer to pay them what they are worth; the employer is just trying to make profit."

If Company A is willing to sell me a good or service for less than Company B why should I not take advantage of this. Why is it ok for me to exploit the company like this?

In the case at hand the worker is the company and the employer is the customer.

Your argument that the company should not be allowed to 'exploit' workers by paying them a price less than the market rate for their services but which they are willing to accept quickly devolves to fixed prices enforced by law for all goods and services (and labor is just another service).

"My problem is with the idea of workers getting the market value for their services. This goes into territory I'm not *too* familiar with; I've sadly been slacking on my reading of Marx. But, iirc, surplus value must come from squeezing the worker; *if* workers were to get their market value *then* wouldn't the goods sold either have to be sold at a higher price than their value (to get the employer some profit) or goods would be sold at exactly their value and thus the employer would simply break even without making profit. Doesn't profit, for the boss, necessarily come from squeezing the worker? Where else can it come from? If the good is priced above it's real value, and this happened across the board, than the profit made by employer Z by over-charging for his products would be [in effect] useless cause employer X over-charges for his products too!"

Incorrect. Value is always subjective. Further even if it were correct this view ignores the fact that the employer also adds value to the product. For example, the individual worker would not likely be able to write contracts with suppliers, locate and negotiate prices with buyers, schedule and organize the sequence of production, provide for the capital necessary to fund the operation since cost is incurred up front and payment is only realized after successful delivery of the product, etc.

[rasilio.livejournal.com]

"And he is probably right; capital has the power, labor merely has numbers. Yet Capital will play labor against itself and, generally, win. But the fact that Hazlitt seems *concerned* with labor exploiting capital, but NOT concerned with capital exploiting labor...why, I don't know, it made me laugh."

Actually you missed (and I can't remember if it is in there explicitly or implicitly, it has been a few years since I read it) that the same holds true in the other direction as well. Short of using coercion and force (typically through buying out the government and getting them to do the company's bidding) an employer cannot compel workers to accept their terms and there is no realistic way to form a cartel to 'exploit' workers and expect it to hold as your competitors seek to hire the most profitable workers wages and working conditions will always rise.

"That seems odd, given that the author is against 'unnecessary govt projects' which would seem to be work--which, according to his own words, would create other work. Even if it's ditch-digging--it's work, and apparently, work creates work...[ok, I'm not in favor of govt ditch-digging work, but I'm just showing how absurd his statement is]"

You misunderstand the meaning of the word work. It is not the same as effort or exertion. The definition of work is ...

1.
exertion or effort directed to produce or accomplish something; labor; toil.
2.
something on which exertion or labor is expended; a task or undertaking: The students finished their work in class.
3.
productive or operative activity.

(there are others as well but they are not relevant here)

As you can see in order for it to be 'work' then something must be produced. Pointless expenditure of effort or energy is not work.

[enders-shadow.livejournal.com]

a ditch is produced through ditch digging....

[meus-ovatio.livejournal.com]

I prefer my own economics in one lesson: People want money. They'll do whatever it takes to get it. Some of them are legal. Some are not. The rest is politics.

[abomvubuso.livejournal.com]

Simple and concise. Win.

[gunslnger.livejournal.com]

Some people want money. Others want the things money can help them acquire.

[eracerhead.livejournal.com]

My problem is with the idea of workers getting the market value for their services... But, iirc, surplus value must come from squeezing the worker; *if* workers were to get their market value *then* wouldn't the goods sold either have to be sold at a higher price than their value (to get the employer some profit) or goods would be sold at exactly their value and thus the employer would simply break even without making profit.]

A worker is selling capability (skills). The value of that depends upon the supply of a given set of skills. The problem is not that workers get full market value, it comes about when workers can successfully receive higher than market value for their skills.

[Doesn't profit, for the boss, necessarily come from squeezing the worker?]

No. Profit comes from efficiency. There are lots of things the boss can do to improve this. E.g. instituting policies that promote greater productivity with less management oversight, or providing direct selling rather than using wholesalers, or by creating demand for his particular product over a competitor's via advertising.

[If the good is priced above it's real value, and this happened across the board, than the profit made by employer Z by over-charging for his products would be [in effect] useless cause employer X over-charges for his products too!]

For anything other than that which is necessary for survival, there is absolutely no such thing as real value. The value of an good or service is precisely what is exchanged for it. It is trade that determines value.

[torpidai.livejournal.com]

*if* workers were to get their market value *then* wouldn't the goods sold either have to be sold at a higher price than their value (to get the employer some profit) or goods would be sold at exactly their value and thus the employer would simply break even without making profit.]

Something (anything) is only worth what another is willing to pay for it. Advertising men are to blame for the increased desire for products, with increased desire for crap that won't last a year, more people want money to buy it, = more people in the market for work, = low wages. This I believe is the true reason for the excess of immigrants in this (and other) country, not many politicians came from the shop floor now hu?

[readherring.livejournal.com]

Supply creates demand because at bottom it is demand.

Simple. People demand bottoms. Just ask Sir Mix-a-lot.

[enders-shadow.livejournal.com]

Is that why Scarlett Jo is such a hot item bout now?

[a-new-machine.livejournal.com]

My problem is with the idea of workers getting the market value for their services. This goes into territory I'm not *too* familiar with; I've sadly been slacking on my reading of Marx. But, iirc, surplus value must come from squeezing the worker; *if* workers were to get their market value *then* wouldn't the goods sold either have to be sold at a higher price than their value (to get the employer some profit) or goods would be sold at exactly their value and thus the employer would simply break even without making profit. Doesn't profit, for the boss, necessarily come from squeezing the worker? Where else can it come from? If the good is priced above it's real value, and this happened across the board, than the profit made by employer Z by over-charging for his products would be [in effect] useless cause employer X over-charges for his products too!

The quote says "market value," which is different from aggregate value (as in the value of labor to the final product).Market value can be defined, in this case most usefully, as "the value given by purchasers for a good or service." An employer who cannot make a product at a profit at a given price for labor will not hire at that price, because there is no advantage to it. Why hire just to break even or lose money? That's not market value.

Value is also more than additive, and economies of scale exist. For instance, say I'm a worker in a factory who applies widgets to a car. The widgets add $X to the sale price of the car, so theoretically the value of my service is $X - $WIDGETCOST. Right? Only if I just had the skills to add widgets, but no one to buy them, or no cars to which I can apply them, then the value of my service drops off dramatically. So my service itself is not worth (X-WIDGET). It's worth some fraction of X, which is multiplied by the presence of the widget and a car to which I can apply it. A tailor can sew beautifully, but that doesn't mean that the motion of sewing itself has value absent some cloth to which I can apply it. Moreover, re: economies of scale, if one worker doing a job all day can produce Y baseballs, but the contract cannot be granted unless we can produce 5xY baseballs daily, then I won't get the contract, regardless of the fact that I can do the same work as the company with five equivalent baseball-makers.

[gunslnger.livejournal.com]

But, iirc, surplus value must come from squeezing the worker; *if* workers were to get their market value *then* wouldn't the goods sold either have to be sold at a higher price than their value (to get the employer some profit) or goods would be sold at exactly their value and thus the employer would simply break even without making profit. Doesn't profit, for the boss, necessarily come from squeezing the worker? Where else can it come from?

It comes from the difference between the cost to produce the item and the value it sells for. The value of the labor is part of the cost to produce, and is not equal to the sale value of the item. Also, value is always relative, price is not.

[enders-shadow.livejournal.com]

You are mistaken.

Value is the same; price is not.

A 1992 Jeep can go for $2000 or $1000

It's value is the same; the price is not; you can sell a good at value, above value or below value, but value is stable.

[gunslnger.livejournal.com]

And the puppies are ugly.

[enders-shadow.livejournal.com]

it's official

you have no soul

[rasilio.livejournal.com]

Oh, for anyone who wants to see what is being talked about, Economics in One Lesson can be read for free online at ...

http://jim.com/econ/

[enders-shadow.livejournal.com]

would ya look at that!

Thanks buddy-guy!

Re: Oh, you bet there's more to come!

[enders-shadow.livejournal.com]

And yeah, I'm not supporting breaking windows to boost the economy; obviously that's nonsense; but the $$ still gets passed around, and given the lesson I would expect him to go into more detail about the harm of the broken window is passed around to *all* not just the baker.

I understand you must have a supply to *get* your demands (i.e. money for food) but that is so different from *creating* demand.

Supply is necessary to *meet* a demand, but it is not *creating* the demand.

And you are welcome--sorry it took so long; life and all.

And I await a response on the union bit. =)

Re: P.S. I don't necessarily agree there are things the government "ought" to do :)

[enders-shadow.livejournal.com]

I skipped ch7, cause I don't think I need the point; I don't fear machinery; I don't believe in the curse of it.

Marx covers this too--should a worker make a chair in 5 hours--but then a machine comes around and makes it possible for that same worker to make a chair in 1 hour. While making the chair in 5 hours would *seem* to increase it's value, it doesn't. Efficiency is always desired.

I don't disagree with using machinery to increase productivity; I am merely pointing out that "work creates work" is false. If someone worked to make a machine that made houses materialize out of thin air, that work would in fact make LESS work. That work would *destroy* not *create* work. So I understand the concept and I don't fear machinery.

[penguin42.livejournal.com]

I'm in a rush so I'll just chime in on the broken window situation really quickly:

An economic system is about taking the available resources in a society and trying to make the things that society needs. If you break a window, yes you're creating more employment for the window-makers, but now you have a society that is (slightly) more focused on window-making than it otherwise would have been (with the same resources available). And this re-distribution of production is necessarily at the expense of other things, such as shelter, food, basic services, investment in future technologies, etc. Because now instead of people spending their labor on such things, they need to spend their labor on getting sand, melting it down, chopping down trees, assembling, distributing, and installing the windows. Yes it's "employment" but to what end? Does the product of all that employment help give society the things it needs?

Well yes it needs a new window NOW. But if you hadn't broken it, it wouldn't, and those people could be working on something more worthwhile.