re: EBC Book #1 - Economics in One Lesson by Henry Hazlitt

A very salient point is made in the fourth section of Ch. 14 on "Saving the X Industry."

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Why should [a dying industry] be kept alive [artificially]? The idea that an expanding economy implies that ALL industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough, it is necessary that some old industries be allowed to shrink or die. They must do this in order to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we [would] have slowed down the growth of the automobile industry and all the trades dependent on it. We [would] have lowered the production of wealth and retarded economic and scientific progress.

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I think his point here is that the government should not pick winners and losers but rather let market forces work such that capital is allocated to those industries that produce the greatest return on investment. Just as conservatives should be against subsidizing new industries at the expense of old industries, we should also be against subsidizing old industries at the expense of new industries. I feel the latter half of that statement is sometimes missed by free market proponents.

As an aside, I'm not for or against the coal industry. I'm against subsidizing other industries to its detriment, but I'm not for propping it up if it's a dying industry. Anyone find it interesting even at the time of this book they were having discussions on "saving the coal industry?"

Question,

Speaking of the Tariff chapter which is what I just finished. Hazlitt states that if we buy the less costly sweater at 25$ from Great Britain then they will have more US dollars to buy exports from us. What happens if they choose to use those dollars in trade with another country rather than the US. Wouldn't we be worst off in that case then if the 5$ duty was in place.

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But if those with the lowest profit margins are driven out of business, supply would go down relative to demand and prices at the surviving firms would necessarily go up in response. Net-net, the consumer is no better off and all you've accomplished is shifting profits from less efficient firms (e.g. moms and pops) to more efficient firms (e.g. the Wal-Marts that the left is supposed to hate). If the large firms are more efficient because they use less labor, you're effectively reducing the number of jobs even though you're increasing the average wage of the jobs that remain.

That is, you're robbing local Peter to pay corporate Paul and you're also robbing worker Peter (no more job) to pay worker Paul (higher wage).

I had this exact conversation with my lefty sister recently, and her response was that Wal-Mart should simply make due with lower profits. Wouldn't that make other firms more competitive? And what if those other firms are just as greedy (or greedier) than Wal-Mart used to be?

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Additionally, profits accumulated by Wal-Mart would then be used to grow, build more stores, thereby increasing the need for more workers. As the demand for workers grows, in theory, the wages for said workers will increase. The biggest problem is the whole "skilled vs unskilled" labor, but even this can be solved by growth.

Case in point, I live in a fairly burgeoning city right now. Growth has been very good, and you can't go to a restaurant anymore that doesn't have a need for more waiters and waitresses. I was talking with a couple of the owners and was asking them about their concerns in the business and every single person said labor. They couldn't find enough quality labor (not skilled), but quality labor, so they are resorting to marketing higher wages, flexibility, and higher average take home (inclusive of tips). After speaking with some of the staff at my local watering hole, many were now leaving the current job to take other jobs that were offering more money and flexibility. Funny how that works huh?

I think that's the right idea, yes.

I happened to highlight that same quote when I came across it a couple of days ago.

Dear God. Krugman gets gored in that article:

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Krugman has even explicitly argued the “case for a higher inflation rate” on the grounds that “it’s really, really hard to cut nominal wages”, so in lieu of “wage cuts”, just have “higher inflation”, which “would lead to lower unemployment”. Krugman constantly contradicts himself, but seems totally oblivious to the implications. So it is that he can argue that Hazlitt was “totally wrong” to argue that eliminating minimum wage laws would reduce unemployment and yet at the same time it is true that reducing workers’ real wages through inflation would reduce unemployment. It’s a case of Krugman offering a heads I win, tails you lose argument.

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Hazlitt is killing it in Ch. 22. This is easily my favorite chapter yet. Here's another really good quote to remember for later:

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Inflation, indeed, throws a veil of illusion over every economic process. It confuses and deceives almost everyone, including even those who suffer by it. We are all accustomed to measuring our income and wealth in terms of money. The mental habit is so strong that even professional economists and statisticians cannot consistently break it. It is not easy to see relationships always in terms of real goods and real welfare. Who among us does not feel richer and prouder when he is told that our national income has doubled (in terms of dollars, of course) compared with some preinflationary period? Even the clerk who used to get $25 a week and now gets $35 thinks that he must be in some way better off, though it costs him twice as much to live as it did when he was getting $25. He is of course not blind to the rise in the cost of living. But neither is he as fully aware of his real position as he would have been if his cost of living had not changed and if his money salary had been reduced to give him the same reduced purchasing power that he now has, in spite of his salary increase, because of higher prices. Inflation is the autosuggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him. Inflation is the opium of the people.

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I'm way behind, but I am still going to finish this book. Loved this quote, it is so spot on:

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The whole argument for the government entering the lending business, in fact, is that it will make loans to people who could not get them from private lenders. This is only another way of saying that the government lenders will take risks with other people’s money (the taxpayers’) that private lenders will not take with their own money.

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