Why Spending More for Local Goods Harms the Economy

The following article by Linn and Ari Armstrong originally was published May 27 by Grand Junction Free Press under the title, “Channel 11 piece peddles economic nonsense.” Stay tuned for a related update about the views of Denver mayoral hopeful Michael Hancock.

If Bernie Lange had taken to the airwaves to promote therapeutic magnetic underwear or report alien anal probes, he rightly would have been laughed off the station. But apparently peddling economic nonsense fits perfectly well with the editorial policies over at Channel 11 News, the local NBC affiliate.

Last week the station broadcast the segment “Made In America,” a silly editorial masquerading as news that falsely argues buying overpriced American products creates jobs. Spending less for the same products made overseas, Lange intones sinisterly, costs Americans not only jobs but “billions in lost dollars.” That’s due to “the multipliers,” you see.

Thankfully, French economist Frédéric Bastiat* exposed Lange’s brand of foolishness way back in 1845 in his “Candlemakers’ petition.” To update the example, consider an obvious way to create jobs galore for manufacturers of light bulbs and the electricity required to run them. Simply block out all sunlight from your home. Board up all the windows. Think of all the American jobs we’d create if we all followed that one simple step. Say no to extraterrestrial sunlight!

Or consider the blight of foreign-made bananas and coffee. Scandalously, Americans tend to buy both those products from Central and South America. Think of all the American jobs we could create if we bought those goods only from U.S. suppliers, or better yet Colorado suppliers.

Impossible, you say? If you check out the web page of Denver Botanic Gardens, you will discover the center currently grows bananas, coffee, and chocolate right here in Colorado (as one of our friends pointed out). No doubt we could grow all those things locally if farmers spent enough on greenhouses and heaters.

Sure, the products would cost more, but just think of “the multipliers!” We could add billions upon billions of dollars to our economy just by spending more on the goods we consume every day. Indeed, by Lange’s logic, the more we spend, the more we prosper!

Clearly there’s something wrong with Lange’s reasoning. To get a better idea of the problem, consider Bastiat’s wisdom about the seen and the unseen. Bastiat writes, “The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

What Lange sees are the manufacturing jobs lost. What Lange ignores are the exporting jobs created and the additional wealth made possible by trade.

Lange sees that spending more money on American-made products would contribute to the paychecks of American workers. Lange ignores the fact that spending more money on the same goods would deprive other businesses of those dollars. If you spend more money on toys and household items, you have less to spend with the local fruit grower or massage therapist.

Let’s get back to basics. Why should we trade at all? Why shouldn’t each individual produce everything he needs, all by himself? The answer should be obvious: everyone would become horrifically poor, and only a tiny fraction of today’s population would manage to survive at all. Just imagine making all your own clothes, growing all your own food, building your own shelter, and acting as your own dentist.

By trading, we benefit from other people’s skills, expertise, accumulated machinery, and natural advantages. Why does Lange think it’s any different when we trade with people in other towns, other states, or other nations?

China features lots of cheap labor. We would be fools not to take advantage of that. America, on the other hand, features lots of complex machinery and other capital goods made possible by industrialization and relative economic liberty. That’s why (as the CIA reports) per capita product in China is around $7,400 annually, whereas in the United Statesit’s $47,400.

If we stop buying stuff that China’s relatively good at making, that means we have to make stuff that we’re relatively bad at making. Such a policy is self-destructive. Buying cheap goods from China and elsewhere allows American workers to specialize on the things they make best.

Of course, it is worth looking into artificial reasons why some American companies move overseas, including high tax rates and business-crushing union policies. We should also explore the reasons for continued high domestic unemployment, particularly the Obama administration’s policies of blowing out the deficit and meddling in the economy. But let’s fix the underlying problems, not succumb to economic fantasies.

We doubt very seriously that Bernie Lange or anyone else at Channel 11 makes much of an effort to buy only American-made goods. And they’d be foolish to do so. Trade is all about specialization according to one’s strengths. We hope, therefore, that Channel 11 sticks to reporting the news and leaves the economic commentary to people like Bastiat.

* Note: I was paid a modest sum to help run Liberty In the Books, which has reviewed select works of Bastiat.

***

Elisheva Hannah Levin commented June 2, 2011 at 8:35 AM
I agree, should the local goods be identical to those from elsewhere. After all, I enjoy coffee as much as most Americans do. My caveat, is that often locally produced food is fresher and/or is produced in ways that make it tastier than mass produced food that is shipped in. And in many cases, such as the one of corn-fed beef in CAFO’s, the real cost is obscured because the federal government subsidizes the production of the corn heavily, and the cost to defend oil sources (need for transportation of feed and of product) is never factored in. Since this makes the American food supply chain an artificial economy, most people do not really know what the true cost of “cheap” food is, and how they are paying for it.
Sadly, although the term “free market” should be a redundancy, the understanding of the term “market” is so poor for most consumers, that we have to say it. Free markets, for all goods, across all boundaries produces a vital economy.

Mark Udall, Meet Henry Hazlitt

A few days ago Grand Junction’s Free Press published an article by by dad and me about Henry Hazlitt and Frederic Bastiat. We wrote, “forcibly transferring wealth from some people to others does not in itself ‘stimulate the economy’ or ‘create jobs.'” Hazlitt reminds us to remember the unseen, the jobs destroyed by taking wealth away from those who would otherwise spend or invest it according to their own best judgment.

Senator Mark Udall needs to read Hazlitt’s classic, Economics In One Lesson. If he did, perhaps he would refrain from making idiotic statements such as following, from his July 21 newsletter:

“Abound Solar, a Loveland-based manufacturer of thin-film solar panels, received a $400 million federal loan guarantee to aid in its expansion, which will help create hundreds of new jobs to help our local economies.”

Udall points to the seen, the jobs created at the solar panel factory, but he forgets about the unseen, the jobs destroyed by sucking that wealth out of the private economy. When the federal government guarantees loans, it diverts those investment dollars away from some developments and toward others. (If the solar panel company were indeed the best investment, then it could attract those dollars without federal assistance.) What is unseen are all the businesses that will no longer be able to get loans, expand their operations, and hire people.

Furthermore, federally manipulated loans are bound to be less productive than free-market loans, because those who answer to politicians and bureaucrats are serving a political agenda, not solely a productive one. Thus, Udall’s program actively destroys wealth by diverting resources away from more-productive uses to less-productive uses.

So the next time you hear some politician such as Udall claim that he is “creating jobs” by forcibly transferring resources, remember that what he really means is that he is destroying wealth.

Hazlitt and Bastiat Answer Today’s Economic Fantasies

The following article originally was published July 23 by Grand Junction’s Free Press.

Hazlitt and Bastiat answer today’s economic fantasies

by Linn and Ari Armstrong

According to today’s great economic fantasy, the way to make everybody better off is to forcibly take money away from some people and give it to others. Such legalized theft is what many of today’s celebrated economists call a “stimulus package.” We call it Fraudonomics.

Unfortunately, such economic “stimulus” sophism often breaks down the walls of common sense and shows up in the writings of self-serving activists and pretentious newspapermen.

Take a few recent examples. The Denver Post’s editorial board recently claimed that corporate welfare for solar panel producers “will provide immediate jobs.” In a separate opinion, the Post argued that declining to pay people more not to work “could hurt the U.S. economy.” (Those with a lick of common sense will notice that paying people not to work tends to induce more people not to work.) An activist group opposing tax-cut measures on this year’s ballot claims those measures “could cost jobs” by cutting government spending.

Now, it is possible to offer other arguments for corporate and personal welfare and against tax cuts, and we will be happy to rebut those arguments elsewhere. Here the point is simply this: forcibly transferring wealth from some people to others does not in itself “stimulate the economy” or “create jobs.”

The 20th Century’s greatest common-sense economist, Henry Hazlitt, addresses this point beautifully in Economics In One Lesson. This is a book that you owe it to yourself and your children to read and promote. Give copies to your elected officials. We’ve often longed to see an essay contest for high school and college students about that book. Hazlitt counsels us to remember the unseen as well as the seen.

Let us say that some misguided politician robs a thousand dollars from Peter and gives the money to Paul to “stimulate” Paul’s budget. If you only look at Paul, this seems like a pretty good deal. Paul might spend that money on a new pair of sneakers, a concert ticket, new tires, and a restaurant meal. All of the businesses where Paul shops see a corresponding increase in revenues, and in turn they buy more from their suppliers.

But look at the unseen. Look at Peter. Peter no longer has his thousand dollars. He can no longer use that money to put food on his table, support his family, and invest in his business. All of the businesses where Peter would have shopped lose out, as do their suppliers.

It is easy to see the “jobs created” by Paul’s spending. It takes a little common sense to remember the jobs lost by forcibly taking wealth away from Peter.

Moreover, forcibly transferring Peter’s wealth to Paul actively destroys wealth. The bureaucrats charged with the transfer take a sizable cut to fund their bloated budgets. Paul’s incentive to work hard takes a hit, as does his ability to plan for his economic future. This remains true when applied to the economy as a whole: so-called “stimulus” programs destroy wealth and hurt the economy.

While there is not yet an essay contest for Hazlitt’s book, Students for Liberty has launched such a project for one of Hazlitt’s key inspirations, the 19th Century French economist Frederic Bastiat, author of classic works such as The Law and Economic Sophisms.

High school and college students may register for the essay contest, with a $1,000 top prize, by December 1; see http://tinyurl.com/bastiatproject. Just by registering, students receive a free book with selections by Bastiat.

Bastiat’s 1845 essay on candlemakers remains the greatest, most hilariously satirical annihilation of economic protectionism of all time. Bastiat argues that, if we’re serious about protecting certain businesses at the expense of competitors and consumers, we ought to block out the sun to help the candlemakers. Much of Bastiat’s analysis also applies to so-called “stimulus” spending; read it for yourself at http://bastiat.org/en/petition.html.

Another of Bastiat’s classics is his 1850 essay on the seen and the unseen, the work toward which Hazlitt says he owes his greatest debt. You can find it at http://tinyurl.com/bastiatseen. In this essay, Bastiat explains the “broken window fallacy.” Does not breaking a window “keep industry going?” “What would become of the glaziers if no one ever broke a window?”

Bastiat answers: “Your theory stops at what is seen. It does not take account of what is not seen. It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library.”

Americans should return to the common-sense wisdom of truly great economists such as Hazlitt and Bastiat. Our economic future depends on it.

Review Questions for Murray Rothbard’s ‘What Has Government Done to Our Money?’

This set of review questions is part of the Liberty In the Books program, a monthly discussion group. These questions cover Murray Rothbard’s What Has Government Done to Our Money?

Note: Because paginations differ across editions, here page numbers corresponding to the 1990 edition (ISBN 0945466102) are used with titles of Rothbard’s sections.

Reading I: Through Page 54 (Parts I and II)

1. Does a voluntary exchange indicate an equality of value among the goods exchanged? (Page 16, “The Value of Exchange”)

2. How did money arise? (Pages 15-20, “The Value of Exchange” through “Indirect Exchange”)

3. What are the key limitations of barter? (Pages 16-17, “Barter”)

4. Why did gold and silver displace other commodities as money? (Pages 18-19, “Indirect Exchange”)

5. What is the significance of the fact that money is a commodity? (Pages 19-20, “Indirect Exchange”)

6. What economic advances does money facilitate? (Pages 20-21, “Benefits of Money”)

7. Originally, to what did the names of currencies refer? (Pages 22-24, “The Monetary Unit”)

8. Why does Rothbard endorse private coinage? (Pages 25-29, “Private Coinage”)

9. In Rothbard’s view, what is the proper supply of money? (Pages 29-34, “The ‘Proper Supply of Money”)

10. What is the consequence of an increase or decrease in the supply of money? (Pages 32-34, “The ‘Proper’ Supply of Money”)

11. Does hoarding of money on a free market present a problem? (Pages 35-39, “The Problem of ‘Hoarding'”)

12. For what legitimate reasons do people increase or decrease their cash reserves? (Pages 35-36, “The Problem of ‘Hoarding'”)

13. Why does Rothbard disapprove of the phrase “circulation of money?” (Page 37, “The Problem of ‘Hoarding'”)

14. Should government promote stable prices? (Pages 39-40, “Stabilize the Price Level?”)

15. Can a free market accommodate more than one currency in the same region? (Pages 41-43, “Coexisting Money”)

16. How does a free market in money lead to the exchange of paper receipts, token coins, and checks? (Pages 43-46, “Money-Warehouses”)

17. What is Rothbard’s case against fractional reserve banking? Is his case sound? (Pages 47-53, “Money-Warehouses”)

Reading II: Page 55 to 111 (Parts III and IV)

1. What is the primary difference between the way private individuals and government acquire more goods and services? (Page 55, “The Revenue of Government”)

2. Why does Rothbard write, “Counterfeiting is evidently but another name for inflation?” (Page 56, “The Revenue of Government”)

3. How does counterfeiting (or inflation) transfer wealth from some to others? (Page 57, “The Economic Effects of Inflation”)

4. Which groups are most harmed by inflation? (Pages 57-58, “The Economic Effects of Inflation”)

5. What is the impact of inflation on business calculation? (Pages 58-59, “The Economic Effects of Inflation”)

6. How does inflation discourage “sober effort,” penalize thrift, and encourage debt? (How does this pertain to the modern housing crisis?) (Page 59, “The Economic Effects of Inflation”)

7. How can inflation morph into hyper-inflation? (Pages 59-60, “The Economic Effects of Inflation”)

8. How can inflation cause a business cycle? (Page 61, “The Economic Effects of Inflation”)

9. Before widescale banking and paper receipts for money, how did governments inflate the money supply? (Pages 61-64, “Compulsory Monopoly of the Mint” and “Debasement”)

10. What happens when a government attempts to impose “bimetallism” to control the exchange rate of commodity moneys? (Pages 64-67, “Gresham’s Law and Coinage”)

11. How do legal tender laws act to further devalue the money supply? (Pages 67-68, “Gresham’s Law and Coinage”)

12. How does granting banks the government privilege of “suspension of specie payment” contribute to inflation? (Pages 69-72, “Permitting Banks to Refuse Payment”)

13. How did central banking arise, and what did it do to the money supply? (Pages 72-76, “Central Banking: Removing the Checks on Inflation”)

14. By what mechanisms does the central bank inflate (or deflate) the money supply? (Pages 77-79, “Central Banking: Directing the Inflation)

15. Why do central banks go off the gold standard, and what is the result? (pages 79-84, “Going off the Gold Standard” and “Fiat Money and the Gold Problem”)

16. How does central banking interfere with international trade? (Pages 84-87, “Fiat Money and Gresham’s Law”)

17. What were the basic steps in the U.S. government’s monetary policy over the last two centuries? (Pages 90-111, Part IV)

Review Questions for Andrew Bernstein’s Capitalism Unbound

This set of review questions is part of the Liberty In the Books program, a monthly discussion group. These questions cover Andrew Bernstein’sCapitalism Unbound.

Reading I: Through Page 60

1. How does Bernstein distinguish today’s American economy from laissez-faire capitalism? (Page x)

2. How did American colonists oppose British economic controls prior to the revolution? (Pages 2-5)

3. In what ways did the U.S. Constitution protect individual rights? (Pages 6-8)

4. In what ways does capitalism protect economic liberty? (Pages 9-10)

5. What is statism, and what are some key historical examples? (Pages 10-14)

6. What is the relationship of “human rights” and “civil rights” to individual rights? (Pages 14-15)

7. What fantasy have enemies of capitalism promoted regarding living conditions before the Industrial Revolution? (Pages 19-20)

8. What were the actual economic conditions of pre-industrial Europe? (Pages 20-22)

9. What were the special problems regarding sanitation and house fires in pre-industrial Europe? (Pages 22-24)

10. What was Thomas Malthus’s theory of population? Under what conditions is he right, and when is he wrong? (Pages 24-26)

11. What is the relationship between intellectual freedom and material prosperity? (Pages 26-28)

12. Who are some of the heroes of the Scottish Enlightenment, and what were their accomplishments? (Pages 29-34)

13. What was the impact of the work of James Watt and Matthew Boulton in the clothing industry? (Pages 34-35)

14. What were the major industrial advances in the fields of metals, agriculture, and transportation during the early industrial era? (Pages 35-37)

15. How do people improve their material conditions, and how did the industrial revolution illustrate this? (Pages 38-41)

16. What is the connection between free minds and free markets? (Pages 41-42)

17. What were the economic impacts of the Northern Securities Company, what was the response by the federal government, and how did this response mark a turning point in American history? (Page 41)

18. What were the advances in communications, construction, technology, and transportation in 19th Century America? (Pages 44-49)

19. What were Andrew Carnegie’s achievements in transportation and steel production? (Pages 49-51)

20. What were John Rockefeller’s achievements in oil production? (Pages 51-52)

21. Were American industrialists “Robber Barons?” Why have they been described as such? (Pages 53-57)

22. Why does Bernstein write, “freedom is fundamentally freedom of the mind?” (Pages 57-59)

23. Why, in Bernstein’s view, has capitalism so often been denounced despite its profound benefits? (Pages 59-60)

Reading II: Pages 63 to 131

1. Why do so many intellectuals denounce capitalism? (Pages 63-66)

2. What is the connection between altruism and collectivism? (Pages 64-68)

3. Why does a welfare-state mixed economy dominate Europe and America? (Pages 68-70)

4. What does selfishness mean? (Pages 71-72)

5. What is a value? What is a sacrifice? (Pages 72-74)

6. How can values be objective? (Pages 74-77)

7. What is the relationship between reason and survival? (Pages 78-80)

8. Why is productiveness a virtue? (Pages 80-82)

9. Why is “cynical exploitativeness” not in one’s rational self-interests? (Pages 82-84)

10. How is rational self-interest necessary for benevolent goodwill? How does self-sacrifice undercut goodwill? (Pages 85-90)

11. How does capitalism protect one’s right to life? (Pages 91-93)

12. What is socialism? (Pages 97-98)

13. How did the West prop up socialist systems in the 20th Century? (Pages 99-100)

14. What were the results of 20th Century socialism? (Pages 98-102)

15. Does socialism allow a rationally planned economy? (Pages 103-106)

16. What is a coercive monopoly, and how do such monopolies violate individual rights? (Pages 107-110)

17. Can unions exist under capitalism? On a free market, what are unions prohibited from doing? (Pages 110-115)

18. What is the relationship between unions and employment? (Pages 110-115)

19. What are the harms of inflation? (Pages 115-116)

20. What caused and prolonged the Great Depression? (Pages 117-123)

21. What caused the modern housing bust? (Pages 123-130)

Liberty In the Books Web Page

I’ve finished the Liberty In the Books web page (for now). Seehttp://tinyurl.com/libertybooks

The readings cover basic economics, health policy, the Great Depression, the housing bust, and antitrust. I’ll continue to add new review questions as the Denver group progresses.

I hope that the web page encourages others around the country to start similar reading groups. I also hope the review questions are useful for independent study. So tell your friends!

Review Questions for D. T. Armentano’s Antitrust: The Case for Repeal

This set of review questions is part of the Liberty In the Books program, a monthly discussion group. These questions cover Dominick T. Armentano’sAntitrust: The Case for Repeal (Revised Second Edition).

Reading I: Through Page 50

1. What have been the basic results of antitrust enforcement, in Armentano’s view? (Page xi)

2. What does “rent-seeking” mean, and how does it apply to antitrust? (Page xi)

3. What is the correct understanding of “competition,” what is “pure competition,” and how does this apply to antirust? (Page xii)

4. What is the meaning of “economies of scale,” and what is the relevance to antitrust? (Page xiii)

5. What are the basic aims of antitrust? (Page xiii)

6. What were the general trends in antitrust enforcement in the 1950s and ’60s, the 1970s and ’80s, and the 1990s? (Pages xiii-xvi)

7. What were the antitrust-related complaints against Microsoft? (Pages 1-2)

8. What does the term “creative destruction” mean? (Page 4)

9. What are “network effects,” and do they justify antitrust action? (Pages 4-5)

10. What is “path dependence,” does it “lock in… inferior technology,” and does it justify antitrust action? (Pages 5-6)

11. Did Microsoft unfairly bundle its web browser with its operating system? How does this complaint look in 2010? (Pages 6-8)

12. What role do exclusive contracts play on an open market, and do they ever justify antitrust action? (Pages 8-9)

13. What was the Lorain Journal case, did it justify antitrust action, and was the Microsoft case comparable to it? (Pages 9-10)

14. What does the Microsoft case illustrate about the nature of antitrust enforcement? (Pages 10-12)

15. What is the “barriers-to-entry doctrine,” and what has been the actual behavior of firms punished under antitrust? (Pages 13-14)

16. What antitrust enforcement actions did IBM face? (Pages 14-15)

17. What was the trend of the data-processing industry in the mid-20th Century? (Page 15)

18. Are profits higher in concentrated industries in the short and long term? Why? (Page 16)

19. What is the actual cause of “monopoly power?” (Page 18)

20. What has antitrust done to business consolidations, and what has been the economic effect? (Page 18)

21. What is the problem with regulators and courts attempting to discover social benefits? (Page 19)

22. Are antitrust laws consistent with rights of property, association, and due process? (Page 19)

23. What lesson does Armentano find in the case of airline deregulation? (Pages 20-21)

24. Contrast the “public interest” with the “special-interest” theories of antitrust policy. (Pages 21-25)

25. What is the theory of “concentrated benefits, dispersed costs,” and how does this apply to antitrust? (Page 24)

26. How does antitrust constitute an attempt to centrally plan the economy? (Pages 25-26)

27. What does the AT&T case reveal about antitrust policy? (Pages 26-29)

28. What is “allocative inefficiency” and “technical inefficiency” in standard antitrust doctrine? (Pages 31-33)

29. What real-world economic activity does the theory of “pure and perfect competition” exclude? (Pages 33-35)

30. Are “free-market monopolies” able to restrict production and raise prices? (Pages 35-39)

31. Contrast the popular account of Standard Oil with the factual history of the company’s performance. (Pages 40-43)

32. Can studies of profitability justify antitrust enforcement? (Pages 43-44)

33. In Armentano’s view, should antitrust be used even against legally enforced monopolies? (Pages 45-46)

34. Why does Armentano push for the complete repeal of antitrust, rather than only administrative reforms?

35. What is Murray Rothbard’s critique of standard monopoly theory? (Pages 47-50)

Reading II: Page 51 to 106

1. What is the meaning of a “non-legal barrier to entry?” (Page 51)

2. What is “product differentiation,” and what are some examples of it? (Page 51-52)

3. What are the “revealed preferences of consumers,” and what do they have to do with antitrust? (Page 52, 54)

4. What is the difference between “pure competition” and the “actual competitive process,” according to Armentano? (Page 53)

5. What is wrong with the assumption of “perfect information?” (Page 55)

6. Was there a monopoly in ready-to-eat cereals in the 1970s? (Page 55, 57)

7. Does risk of failure by potential new competitors, economies of scale for existing competitors, or efficiency of existing competitors justify antitrust action? (Page 56)

8. Can advertising constitute an unfair barrier to entry? (Pages 57-60)

9. Is it true that “more competitors are always better than less?” (Page 60)

10. Did the Aluminum Company of America constitute an unfair or inefficient monopoly? (Pages 60-63)

11. Is the ability of an established, successful firm to raise capital, offer innovative products, or lower prices unfair or harmful to consumers? (Pages 63-67)

12. What is “price discrimination,” what are some examples from every-day life, and does it justify antitrust action? (Pages 69-73)

13. What are “tying agreements,” and do they justify antitrust action? (Pages 73-76)

14. What are “resale price-maintenance agreements,” are they fair, and do they justify antitrust action? How did the U.S. government once forcibly limit price competition? (Pages 76-77) (Note: The Supreme Court seems to have subsequently limited restrictions on pricing agreements; see http://en.wikipedia.org/wiki/ Leegin_Creative_Leather_Products,_Inc._v._PSKS,_Inc.)

15. What are “vertical mergers,” and should they ever be legally restricted? What the government justified in intervening in Brown Shoe’s acquisition of Kinney retailers? (Pages 77-79)

16. What are the different sorts of “horizontal agreements,” and how are they treated under antitrust? (Page 81)

17. Is the “rule of reason” approach in antitrust in fact reasonable? (Page 82)

18. Are government regulators able to accurately define the “relevant market” for alleged monopolistic practices? (Pages 83-85)

19. Is there any clear relationship between market concentration and “economic power to reduce market output and raise market prices?” (Pages 85-86)

20. What is the problem with attempting to tie alleged monopolistic practices to output restriction? (Pages 86-87)

21. Can government regulators accurately determine “social benefits” of mergers? How does the Staples case illustrate the problems with intervention? (Pages 87-90)

22. Can “horizontal price coordination” create market efficiencies? Should it be outlawed? (Pages 90-94)

23. How did the federal government forcibly restrict competition in the trucking industry through the Interstate Commerce Commission? (Page 93)

24. Are attempts by firms to reduce output and raise prices generally effective? What is the appropriate remedy for such attempts, according to Armentano? (Pages 94-95)

25. Did the Addyston Pipe Case of the 1890s demonstrate the need for antitrust laws? (Pages 95-97)

26. How do “antitrust laws stand in direct violation of civil liberties, individual rights, and due process of law?” (Pages 99-106)

Review Questions for Henry Hazlitt’s Economics In One Lesson

This set of review questions is part of the Liberty In the Books program, a monthly discussion group. The questions cover Henry Hazlitt’s classicEconomics In One Lesson, 1979 edition.

Reading I: Through Page 70, Chapter IX: Disbanding Troops
and Bureaucrats

** Preface **

1. What is Hazlitt’s purpose in writing this book?

2. What is Hazlitt’s view of novelty in economic theory?

3. Hazlitt addresses fallacies in their popular form, not their academic form. Can Hazlitt do this and be fair to the theories in
their more sophisticated forms? What does Hazlitt’s view say about the relationship between academics and popular culture?

4. In his preface, Hazlitt discusses his use of statistics. Likewise, in Chapter VII, he writes [page 54], “Statistics and history are
useless in economics unless accompanied by a basic deductive understanding of the facts.” What is Hazlitt’s basic view of the use and status of statistics?

** Chapter I: The Lesson **

5. Why is economics especially beset by fallacies?

6. What does Hazlitt mean by the “special pleading of selfish interests,” and what is the result of such pleading?

7. Is it true that “certain public policies would in the long run benefit everybody?”

8. What is Hazlitt’s “One Lesson?”

9. Is Hazlitt’s “One Lesson” really adequate for understanding the essence of economics?

10. What are modern examples of “brilliant economists, who deprecate saving and recommend squandering on an national scale as the way of economic salvation?”

11. Hazlitt warns against the error “of looking at the consequences only for a particular group to the neglect of other groups.” Is it possible to justly “balance” the interests of groups? Does Hazlitt’s view depend on a utilitarian framework?

12. Hazlitt also warns against “a certain callousness toward the fate of groups that were immediately hurt by policies.” What does this suggest in terms of transitioning from political controls to free markets?

13. While demagogues get by with snappy “half-truths,” good economics “often requires a long, complicated, and dull chain of reasoning.” Does this ultimately imply a pessimistic view? Is there a solution to the problem?

** Chapter II: The Broken Window **

14. What are some modern examples of the “broken window” fallacy at work?

15. What is the problem of the seen and the unseen? (See also Chapter V.)

** Chapter III: The Blessings of Destruction **

16. Is there such a thing as “accumulated” or “pent-up” demand?

17. What is the difference, in economic terms, between need and demand?

18. What is the “money illusion” or the “monetary veil,” and how does this relate to wage levels?

19. What does Hazlitt mean when he says that supply equals demand?

20. What is the “optimal rate of replacement” of capital goods mean?

** Chapter IV: Public Works Mean Taxes **

21. Where does political spending come from?

22. What public works projects does Hazlitt consider “essential?” (See also Chapter IX.) Without entering a long debate over the matter, what are the other basic schools of thought on this issue?

** Chapter V: Taxes Discourage Production **

23. What is the effect of taxes on incentives?

** Credit Diverts Production **

24. What is credit?

25. What is the result of politically favoring one party with credit?

26. Hazlitt criticizes the view that some credit risks are “too great for private industry.” Is his criticism always warranted?

27. Hazlitt uses the example of “government-guaranteed home mortgages.” How do his comments line up with recent events?

28. Hazlitt leaves open the possibility of government loans “under certain emergency circumstances.” Is he right about this, and, if so, what are those circumstances?

** Chapter VII: The Curse of Machinery **

29. What are some of the major examples Hazlitt uses of machinery displacing certain workers?

30. Is “industrial overproduction” a real problem?

31. Is there an upper limit to the number of jobs available?

32. What is the long-term impact of technological advances on employment? On standard of living?

** Chapter VIII: Spread-The-Work Schemes **

33. What are some examples of make-work schemes from Hazlitt and modern policy?

34. Is there any context in which make-work is appropriate?

** Chapter IX: Disbanding Troops and Bureaucrats **

35. What is the cost of providing employment to soldiers and bureaucrats?

Reading II: Page 71 (Chapter X: The Fetish of Full Employment) to Page 139 (Chapter XIX: Minimum Wage Laws)

** Chapter X: The Fetish of Full Employment **

1. Hazlitt writes (page 71), “The whole economic progress of mankind has consisted of getting more production with the same labor.” Name some more recent examples.

2. What is the proper relationship between employment and production (page 71)?

3. Hazlitt discusses the erroneous “assumption that there is only a fixed amount of work to be done” (page 72). What are some modern examples of this fallacy?

4. In what context is reducing employment a good thing (page 73)?

** Chapter XI: Who’s “Protected” By Tariffs? **

5. What are some modern examples of tariffs? Hint:
http://en.wikipedia.org/wiki/2002_United_States_steel_tariff
http://www.msnbc.msn.com/id/32808731/

6. What is comparative advantage?

7. What are the effects of eliminating a protective tariff (pages 76-82)?

** Chapter XII: The Drive for Exports **

8. What does Hazlitt mean when he writes, “In the long run imports and exports must equal each other” (page 85)?

9. Advanced bonus question: How would Hazlitt’s analysis apply in the context of an international gold standard rather than national fiat currencies?

10. Should politicians “stimulate” foreign exports via subsidies?

** Chapter XIII: “Parity” Prices **

11. What are “parity prices?”

12. Why is it economically nonsensical and harmful to forcibly set prices at “parity?”

** Chapter XIV: Saving the X Industry **

13. What are the ways that politicians attempt to save Industry X (pages 98-100)?

** Chapter XV: How the Price System Works **

14. What does “production for use” mean (page 103)?

15. Describe “the problem of alternative applications of labor and capital” (pages 104-105)?

16. What is supply?

17. What id demand?

18. How does the price system address the problem of alternative uses of time and labor (pages 105-107)?

19. What is the relationship between price and the cost of production (page 106)?

20. What is the consequence of forcibly reducing the scarcity of some good (pages 107-109)?

** Chapter XVI: “Stabilizing” Commodities **

21. Aside from direct price controls, how have politicians tried to “stabilize” prices (pages 111-113)?

22. Are speculators economically damaging or productive (pages 111-112)?

23. What are the effects of forcibly “stabilizing” prices on speculators? On short and long term prices? On production? (Pages
112-115.)

** Chapter XVII: Government Price-Fixing **

24. What are the economic consequences of forcing prices below market levels (pages 119-120)?

25. What are the social consequences of price controls and rationing (pages 123-124)?

26. What are the real causes of price increases? What are the appropriate responses? (Pages 124-126.)

** Chapter XVIII: What Rent Control Does **

27. What are the effects of rent control?

** Chapter XIX: Minimum Wage Laws **

Background reading: Surprise! Youth employment rate hits record low

28. What determines the maximum wage an employer will pay to an employee (page 135)?

29. What are the consequences of subsidizing unemployment (page 137)?

30. What are the real causes of rising real wages (page 139)?

Reading III: Page 140 to the end

** Chapter XX: Do Unions Really Raise Wages? **

1. What is the source of the delusion that “labor unions can substantially raise real wages over the long run for the whole working population?” (Page 140)

2. Why do employers choose to pay workers more? (Pages 140-141)

3. What legitimate function does Hazlitt see unions serving? (Pages 140-141, 149)

4. What is the mark of a legitimate versus an illegitimate strike? (Pages 142-143)

5. How does forcibly increasing union wages hurt other workers and consumers? (Page 143-146)

6. What is the impact of unemployment welfare? (Pages 145-146)

7. What are the long-range impacts on investment of forced wage hikes? (Pages 147-148)

8. Besides forcing up wages, what other harmful controls have unions advocated? (Page 150)

** Chapter XXI: “Enough to Buy Back the Product” **

9. What is the “buy back the product” doctrine? (Page 153)

10. What is wrong with that doctrine? (Pages 154-155, 158)

11. What are equilibrium wages and prices? What are the consequences of forcing wages or prices up or down? (Page 158)

** Chapter XXII: The Function of Profits **

12. A business can make profits or losses. What is the consequence of forcibly limiting profits? (Pages 160-161)

13. What are the long-term effects of high profits in a particular industry? How do profit and loss function in a free economy? (Page 161)

14. How are profits typically achieved? (Pages 162-163)

** Chapter XXIII: The Mirage of Inflation **

15. What is the difference between wealth and money? (Pages 164-165)

16. What are the various justifications people give for inflationary policy? (Page 165-166, 171)

17. What is the basic process by which the money supply is inflated? (Pages 167-169)

18. What does inflation do to the “structure of production?” (Page 170)

19. In what sense can inflation counteract problems of above-market wage rates? (Page 172)

20. Why is inflation so popular among many government officials? (Pages 172-174)

21. What is the worst-case outcome of inflation? (Page 176)

** Chapter XXIV: The Assault on Saving **

22. What is the difference between consumer goods and capital goods, and how is savings related? (Pages 177-179)

23. What is the difference between saving and withholding spending? What causes each? (Pages 180-181)

24. What harmonizes savings and investment on a free market? (Pages 184-185)

25. What is the result of keeping interest rates artificially low? (Pages 185-187)

** Chapter XXV: The Lesson Restated **

26. Who is the Forgotten Man? (Pages 194-195)

27. How is the division of labor related to “the insane doctrine of wealth through scarcity?” (Pages 195-199)

** Chapter XXVI: The Lesson After Thirty Years? **

28. Has the lesson been learned? Will it be learned? (See especially pages 204, 208-209.)

Review Questions for Thomas Sowell’s Housing Boom and Bust

Liberty In the Books reviewed Thomas Sowell’s The Housing Boom and Bust. These are the review questions (for the original edition; there has since been a revised edition).

Reading Section I: Through Chapter 3

1. What were the general real-estate trends from 2000 to 2005?

2. How does the Federal Reserve influence mortgage trends?

3. What were the land use restrictions of the 1970s, and what were their effects?

4. In Sowell’s view, what was the actual nature of the “affordable housing crisis,” and what was the political response?

5. What were the “creative” ways to finance mortgages, and how were they influenced by federal policy?

6. What is the history and impact of the Community Reinvestment Act?

7. What were the impacts on the housing market of Freddie and Fannie, HUD, and the FHA?

8. Who issued warnings about a housing bubble? Who ignored those warnings?

9. What was the political response to the housing bust? “How’s that working for you?”

Reading Section II: Chapters 4-5

1. What does Sowell mean by a “vision?” (Page 90)

2. What are the various aspects of the housing “vision” that created the housing boom and bust? (Pages 90, 95)

3. How does the “vision” of some relate to the narrow interest of others? (Page 91)

4. What was the Millennial Housing Commission and what where its findings and errors? (Page 92)

5. What was the brief history of political interference in housing in the 19th and 20th Centuries? (Pages 92-94)

6. What were the various motivations behind the crusade against alleged lending discrimination? (Pages 95-97)

7. Besides income, what are the other relevant factors related to mortgage lending? (Pages 98-100, 104)

8. How did government agencies and media outlets sensationalize lending statistics? (Pages 103)

9. In what ways did the federal government “encourage” banks to make risky loans? (Pages 105-107)

10. What impact did political interference in housing have on minorities? (Page 108)

11. In a political context, what is the meaning of terms like “community,” the market,” and “social?” (Pages 110, 113-114)

12. How are costs weighed in the market and in the political sphere? (Pages 114-116, 119-121)

13. Describe the background and implementation of Section 8 Housing. (Pages 123)

14. Compare the comments of George W. Bush and Hillary Clinton before and after the housing bust. (Pages 95, 123)

15. What problem did the FDIC seek to address, and how was that problem caused? (Pages 124-125)

16. Compare the administrations of Hoover, FDR, and Obama. (Pages 131-132, 141-145)

17. What is the effect on the economy and on politics of politically-funded jobs? (Pages 133-134)

18. What were the major interventions of the Great Depression that Sowell reviews? (Pages 135-136)

19. In Sowell’s view, why did the Great Depression come to an end? (Pages 137-139)

20. What is the significance of the comment, “You never want a serious crisis to go to waste”? (Page 143)

21. BONUS QUESTION involving optional reading: Compare and contrast the views of Sowell and Robert Higgs (http://bit.ly/oQe23 ) regarding the relationship of WWII and economic recovery.