[NOTE: I originally started writing this last December.]
Reddit this morning led me to a book by Henry Hazlitt presumptuously entitled Economics in One Lesson. And since rounding out my collection of articles on why everyone but me is wrong about everything seems like as good a way as any to sign off this disastrous year I thought I'd take a swipe at the Libertarians and critique Hazlitt.
Hazlitt's argument is seductively self-evident: any argument for government intervention in the free market is wrong because it focuses myopically on the benefciaries of that policy while ignoring the (invariably far more numerous) victims. According to Hazlitt, "Economics is haunted by more fallacies than any other study known to man" because of:
"... the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.
I decided to pick on Hazlitt because he himself suffers from the very same myopia which he credits as the source of so many economic fallacies. It is an instructive exercise to read Hazlitt even if only to see whether you can see past his critiques of what other people have overlooked and figure out what he himself has overlooked. It is easy to get caught up in the fun of demolishing other people's arguments, even if many of them are just straw men, and so miss the fact that you are being snookered. Go on, give it a go. I'll wait.
Did you figure it out?
Identifying Hazlitt's myopia is challenging because most of his arguments are actually correct. Government intervention in free markets usually does lead to all manner of negative consequences. Unfettered capitalism really does lead to increased productivity and societal wealth. Minimum wage legislation really does increase unemployment. And so on and so on. So what's the problem?
Hazlitt himself leads the reader half-way there:
Our study of our lesson would not be complete if, before we took leave of it, we neglected to observe that the fundamental fallacy with which we have been concerned arises not accidentally but systematically. It is an almost inevitable result, in fact, of the division of labor.
In a primitive community, or among pioneers, before the division of labor has arisen, a man works solely for himself or his immediate family. What he consumes is identical with what he produces. There is always a direct and immediate connection between his output and his satisfactions.
But when an elaborate and minute division of labor has set in, this direct and immediate connection ceases to exist. I do not make all the things I consume but, perhaps, only one of them. With the income I derive from making this one commodity, or rendering this one service, I buy all the rest. I wish the price of everything I buy to be low, but it is in my interest for the price of the commodity or services that I have to sell to be high. Therefore, though I wish to see abundance in everything else, it is in my interest for scarcity to exist in the very thing that it is my business to supply. The greater the scarcity, compared to everything else, in this one thing that I supply, the higher will be the reward that I can get for my efforts.
Just as there is no technical improvement that would not hurt someone, so there is no change in public taste or morals, even for the better, that would not hurt someone. An increase in sobriety would put thousands of bartenders out of business. A decline in gambling would force croupiers and racing touts to seek more productive occupations. A growth of male chastity would ruin the oldest profession in the world.
But it is not merely those who deliberately pander to men's vices who would be hurt by a sudden improvement in public morals. Among those who would be hurt most are precisely those whose business it is to improve those morals. Preachers would have less to complain about; reformers would lose their causes; the demand for their services and contributions for their support would decline.
If there were no criminals we should need fewer lawyers, judges and firemen, and no jailers, no locksmiths, and (except for such services as untangling traffic snarls) even no policemen.
Under a system of division of labor, in short, it is difficult to think of a greater fulfillment of any human need which would not, at least temporarily, hurt some of the people who have made investments or painfully acquired skill to meet that precise need.
Now it is often not the diffused gain of the increased supply or new discovery that most forcibly strikes even the disinterested observer, but the concentrated loss. The fact that there is more and cheaper coffee for everyone is lost sight of; what is seen is merely that some coffee growers cannot make a living at the lower price. The increased output of shoes at lower cost by the new machine is forgotten; what is seen is a group of men and women thrown out of work. It is altogether proper—it is, in fact, essential to a full understanding of the problem—that the plight of these groups be recognized, that they be dealt with sympathetically, and that we try to see whether some of the gains from this specialized progress cannot be used to help the victims find a productive role elsewhere.
So far so good. Here is where he goes off the rails:
But the solution is never to reduce supplies arbitrarily, to prevent further inventions or discoveries, or to support people for continuing to perform a service that has lost its value.
Really? Why not? On this point Hazlitt is silent. He simply takes it as axiomatic that the more goods and services are being produced the better off the world is. He sees only the forest and misses the trees. And, unfortunately, in this case the trees are people. To someone on the street with no money and no marketable skills it matters not a whit if economic progress has produced cheaper coffee (Hazlitt's example), he still can't afford to buy a cup. Disposing of excess buggy whip makers is a much thornier problem than disposing of excess buggy whips. But Libertarians try to pretend that these are structurally comparable issues.
Unfortunately it doesn't work that way. There are lots of things you can do with buggy whips that you can't so easily do with human beings. You can put buggy whips in warehouses or landfills, but you can't do that with buggy whip makers, at least not in a civil society.
The Liberatarian answer is that when buggy whips become obsolete the buggy whip makers should find something new to do. But this is not always so easy. A fifty year old who has spent his whole life making buggy whips might not have such an easy time learning a new trade, particularly in a world where productive occupations often require decades of training.
The fundamental problem with Liberatarian economics is that there is a positive-feedback effect that tends to put capital in the hands of those who need it the least. This gives those lucky few the leverage to effectively turn everyone else into indentured servants who have to work their entire lives to pay off their debts. Or, even worse, it lets some people slip through the cracks even if they are ready, willing and able to be productive simply because they don't have the capital to find a market for their services (a.k.a. a job).
Certainly in the aggregate the world is better off if we can simply take excess people and, like excess buggy whips, warehouse them or discard them or otherwise turn them into somebody else's problem. But is that really a better world? I think not.
Finding the right quality metric for an economy is not easy, and Ron's First Law applies: all extreme positions are wrong, which in this case means that all facile positions are wrong. The Right wants to increase the average while the Left wants to decrease the variance. Those extremes lead to lassez-faire capitalism and Marxist communism, both of which the world has rightly decided are pretty bad ideas.
The right answer is some sort of engineering compromise: free markets encourage innovation and increase productivity and standards of living, but then I also think there ought to be some government intervention to recycle some of the capital from the top back to the bottom to prevent people from falling into abject poverty and despair. Yes, it's inefficient. Efficiency needs to be tempered with (but not sacrificed to) compassion.