1. Economics in One Sentence

Henry Hazlitt, in his book “Economics in One Lesson” stated that when it comes to analysis of intervention in free-markets, the whole of economics can be reduced down to a single lesson, and that that lesson can be reduced down to a single sentence:

“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.

Nine-tenths of the economic policies that are working such dreadful harm in the world today are the result of ignoring this lesson.  In particular, they stem from one or two central fallacies, or both:

• That of looking only at the immediate consequences of an act or proposal.
• That of looking at the consequences only for a particular group to the neglect of other groups.”

A typical example of an analysis ignoring this lesson is the Broken Window Fallacy. 

A young hoodlum, say, throws a brick through the window of a baker’s shop.  The baker runs out furious, but the boy is gone.  A crowd gathers and condemns the action of the boy.  Later on, the baker pays a glazier $50 to install a window.  A member of the crowd points out a bright side of this story: some business has been generated for the glazier.  Thanks to this business, the glazier’s well-being is increased, and so is that of his suppliers, and the businesses that benefit from the glazier spending his extra money.  So many people benefit from the action of breaking the glass.  Imagine if no windows were ever smashed!  The glazier would be out of work!  With this thought in mind, the act of breaking windows appears to be a benefit society.

Most people would recognize that this is a fallacious idea, because it leads to the obvious conclusion that destroying wealth is good, because jobs are created to restore it.  If this were true, shouldn’t a country that has been bombed in war be grateful for all the jobs the destruction has created?

The central fallacy here is looking only at the glazier and the group of beneficiaries from the window being smashed.  Those who lose out are ignored.  Firstly, the baker has lost out, because he planned to spend that $50 on a new suit, which now he cannot afford.  Where he did have a window and $50, now he just has a window.  Additionally, the tailor has lost some business; he has sold one less suit.  All his suppliers and all the businesses where he would have spent the $50 have lost out.  Ultimately, one less suit has been made, and one extra piece of glass (which replaces the broken one).  The structure of production has been distorted away from suit-making and into glass-making, decreasing satisfaction of consumers’ desires.  Society is worse off because one less suit has been made.

To the naive crowd member, the glass is seen, and the glazier, but the baker is not, and neither is the tailor or the suit that never came into being.  This simple example demonstrates the error of looking only at some groups of society, not all.  The error is easy to spot in this case.  But this same error is made even by professional economists in more complicated examples.

Given a basic understanding of true economics – the economics of the individual, the economics of exchange, both direct and indirect – we will now examine some of the effects of policies undertaken by governments advised by bad economists.  As Henry Hazlitt advised, we will take care to not merely consider the immediate but also the longer effects of any act or policy, and not merely consider the effect of that policy for one group of individuals, but for all groups.