Based on the Henry Hazlitt book, this presentation is an introduction to applied economics. Hazlitt's lesson, to consider what is unseen as well as what is seen, is applied to various situations: broken windows, wars and governments. The market process for allocating resources is introduced, and the effects of price controls, such as the minimum wage law, on resource allocation is examined. Finally, the One Lesson and the theory of price controls is applied to the phenomenon of the boom-bust cycle, which is explained as a necessary consequence of government manipulation of interest rates.

1. Economics in One Lesson by Graham Wright (http://managainstthestate.blogspot.com/) based on the book by Henry Hazlitt

2. Agenda The One Lesson The Lesson Applied The Broken Window Fallacy “War is good for the economy” “Government can create jobs” “Government can create wealth” Activity: How the market allocates resources “The minimum wage law benefits poor people” “The boom-bust cycle is a market phenomenon” “Government can help an economy recover from a recession”

3. Frederic Bastiat “What is Seen and What is Not Seen” (1850) Henry Hazlitt “Economics in One Lesson” (1946)

4. The One Lesson Economics is a subject haunted by fallacies. Henry Hazlitt estimated that 90% of the fallacies can be avoided by remembering his One Lesson… “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.”

5. BROKEN WINDOWS The Broken Window Fallacy

6. Claim “Broken windows are good for the economy” BROKEN WINDOWS The Broken Window Fallacy

8. The benefits to the glazier and those people the glazier buys from are seen.

9. Another group is unseen.

10. Suppose the baker was planning to buy a new suit. Now he has to pay for a window, he cannot buy a new suit. Instead of a window and a new suit, the baker now has just a window.

11. The tailor loses work, and so do all the people that the tailor would have bought from.

12. The benefits to the tailor are simply redistributed to the glazier.

13. Overall, the community is worse off by precisely one suit, because that suit will now never come into being.BROKEN WINDOWS

14. BROKEN WINDOWS The Broken Window Fallacy

15. BROKEN WINDOWS The Broken Window Fallacy Claim “Broken windows are good for the economy” Broken windows are bad for the economy

16. BROKEN WINDOWS War Claim “War is good for the economy” “World War Two ended the Depression!” “The military makes jobs for industry!” “If we bring the troops home or cut military jobs, we will have mass unemployment!”

17. BROKEN WINDOWS War War is a lot of broken windows. The fallacy of this claim is to see the jobs created by wars. But the jobs that would have been created are unseen, precisely because they never came into existence. What matters is what is being produced. In war-torn countries, there is often low unemployment. But many people are employed in jobs to repair the damagecaused by the war. They are jobs replacing lost wealth, not jobs creating new wealth. In war-like nations, many jobs exist purely to serve the war machine. Unseen are the jobs that would have existed but for the war. And more importantly, the wealth that would have been created by those jobs.

18. BROKEN WINDOWS War Claim “War is good for the economy” War is bad for the economy

19. BROKEN WINDOWS Government Jobs Claim “Government can create jobs”

21. BROKEN WINDOWS Government Jobs Government can only redistribute jobs

22. BROKEN WINDOWS Taxation and Spending Claim “Government can create wealth”

23. BROKEN WINDOWS Taxation and Spending All government spending requires taxation, whether the tax is taken immediately, deferred to future generations, or takes the form of monetary inflation. All taxes are ultimately paid by consumers (under the threat of violence). Taxes discourage production, by making marginal businesses unviable, and disincentivising saving and entrepreneurship; destroying wealth. Taxes divert production from satisfying the needs of the consumer to satisfying the needs of government; redistributing wealth. For all government taxation/spending… …the results of the spending are seen… …but the wealth that would have been produced had the taxpayers been able to spend their money freely (voluntarily), is unseen. THE COSTS OF TAXATION MUST ALWAYS OUTWEIGH THE BENEFITS OF GOVERNMENT SPENDING; THAT WHICH IS UNSEEN MUST BE VALUED MORE THAN THAT WHICH IS SEEN; THE SUIT MUST BE VALUED MORE THAN THE WINDOW.

24. BROKEN WINDOWS Taxation and Spending Government can only redistribute and destroy wealth

25. Agenda The One Lesson The Lesson Applied Broken windows are bad for the economy War is bad for the economy Government can only redistribute and destroy jobs and wealth Activity: How the market allocates resources “The minimum wage law benefits poor people” “The boom-bust cycle is a market phenomenon” “Government can help an economy recover from a recession”

26. Activity: How the market allocates resources PRICES AND PRODUCTION

28. More demand => higher prices.

29. Less demand => lower prices.

30. More supply => lower prices.

31. Less supply => higher prices.

32. If prices are set too high or too low, supply and demand are decoupled and there will be either a shortage (price set too low) or a surplus (price set too high).

33. On a free market, prices tend towards the price at which the market “clears”: supply meets demand. This market process is driven by entrepreneurs and investors seeking profits.

34. The market process is the structure of production changing to a more optimal allocation of resources for satisfying ever-changing consumer desires.

36. When hampered by maximum price controls, the structure of production fails to increase supply; a perpetual shortage. PRICES AND PRODUCTION More production needed Demand > Supply No Change to Structure of Production! Prices Capped No change in Profits No profit signal or incentive for existing firms to increase production or for new firms to enter the market. In response to consumer lobbying, government sets a maximum price control. Any sale at a higher price is forbidden. The structure of production does not change; a perpetual shortage

37. Maximum Price Controls PRICES AND PRODUCTION Maximum price controls create shortages

38. The market process is entrepreneurs and investors responding to profit and loss signals. PRICES AND PRODUCTION Less production needed; resources are needed elsewhere Supply > Demand Prices Decrease Profits Decrease Production Decreases Existing firms decrease production of that product, and some firms go bankrupt. Competition impels entrepreneurs to decrease prices to try to maximise profits The structure of production is rearranged to decrease production

39. When hampered by minimum price controls, the structure of production fails to decrease supply; a perpetual surplus. PRICES AND PRODUCTION Less production needed; resources are needed elsewhere Supply > Demand No Change to Structure of Production! Prices Collared No change in Profits No profit signal or incentive for existing firms to decrease production; no bankruptcies. In response to producer lobbying, government sets a minimum price control. Any sale at a lower price is forbidden. The structure of production does not change; a perpetual surplus

40. Minimum Price Controls PRICES AND PRODUCTION Minimum price controls create surpluses

41. The Minimum Wage Law PRICES AND PRODUCTION Claim “The minimum wage law helps poor people”

43. It is clear that he will choose the former in almost all cases, since most of his staff are just not that profitable: he would make a loss if he had to pay them that much.

44. No one except the most highly skilled would have a job! Productivity would decrease and prices would increase. Willing workers are denied jobs; willing firms are denied labour. Consumers have to pay higher prices. The structure of production is inefficient. Those working minimum wage jobs are seen; those who are unemployed because of the law are unseen. The short-term effects are seen; the long-term effects are unseen.

45. PRICES AND PRODUCTION The Minimum Wage Law The minimum wage law particularly harms the poor

46. Agenda The One Lesson The Lesson Applied Broken windows are bad for the economy War is bad for the economy Government can only redistribute and destroy jobs Activity: How the market allocates resources The minimum wage law creates perpetual unemployment, particularly harming low skilled labourers “The boom-bust cycle is a market phenomenon” “Government can help an economy recover from a recession”

47. BOOM-BUST CYCLE The Boom-Bust Cycle Claim “The boom-bust cycle is a free market phenomenon”

48. The interest rate is a reflection of time-preferences BOOM-BUST CYCLE High time-preferences High interest rates High spending, low saving Low time-preferences Low interest rates Low spending, high saving The interest rate is the price of borrowing money. Like all prices, in a free market, the interest rate is determined by supply and demand. The supply of money to be loaned (savings) and the demand for loans. The free market interest rate is therefore a reflection of the time-preferences of the individuals in society; that is, how highly people value current consumption over saving that will allow them future consumption. The market coordinates time with interest. When a central bank inflates the money supply the interest rate price signal is distorted. This causes the time-structure of production to become distorted.

50. It appears as though people are saving for the future, when in fact they want to consume now.

51. Entrepreneurs are misled into starting more and different, especially long-term production projects, believing they will be profitable.

52. There is an “artificial” boom, especially in capital goods industries: housing, construction, mining, manufacturing, etc. This boom is a result of malinvestments of resources in unsustainable projects.

53. While the boom continues, the malinvestments are unseen; they appear to be profitable businesses. The bigger and longer the boom, the more malinvestments take place.

55. The Recession BOOM-BUST CYCLE Claim “Government actions can help the economy recover”

56. BOOM-BUST CYCLE The recession is the recovery period; the “hangover” following the binge of the artificial boom The bust is followed by an inevitable recession. The recession is the market process adjusting the structure of production back to satisfying consumers’ real time-preferences. Bankruptcies, defaults and unemployment increase as the malinvestments are liquidated. This frees up the land, labor and capital to be put to use satisfying real consumer demand. Further money creation – attempting to keep interest rates low – may delay the bust, but it will only create even more malinvestments, which will cause a bigger bust in the future. Hyperinflation is when the money supply is increased so much (in an attempt to delay a bust) that the value of the money rapidly decreases, until it is almost worthless. The market process of the recession-recovery can only be slowed down by government interference, since the market process requires free market prices.

58. This created a large artificial boom, resulting in an inevitable bust in 1920.

60. This created a large artificial boom, resulting in an inevitable bust in 1929.

62. Agenda The One Lesson The Lesson Applied Broken windows are bad for the economy War is bad for the economy Government can only redistribute jobs Government can only redistribute and destroy wealth Activity: How the market allocates resources The minimum wage law creates perpetual unemployment, particularly harming low skilled labourers The boom-bust cycle is a result of government manipulation of interest rates Government actions during a recession can only impede recovery

63. Resources “Economics in One Lesson” by Henry Hazlitt http://jim.com/econ/ The Ludwig von Mises Institute, the intellectual home of the Austrian School mises.org