Book review: Economics in One Lesson

It's been a while since I last posted a book review. That isn't because I haven't been reading, but rather I have two books that I wanted to review consecutively (one today, and one tomorrow). The first book is Economics in One Lesson, by Henry Hazlitt. This book was first published in 1946, and I believe that it is still in print. I read the 'New Edition' from 1979.

The reason that this book is still in print is that it is a mainstay of laissez faire market fundamentalist economics. Before we come to that point, here's the one lesson for which the book is named:

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.

On the face of it, that doesn't seem too controversial. In fact, understanding that policies have positive effects on some groups, and negative effects on other groups, is fundamental to economics. That is the essence of trade-offs that policymakers have to evaluate in deciding on policy. The problem comes when Hazlitt applies that rule to argue that essentially any policy that deviates a market from the laissez faire outcome makes some group worse off, and therefore should not be enacted. That approach rather misses the point of recognising the trade-offs, and fails to consider the distributional consequences of policy. That is exemplified in Hazlitt's assertion in the final part of the 1979 edition, where he asserts that:

Government's main economic function is to encourage and preserve a free market.

I'm sure that assertion would come as a surprise, and be rightly ridiculed, by the majority of political scientists, as well as many economists. A more sensible consideration of the role of markets is to be found in John McMillan's 2002 book Reinventing the Bazaar (which I reviewed here). In McMillan's view, governments have important roles in market design, but that doesn't mean that in all circumstances the free market is the optimal solution. It certainly isn't the only solution, and it definitively is not the main economic function of governments.

The free market ideal has its place, but it is in most cases an unrealistic ideal. That doesn't mean, as some critics believe, that markets are the worst way to organise economic activity. Instead, it means that we should recognise market failures, and that a necessary function of government is to ameliorate the negative impacts of those failures.

However, even in terms of markets, I was given cause to question how Hazlitt believes that markets work. Consider this passage:

If because of unusual weather conditions there is a sudden increase in the crop of oranges, all the consumers will benefit. The world will be richer by that many more oranges. Oranges will be cheaper. But that very fact may make the orange growers as a group poorer than before, unless the greater supply of oranges compensates or more than compensates for the lower price.

I fail to see how "orange growers as a group" could be poorer than before if they are growing more oranges. Producer surplus (farmer profits in aggregate) must increase. Hazlitt gives the example of a farmer whose crop is no larger than before, being worse off because of the lower orange price. That is correct, but that is not the same as all growers as a group being worse off.

The book does have some good parts, and it has aged well, with many of the examples remaining relevant today. It also has some funny bits, including this passage (comparing the efficiency of private lenders with government lenders):

Thus private lenders (except the relatively small proportion that have got their funds through inheritance) are rigidly selected by a process of survival of the fittest. The government lenders, on the other hand, are either those who have passed civil service examinations, and know how to answer hypothetical questions hypothetically, or they are those who can give the most plausible reasons for making loans and the most plausible explanations of why it wasn't their fault that the loans failed.

Of course, many readers will disagree with the 'rigid selection' of private lenders, given that it was those 'rigidly selected' lenders who paved the way for the Global Financial Crisis. Also, many readers will disagree strongly with Hazlitt's strongly negative position on any form of the welfare state, and on public housing.

Overall, it was useful for me to read this book, given that it continues to hold a lot of weight among market fundamentalists. However, it didn't persuade me on any particular point, and as I'll note in my next review (as well as my review above), there are several obvious aspects on which it can be criticised.