Book SummaryEconomics in One Lesson, by Henry Hazlitt

1-Page Summary1-Page Book Summary of Economics in One Lesson

In this classic introduction to economics, Henry Hazlitt explains and illustrates the single most important lesson in economics: Every economic policy has secondary consequences that often do the opposite of the intended effect of the policy. Policies such as tariffs and minimum wage raises are enacted based on fallacies that overlook these consequences. At the root of these fallacies is a tendency to consider only how economic policies will affect specific groups of people in the short term, while neglecting the long-term effects on other industries and consumers. Failure to consider the long-term, broad effects of policies leads the government to impose policies that sometimes exacerbate the problem they intend to solve. In this summary, we’ll explore the consequences of economic policies and government interventions—including rent control, inflation, and tariffs—that result from short-term, narrowly focused fallacies.

(Shortform note: We’ve grouped the fallacies into categories to clarify themes and make them easier to remember.)

Tax-Funded Expenses Inhibit Private Industry Growth and National Wealth

Some of the most prevalent fallacies revolve around taxes. Some tax-funded projects are essential to keep the country running. But when the government uses taxes to fund projects and pay wages that are unnecessary, the consequences outweigh the benefits.

Public Works Projects Divert Money From Private Industry

Fallacy: Public works projects and other tax-funded projects create jobs and wealth.

Reality: Public works projects and other tax-funded projects divert resources and manpower that would have otherwise supported jobs in private industries.

While some public works projects create necessary structures like roads and bridges, the government launches others primarily to create jobs—but it fails to see the invisible costs. Government spending is paid through taxes, meaning that public works projects come at the cost of the goods and services that individuals would have bought with the money they paid in taxes. This means less money for the merchants providing those goods and services to put toward wages, and lower wages offset the jobs that are created on the public works project.

Furthermore, high taxes cause businesses to slow or stop expanding, avoid starting new companies, delay upgrades to production facilities, reduce job creation, and limit wage raises. Similarly, high taxes make people reluctant to spend or invest their money, which hurts private industry growth.

Government Payroll Reduces Purchasing Power

Fallacy: Government-paid jobs have no negative impact on private industry.

Reality: When government-paid jobs are no longer needed, continuing to fund them with taxes hurts national productivity and wealth.

Taxpayers fund the salaries of members of the military and civilian government workers, and their work is critical to the country’s well-being, but when their services are no longer essential, they become a drain on national productivity and collective wealth. Every tax dollar that goes to paying government workers is a dollar that taxpayers can’t pay to an industry that produces goods, which contributes to national wealth. Lawmakers should regularly evaluate the necessity of all jobs on government payroll and eliminate those that are not needed.

Maximizing Production Levels Increases National Wealth

Many policies use various schemes to save jobs, increase employment, or increase wages. However, the ultimate goal should be to increase production levels, because more output creates larger profits for businesses, enabling them to expand production, hire more workers, and/or raise wages.

Technology Doesn’t Kill Jobs

Fallacy: Labor-saving technology reduces jobs and, thus, collective wealth.

Reality: Labor-saving technology increases productivity and collective wealth, which often leads to an increase in employment.

For centuries, people have mistakenly blamed labor-saving machinery for eliminating jobs. However, any jobs that would be lost to more efficient equipment are offset by:

• The jobs of the people who make and repair the equipment
• Savings in labor costs, which the company could use to expand and create new jobs
• Increased profits due to greater efficiency, which means that company executives and employees have more money to spend on goods and services that support those merchants
• Lower prices for products due to greater efficiency, which allows customers to either buy more of those products or support other industries by buying their products and services

Overall, labor-saving machines raise production rates, economic well-being, and standard of living—and an increase in employment generally results from those effects.

Spreading the Work Decreases Productivity and Employment

Fallacy: Spread-the-work practices lead to higher employment.

Reality: Spread-the-work practices decrease productivity and employment levels.

The fallacy that efficiency kills jobs—and that inefficiency leads to higher employment—leads to labor union practices that spread the work among as many people and over as many hours as possible. These practices include:

1. Subdivision of labor, which mandates that only members of a particular union perform tasks that are specific to that trade—even if the tasks are minor aspects of another worker’s job. For example, a plumber isn’t allowed to remove tiles herself in order to replace a pipe in the shower. Instead, she must call a tile-setter to remove and subsequently repair the tiles. Although two people get work for the day instead of one, dividing labor increases the cost of production, which takes money away from other industries (for example, the homeowner with the broken shower could have spent the tile setter’s wages on buying a...

Economics in One Lesson Summary Introduction: A Narrow, Short-Term View Leads to Bad Policies

In this classic introduction to economics, Henry Hazlitt explains and illustrates the single most important lesson in economics: Every economic policy has secondary consequences that often do the opposite of the intended effect of the policy. Policies such as tariffs and minimum wage raises are enacted based on fallacies that overlook these consequences.

There are two reasons for these fallacies. First, people commonly focus on how a policy would impact a specific group of people, while neglecting to consider the ripple effect on the rest of the nation. For example, a narrow lens shows that raising the price of bread increases profits for bakers, grain mills, and wheat farmers—but a broader view reveals that the higher prices force consumers to buy less bread. People push economic policies that would benefit them and people like them, despite the possible harm to other groups. Lobbyists and advertising campaigns promote fallacies to minimize the negative consequences and garner public support for these policies.

Second, **many people focus on the short-term effects of a policy, while neglecting the long-term consequences, which may not become apparent until months or even...

Shortform Exercise: Have You Been Affected by Economic Fallacies?

Reflect on your experience with economic policies based on fallacies.

Describe an instance when you’ve been positively or negatively affected by a policy that was intended to help a specific group. (For example, the Affordable Care Act intended to improve healthcare for low-income Americans, but it also caused many middle-class Americans to lose coverage and pay higher premiums.)

Economics in One Lesson Summary Part 1: Tax-Funded Expenses Hurt National Wealth

Some of the most prevalent fallacies revolve around taxes. Some tax-funded projects are essential to keep the country running. But when the government uses taxes to fund projects and pay wages that are unnecessary, the consequences outweigh the benefits.

Public Works Projects Hurt National Production

Fallacy: Public works projects create jobs.

Reality: Public works projects divert resources and manpower that would have otherwise supported jobs in private industries.

People tend to be shortsighted and overly optimistic about public works projects. Many people see the benefits of public works projects—including job creation and construction of useful structures, like roads and bridges—but they fail to see the invisible costs. Government spending is paid through taxes, meaning that public works projects come at the cost of the goods and services that individuals would have spent with the money they paid in taxes.

People generally make two arguments in defense of public works projects, such as building a $100 million bridge:

1. The projects create employment. Although it’s true that one group of people gets jobs working on the bridge, the full picture...

Shortform Exercise: What Are the Invisible Costs of Your Taxes?

Consider the invisible costs of your taxes.

Do you know about how much of your income goes to taxes? If so, how much?

Economics in One Lesson Summary Part 2: Maximizing Production Levels Increases National Wealth

Many policies use various schemes to save jobs, increase employment, or increase wages. However, the ultimate goal should be to increase production levels, because more output creates larger profits for businesses, enabling them to expand production, hire more workers, and/or raise wages.

Technology Doesn’t Kill Jobs

Fallacy: Labor-saving technology reduces jobs and, thus, collective wealth.

Reality: Labor-saving technology increases productivity and collective wealth, which often leads to an increase in employment.

For centuries, people have mistakenly blamed labor-saving machinery for eliminating jobs. The relationship between labor-saving equipment and employment seems like a simple equation: If a machine produces the same number of goods with half the manpower, then it eliminates half of the production jobs. However, that doesn’t tell the whole story. As in other policies we’ve discussed, the fallacy overlooks the indirect effects.

Let’s examine how machinery affects employment in the case of a coat company that buys a coat-making machine that requires just half the labor otherwise needed. On one hand, the company could choose to keep all of its employees...

Shortform Exercise: How Has Technology Impacted Your Industry?

Reflect on your experience with labor-saving technology.

Has your company introduced labor-saving technology during your tenure? If so, what was it?

Economics in One Lesson Summary Part 3: Government Efforts to Help Industries Hurt the Economy

When the government intervenes in private industry—even in an effort to help—it interferes with the natural equilibrium of supply and demand and creates unintended ripple effects.

Government Loans Support Inefficient Businesses

Fallacy: Government loans enable individuals and businesses to achieve prosperity that they otherwise couldn’t, which contributes to collective productivity and wealth.

Reality: Government loans divert resources away from the businesses and individuals who could create the most productivity and wealth, to businesses and individuals who would and should be weeded out by private industry standards.

Similar to the drawbacks of excessive taxes, government loans and credits are problematic when you consider the cost to taxpayers in order to provide those loans. Supporters of government loans argue that the government should make investments that are too risky for private industry—in other words, proponents say that the government should make investments with other people’s (taxpayers’) money that private individuals and institutions won’t risk with their own money. As we’ll see, this leads to wasted capital and lower production.

In...

Economics in One Lesson Summary Part 4: Artificially Altering Prices Has Negative Effects

Sometimes the government’s efforts to help businesses includes artificially raising or lowering the prices of goods. As with other government interventions, price setting throws off the balance of supply and demand and, thus, creates ill effects.

Parity Pricing Hurts Consumers

Fallacy: Parity pricing protects farmers’ profits, which allows them to buy industrial goods, thus contributing to full employment.

Reality: Parity pricing hurts consumers and decreases national wealth.

Through exports and domestic sales, there is a steady demand for agricultural goods—but their prices and profits are not always as stable. During the Great Depression, the price of farm goods plummeted, but the cost of industrial goods and farm equipment decreased only slightly. As a result, farmers couldn’t make enough to buy industrial products, which shrunk the supply of farm goods, and limited supplies raised the cost of groceries. Meanwhile, many consumers had been laid off from their jobs and couldn’t afford higher-priced groceries and other farm products.

Parity pricing was enacted in order to prevent this vicious cycle from repeating in the future. Parity pricing establishes a...

Economics in One Lesson Summary Part 5: Artificially Raising Wages Decreases Productivity and Hurts Workers

Adjusting wages is another form of price setting, since wages are simply the price of labor. Artificially raising wages decreases productivity as well as overall wages.

Minimum Wage Laws Hurt Workers

Fallacy: Minimum wage laws benefit workers.

Reality: Minimum wage laws increase unemployment and decrease productivity.

Just as artificially raising prices hurts productivity and employment, raising wages has the same effect. Raising the minimum wage forces companies to do one of two things:

1. Companies can raise the prices for their products, in order to pass the burden to consumers. However, higher prices can cause consumers to either buy less or find cheaper or alternative goods, which cuts into companies’ profits and lowers employment and productivity levels.
2. Companies can absorb the higher cost of labor without raising prices on their products. In this case, marginal companies will go out of business, leading to unemployment and less overall production. (Shortform note: This point appears contradictory to Hazlitt’s earlier argument that inefficient companies must be allowed to die so that their capital and manpower can go to more...

Shortform Exercise: What’s Your Take on Raising Minimum Wage?

Reflect on your experience with and opinion of minimum wage laws. (Shortform note: Some researchers’ conclusions about the effects of minimum wage contradict Hazlitt’s argument. For example, the Washington Center for Equitable Growth found that raising the minimum wage did not lead to unemployment.)

State and federal elected officials regularly propose new minimum wage laws. In the past, what has been your opinion (or vote, if applicable) on raising the minimum wage?

Economics in One Lesson Summary Part 6: Supply and Demand Keep the Economy in a Natural Equilibrium

We’ve seen over and over the ill effects of government intervention in private industry. Despite occasional short-term pains to specific groups (which government interventions often aim to prevent), the economy maintains balance and high productivity levels when it’s governed by supply and demand

The Price System Supports Efficient Industries

Fallacy: The price system—in which supply and demand dictate prices for goods—serves the desires of greedy businesses rather than the needs of the consumers and the national interest.

Reality: The price system naturally diverts capital and manpower to the industries that produce most efficiently and contribute the most to national wealth.

Many people falsely believe that the price system hurts productivity and national wealth because industries only make goods as long as they’re profitable, which:

• Limits productivity and, thus, national wealth
• Prevents consumers from having ample supplies of goods

These opponents of the price system argue that instead of producing only enough laptops to meet demand, manufacturers should produce as many laptops as their factories can put out. In their view, this approach would...

Economics in One Lesson Summary Part 7: Miscellaneous

A few fallacies don’t fit into any broad categories, but they are still critical to understand and are relevant to the modern economy.

Destruction Doesn’t Stimulate New Business

Fallacy: Destruction—for instance, storm damage or war—requires repair, which leads to a net economic gain (the broken-window fallacy).

Reality: Destruction diverts money from discretionary spending to obligatory spending to repair the damage.

One common fallacy in economics is the broken window fallacy, which says that destruction leads to recovery, that recovery creates a boost to the economy. Like the other fallacies we’ve discussed, this mistaken view results ignores the invisible costs of recovery. To illustrate this, imagine that someone throws a brick through a bakery window, and the bakery owner has to pay $250 to replace the window. As a result, the glass repair person will get $250 that he wouldn’t have otherwise had, and, if he uses it to buy a new bike, the bike shop owner will have $250 that he wouldn’t have had. On and on it goes, as the money continues to change hands.

Per the broken-window fallacy, people look at the destruction of the baker’s window and see a net...