Friday, April 06, 2012

A Review of Economics in One Lesson by Henry Hazlitt.

I would like to start off by saying that Henry Hazlitt does a great job in breaking down economic myths like parity-pricing and within the context of economics I agree with a majority of what he says. I have a few issues however and will address them in this essay. 

In Chapter 4 pg 31, he begins by stating that "everything we get, outside the free gifts of nature, must in some way be paid for".  There is no such thing as free gifts, period. Everything has a cost, some of which cannot be valued accurately in monetary terms.  

Economies are a subsystem of the environment, without environment there is no economy.  Economies only put costs on labour, energy and material. Energy and material derive their economic costs from private property enclosures. Somebody owns the land from whence the raw materials come, hence a negotiated price come with the allowance to use the resource. Materials that do not have an owner, like water or air, tend to be used and misused ie. Pollution because their is no "cost" associated with them.  

This is a regular tragedy of the commons, which on the face of it lends a certain strength to the argument that all property should be enclosed, even water and air. By assigning an owner, thereby assigning a cost, it will make those who use the resource and pollute it think twice as it hits their bottom line.  Perhaps this would even work if you have faith that the price system could communicate the real value of air and water, but seeing the history of the cost of oil, massively undervalued, I don't. 

In Chapter 3, page 26 Hazlitt distinguishes the difference between need and demand. Need is essentially mirrors demand to the extent that it has purchasing power backing it up. Excess need (in excess of purchasing power) is irrelevant to the economy. Hazlitt has a real problem with the government intervening to prevent excess need from going unfulfilled which I would agree to in the case of subsidizing oil companies when in fact they are raking in record profits, but some sort of intervention is required for those of our citizens who have insufficient purchasing power to feed themselves. It is a basic requirement for the foundation of good communities to take care of it's most vulnerable members.

He chides us for reviling profits and to a certain extent I agree that profits are ok.  However it is the  system that makes maximum profits mandatory by law (CEO fiduciary duty to the shareholder first and foremost) and the relatively short time horizons combined with a vested interest in options to buy shares in the company that makes an honest CEO a rarity.

If given the choice between logging a tract of forest sustainably in perpetuity for a ROI of 10% per year or logging the forest to its destruction in 10 years for an ROI of 15% per year, the CEO, conscience aside, would be hard pressed to pick the former option as the BoD would be moved to remind the CEO of his mandate, profit maximization for his shareholders. And with a ten year time horizon his options will likely end up "in the money" and retire very wealthy. 

He accuses labour unions of suppressing wages and even goes so far as to say that unions and minimum wage laws have nothing to do with the advancement of salary over time.  Mr. Hazlitt needs to read more history, some of which he lived through. In Howard Zinn's "A People's History" he lays out the awful and violent battles between workers and owners. If the owners of capital had their way, workers would steadily have their pay cheques whittled away as the profits rose.  Workers had no choice but to fight back.  

Also minimum wage laws establishes a floor and a measuring stick that raises the bar for everyone.  Minimum wage laws force businesses to do what Henry Ford did willingly in the beginning of the 1900's, double his workers wages.  He, and soon other CEO's, recognized that workers that were not paid well could not absorb all the excess inventory brought about by mechanized production. Mr. Hazlitt seems to recognize that wealth is not tied to money nor just production, but the rate of production per man hour of labour.  What Henry Ford did and what business's refuse to do now is share out what I like to call the "productivity dividend".  Technological development has proceeded apace to the point at which for some industries it no longer makes sense to assign variable costs based on man hours of labor and some have switched to assigning variable costs based on machine hours instead.

This is why businesses refuse to share out the productivity dividend anymore, or do so very grudgingly, because people are becoming increasingly irrelevant in production thus unions are losing their bargaining power as they lose people.  Back in the 1800's it was not unusual for unions to go on strike and field hundreds of thousands of strikers. Today it would be a surprising event to see tens of thousands.  With the increasing popularity of temporary workers, full time or part time employment with all of the onerous costs to business (pesky things like medical coverage, vacations, dental, sick leave, etc) is becoming a thing of the past. 

Still on the subject of labour, Hazlitt doesn't acknowledge the huge power differential between labour and capital in the favor of capital that is only getting worse as technological means of replacing labour, either directly through automation, or indirectly through outsourcing, increases.  Unions are the last bastion of the worker and it is fading fast. 

Hazlitt talks disparagingly of alternative economies and production-for-use.  He seems to think that the price system is so miraculous and efficient and no group of men or governments could possibly plan it better.  But he fails to mention the fact that a high percentage of start-ups and investors fail. Eventually a small percentage will find a winning combination, but the carnage of private capital to get there is substantial. One thing that capitalism has done to compensate for this, is it is really, really good at liquidating mal-investments, when allowed to do so. 

Additionally he thinks that the price system and therefore money is the only way to communicate the publics demand to industry and the industries supply to the public. For example, you could just as easily have the public communicate their demand directly through POS systems, the problem of what to allocate to which industries will be enormously simplified when you stop, as a culture, trying to sell your neighbors useless crap or junk that is designed for the dump.

Reserve allocations for the basics, food, water, clothing, shelter, transportation, and medical care, produced on demand, any excess left over to be allocated on a first come first served basis, which is not quantitatively different from being deprived of a purchase due to lack of purchasing power. The focus should be putting as many services and goods under the auspices of the civil commons as possible. If you don't like the "first come first served" system, everything else can be dealt with via barter or monetary exchange.

Lastly Hazlitt doesn't recognize, even after his 30 year update, that it is not government calling the shots, transnational corporations that pay lip service to the idea of the free market and capitalism write legislation which gives big business all the protection from competition it needs and thus protects their profits. 

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