This is contrary to what a lot of economic authors will inform you. Business economics is everything about sound judgment. Structures refuting, paying people who do not create, providing individuals things for cost-free, therefore much more, do not turn out positive for an individual or a nation.
Bad economic experts focus on the temporary effects of a plan for an unique team, and also miss out on the most vital long-term impacts.
Great economic experts concentrate on the long-lasting impact of their entire economic situation and all of their people. The economic good sense for a household— create more, conserve a lot more, invest much more, acquire even more possessions— applies equally as well to a country.
For in order that the new workers will individually receive three-fourths as many dollars a week as the old workers used to receive, the old workers will themselves now individually receive only three-fourths as many dollars a week as previously. It is true that the old workers will now work fewer hours; but this purchase of more leisure at a high price is presumably not a decision they have made for its own sake: it is a sacrifice made to provide others with jobs.
What would be the consequences of such a plan? The first and most obvious consequence would be to raise costs of production. If we assume that the workers, when previously employed for forty hours, were getting less than the level of production costs, prices and profits made possible, then they could have got the hourly increase without reducing the length of the working week.
They could, in other words, have worked the same number of hours and got their total weekly incomes increased by one-third, instead of merely getting, as they are under the new thirty-hour week, the same weekly income as before. The result of the higher wage rate, therefore, will be a much greater unemployment than before.
The least efficient firms will be thrown out of business, and the least efficient workers will be thrown out of jobs. Production will be reduced all around the circle.
Higher production costs and scarcer supplies will tend to raise prices, so that workers can buy less with the same dollar wages; on the other hand, the increased unemployment will shrink demand and hence tend to lower prices. What ultimately happens to the prices of goods will depend upon what monetary policies are then followed. But if a policy of monetary inflation is pursued, to enable prices to rise so that the increased hourly wages can be paid, this will merely be a disguised way of reducing real wage rates, so that these will return, in terms of the amount of goods they can purchase, to the same real rate as before.
The result would then be the same as if the working week had been reduced without an increase in hourly wage rates. And the results of that have already been discussed. The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering.
The people who support such schemes think only of the employment they would provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody. The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied.
In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations to each other. What these relations are we shall later consider. When, after every great war, it is proposed to demobilize the armed forces, there is always a great fear that there will not be enough jobs for these forces and that in consequence they will be unemployed.
It is true that, when millions of men are suddenly released, it may require time for private industry to reabsorb them—though what has been chiefly remarkable in the past has been the speed, rather than the slowness, with which this was accomplished. The fears of unemployment arise because people look at only one side of the process. They see soldiers being turned loose on the labor market. If we assume that the public budget is being balanced, the answer is simple.
The government will cease to support the soldiers. But the taxpayers will be allowed to retain the funds that were previously taken from them in order to support the soldiers. And the tax payers will then have additional funds to buy additional goods. Civilian demand, in other words, will be increased, and will give employment to the added labor force represented by the soldiers.
If the soldiers have been supported by an unbalanced budget—that is, by government borrowing and other forms of deficit financing—the case is somewhat different. But that raises a different question: we shall consider the effects of deficit financing in a later chapter. It is enough to recognize that deficit financing is irrelevant to the point that has just been made; for if we assume that there is any advantage in a budget deficit, then precisely the same budget deficit could be maintained as before by simply reducing taxes by the amount previously spent in supporting the wartime army.
But the demobilization will not leave us economically just where we were before it started. The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians. If we assume that the men who would otherwise have been retained in the armed forces are no longer needed for defense, then their retention would have been sheer waste.
They would have been unproductive. The taxpayers, in return for supporting them, would have got nothing. But now the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services.
Total national production, the wealth of everybody, is higher. The same reasoning applies to civilian government officials whenever they are retained in excessive numbers and do not perform services for the community reasonably equivalent to the remuneration they receive.
Would you injure the landlords and tradesmen who depend on that purchasing power? Once again the fallacy comes from looking at the effects of this action only on the dismissed officeholders themselves and on the particular tradesmen who depend upon them. Once again it is forgotten that, if these bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken from them for the support of the bureaucrats.
If the particular shopkeepers who formerly got the business of these bureaucrats lose trade, other shopkeepers elsewhere gain at least as much. Washington is less prosperous, and can, perhaps, support fewer stores; but other towns can support more. Once again, however, the matter does not end there. The country is not merely as well off without the superfluous officeholders as it would have been had it retained them.
It is much better off. For the officeholders must now seek private jobs or set up private businesses. And the added purchasing power of the taxpayers, as we noted in the case of the soldiers, will encourage this. But the officeholders can take private jobs only by supplying equivalent services to those who provide the jobs—or, rather, to the customers of the employers who provide the jobs.
Instead of being parasites, they become productive men and women. I must insist again that in all this I am not talking of public officeholders whose services are really needed.
Necessary policemen, firemen, street cleaners, health officers, judges, legislators and executives perform productive services as important as those of anyone in private industry. They make it possible for private industry to function in an atmosphere of law, order, freedom and peace. But their justification consists in the utility of their services. It could just as well apply to a racketeer or a thief who robs you. After he takes your money he has more purchasing power. He supports with it bars, restaurants, night clubs, tailors, perhaps automobile workers.
But for every job his spending provides, your own spending must provide one less, because you have that much less to spend. Just so the tax payers provide one less job for every job supplied by the spending of officeholders.
When your money is taken by a thief, you get nothing in return. When your money is taken through taxes to support needless bureaucrats, precisely the same situation exists. We are lucky, indeed, if the needless bureaucrats are mere easy-going loafers. They are more likely today to be energetic reformers busily discouraging and disrupting production.
When we can find no better argument for the retention of any group of officeholders than that of retaining their purchasing power, it is a sign that the time has come to get rid of them.
The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck.
It is for this reason that men used their ingenuity to develop a hundred thousand labor-saving inventions. All this is so elementary that one would blush to state it if it were not being constantly forgotten by those who coin and circulate the new slogans.
Translated into national terms, this first principle means that our real objective is to maximize production. In doing this, full employment—that is, the absence of involuntary idleness becomes a necessary by-product. But production is the end, employment merely the means.
We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production. Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment. China and India are incomparably poorer than ourselves, but the main trouble from which they suffer is primitive production methods which are both a cause and a consequence of a shortage of capital and not unemployment.
Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment. Everywhere the means is erected into the end, and the end itself is for gotten.
Wages and employment are discussed as if they had no relation to productivity and output. On the assumption that there is only a fixed amount of work to be done, the conclusion is drawn that a thirty-hour week will provide more jobs and will therefore be preferable to a forty-hour week.
A hundred make-work practices of labor unions are confusedly tolerated. When a Petrillo threatens to put a radio station out of business unless it employs twice as many musicians as it needs, he is supported by part of the public because he is after all merely trying to create jobs.
When we had our WPA, it was considered a mark of genius for the administrators to think of projects that employed the largest number of men in relation to the value of the work performed—in other words, in which labor was least efficient. The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.
A much smaller proportion of the American population needs to work than that, say, of China or of Russia. The real question is not whether there will be 50,, or 60,, jobs in America in , but how much shall we produce, and what, in consequence, will be our standard of living? The problem of distribution, on which all the stress is being put today, is after all more easily solved the more there is to distribute.
We can clarify our thinking if we put our chief emphasis where it belongs—on policies that will maximize production. A mere recital of the economic policies of governments all over the world is calculated to cause any serious student of economics to throw up his hands in despair. What possible point can there be, he is likely to ask, in discussing refinements and advances in economic theory, when popular thought and the actual policies of governments, certainly in everything connected with international relations, have not yet caught up with Adam Smith?
For present-day tariff and trade policies are not only as bad as those in the seventeenth and eighteenth centuries, but incomparably worse. The real reasons for those tariffs and other trade barriers are the same, and the pretended reasons are also the same. In the century and three-quarters since The Wealth of Nations appeared, the case for free trade has been stated thousands of times, but perhaps never with more direct simplicity and force than it was stated in that volume.
From another point of view, free trade was considered as one aspect of the specialization of labor:. It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.
The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.
What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. But what ever led people to suppose that what was prudence in the conduct of every private family could be folly in that of a great kingdom?
It was a whole network of fallacies, out of which mankind has still been unable to cut its way. And the chief of them was the central fallacy with which this book is concerned.
It was that of considering merely the immediate effects of a tariff on special groups, and neglecting to consider its long-run effects on the whole community. An American manufacturer of woolen sweaters goes to Congress or to the State Department and tells the committee or officials concerned that it would be a national disaster for them to remove or reduce the tariff on British sweaters.
He is not thinking of himself, of course, but of the thousand men and women he employs, and of the people to whom their spending in turn gives employment. Throw them out of work, and you create unemployment and a fall in purchasing power, which would spread in ever-widening circles. And if he can prove that he really would be forced out of business if the tariff were removed or reduced, his argument against that action is regarded by Congress as conclusive.
But the fallacy comes from looking merely at this manufacturer and his employees, or merely at the American sweater industry. It comes from noticing only the results that are immediately seen, and neglecting the results that are not seen because they are prevented from coming into existence. The lobbyists for tariff protection are continually putting forward arguments that are not factually correct.
But let us assume that the facts in this case are precisely as the sweater manufacturer has stated them. We have deliberately chosen the most unfavorable example of any for the removal of a tariff.
We have not taken an argument for the imposition of a new tariff in order to bring a new industry into existence, but an argument for the retention of a tariff that has already brought an industry into existence, and cannot be repealed without hurting somebody.
The tariff is repealed; the manufacturer goes out of business; a thousand workers are laid off; the particular tradesmen whom they patronized are hurt. This is the immediate result that is seen. But there are also results which, while much more difficult to trace, are no less immediate and no less real. Consumers can now buy the same quality of sweater for less money, or a much better one for the same money. But the results do not end there. By buying English sweaters they furnish the English with dollars to buy American goods here.
This, in fact if I may here disregard such complications as multilateral exchange, loans, credits, gold movements, etc. Because we have permitted the British to sell more to us, they are now able to buy more from us. They are, in fact, eventually forced to buy more from us if their dollar balances are not to remain perpetually unused.
So, as a result of letting in more British goods, we must export more American goods. And though fewer people are now employed in the American sweater industry, more people are employed—and much more efficiently employed—in, say, the American automobile or washing-machine business.
American employment on net balance has not gone down, but American and British production on net balance has gone up. Labor in each country is more fully employed in doing just those things that it does best, instead of being forced to do things that it does inefficiently or badly. Consumers in both countries are better off. They are able to buy what they want where they can get it cheapest. American consumers are better provided with sweaters, and British consumers are better provided with motor cars and washing machines.
Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. There would be nothing logically wrong with this argument so far as it went.
The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business. But American consumers would be forced to subsidize this industry. Americans would be employed in a sweater industry who had not previously been employed in a sweater industry.
That much is true. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 20, persons might be employed in a sweater industry, 20, fewer persons would be employed elsewhere. But the new industry would be visible.
The number of its employees, the capital invested in it, the market value of its product in terms of dollars, could be easily counted. The neighbors could see the sweater workers going to and from the factory every day. The results would be palpable and direct.
But the shrinkage of a hundred other industries, the loss of 20, other jobs somewhere else, would not be so easily noticed. It would be impossible for even the cleverest statistician to know precisely what the incidence of the loss of other jobs had been—precisely how many men and women had been laid off from each particular industry, precisely how much business each particular industry had lost—because consumers had to pay more for their sweaters.
For a loss spread among all the other productive activities of the country would be comparatively minute for each. The overwhelming majority of the people, therefore, would probably suffer from the optical illusion that the new industry had cost us nothing. It is important to notice that the new tariff on sweaters would not raise American wages. To be sure, it would enable Americans to work in the sweater industry at approximately the average level of American wages for workers of their skill , instead of having to compete in that industry at the British level of wages.
But there would be no increase of American wages in general as a result of the duty; for, as we have seen, there would be no net increase in the number of jobs provided, no net increase in the demand for goods, and no increase in labor productivity. Labor productivity would, in fact, be reduced as a result of the tariff.
And this brings us to the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results, in fact, in a net loss to the country. For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages. Let us observe more clearly how it does this. We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles.
There is here no net gain to industry as a whole. But as a result of the artificial barrier erected against foreign goods, American labor, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall, the average productivity of American labor and capital is reduced.
Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. The general purchasing power of his income has therefore been reduced. Whether the net effect of the tariff is to lower money wages or to raise money prices will depend upon the monetary policies that are followed.
But what is clear is that the tariff—though it may increase wages above what they would have been in the protected industries—must on net balance, when all occupations are considered, reduce real wages. Only minds corrupted by generations of misleading propaganda can regard this conclusion as paradoxical. What other result could we expect from a policy of deliberately using our resources of capital and manpower in less efficient ways than we know how to use them?
What other result could we expect from deliberately erecting artificial obstacles to trade and transportation? For the erection of tariff walls has the same effect as the erection of real walls.
It is significant that the protectionists habitually use the language of warfare. And the means they suggest in the fiscal field are like those of the battlefield. The tariff barriers that are put up to repel this invasion are like the tank traps, trenches and barbed-wire entanglements created to repel or slow down attempted invasion by a foreign army. And just as the foreign army is compelled to employ more expensive means to surmount those obstacles—bigger tanks, mine detectors, engineer corps to cut wires, ford streams and build bridges—so more expensive and efficient transportation means must be developed to surmount tariff obstacles.
On the one hand, we try to reduce the cost of transportation between England and America, or Canada and the United States, by developing faster and more efficient ships, better roads and bridges, better locomotives and motor trucks. On the other hand, we offset this investment in efficient transportation by a tariff that makes it commercially even more difficult to transport goods than it was before.
We make it a dollar cheaper to ship the sweaters, and then increase the tariff by two dollars to prevent the sweaters from being shipped. By reducing the freight that can be profitably carried, we reduce the value of the investment in transport efficiency.
The tariff has been described as a means of benefiting the producer at the expense of the consumer. In a sense this is correct. Those who favor it think only of the interests of the producers immediately benefited by the particular duties involved. They forget the interests of the consumers who are immediately injured by being forced to pay these duties. But it is wrong to think of the tariff issue as if it represented a conflict between the interests of producers as a unit against those of consumers as a unit.
It is true that the tariff hurts all consumers as such. It is not true that it benefits all producers as such. On the contrary, as we have just seen, it helps the protected producers at the expense of all other American producers, and particularly of those who have a comparatively large potential export market.
We can perhaps make this last point clearer by an exaggerated example. Suppose we make our tariff wall so high that it becomes absolutely prohibitive, and no imports come in from the outside world at all. The figures are chosen merely to illustrate a principle: there will, of course, be no such symmetrical distribution of the loss; moreover, the sweater industry itself will doubtless be hurt because of protection of still other industries. But these complications may be put aside for the moment.
Now because foreign industries will find their market in America totally cut off, they will get no dollar exchange, and therefore they will be unable to buy any American goods at all. As a result of this, American industries will suffer in direct proportion to the percentage of their sales previously made abroad. Those that will be most injured, in the first instance, will be such industries as raw cotton producers, copper producers, makers of sewing machines, agricultural machinery, typewriters and so on.
A higher tariff wall, which, however, is not prohibitive, will produce the same kind of results as this, but merely to a smaller degree. The effect of a tariff, therefore, is to change the structure of American production. It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another. It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller.
Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely. In the long run, notwithstanding the mountains of argument pro and con, a tariff is irrelevant to the question of employment. True, sudden changes in the tariff, either upward or downward, can create temporary unemployment, as they force corresponding changes in the structure of production.
Such sudden changes can even cause a depression. But a tariff is not irrelevant to the question of wages. In the long run it always reduces real wages, because it reduces efficiency, production and wealth.
Thus all the chief tariff fallacies stem from the central fallacy with which this book is concerned. They are the result of looking only at the immediate effects of a single tariff rate on one group of producers, and forgetting the long-run effects both on consumers as a whole and on all other producers.
On the subject of the tariff we must keep in mind one final precaution. It is the same precaution that we found necessary in examining the effects of machinery.
It is useless to deny that a tariff does benefit—or at least can benefit—special interests. A fundamental influence on modern libertarianism, Hazlitt defends capitalism and the free market from economic myths that persist to this day. One of the Best Works of Thomas Sowell. Please note that the characters, names or techniques listed in Basic Economics is a work of fiction and is meant for entertainment purposes only, except for biography and other cases.
DMCA and Copyright : Dear all, most of the website is community built, users are uploading hundred of books everyday, which makes really hard for us to identify copyrighted material, please contact us if you want any material removed. Yet the vast new wealth isn't due to an increase in talent or effort at the top, but rather to changing social attitudes legitimizing greed and government policy changes that favour the new elite.
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