How to Think About Economics
MARCH 01, 1981 by GEORGE REISMAN
George Relsman is Associate Professor of Economics at Pepperdine University In Los Angeles. He is the author of a recently published book, The Government Against the Economy (Caroline House, Ottawa, Illinois, 1979).
This article is reprinted by permission from the September 1, 1980 Issue of The Intellectual Activist.
There is no subject that more urgently needs to be understood in the world today than economics. Our well-being, indeed, our very lives, depend on the production of wealth. The production of wealth, in turn, vitally depends on the existence of the division of labor—the specialization of tasks.
As an important illustration of this dependence, consider the fact that to the extent there is a division of labor, there is a multiplication of the knowledge that is used in production. In a division-of-labor economy, such as that of the United States, as many specialized bodies of knowledge enter into production as there are specializations in employment. On the other hand, in an economy with relatively little division of labor, such as that of India, in which the great majority of people live as self-sufficient farmers, practically all producers possess the same body of knowledge; and thus the knowledge that enters into production is limited essentially to what one mind alone can hold.
The great majority of people, including the great majority of presumably educated people, are not explicitly aware even of the importance of the division of labor. Still less are they aware of the fact that the division of labor has definite requirements for its successful functioning, indeed, for its very existence. The division of labor can intensify and flourish, or it can be largely or even entirely destroyed. Examples are provided by the rise and fall of civilizations—such as the Middle Ages, with its minimal division of labor, and the last two centuries or more, with their great intensification of the division of labor.
What happens to the division of labor is the result of human choices, specifically, choices of a political nature. Acting in their political capacity, men have the power to adopt laws and social institutions that make possible the growth and successful functioning of the division of labor, or to adopt laws and social institutions that are incompatible with the division of labor. The laws and social institutions of the United States for most of its history provide an example of the first kind; those of the late Roman Empire and the Middle Ages, an example of the second kind.
Understanding the Process
In order for men to make intelligent choices respecting the division of labor, they must have knowledge concerning it. They must know in principle what the division of labor accomplishes, what it requires, and what promotes or impairs it. This knowledge is provided by economics. Economics is the science that studies the production of wealth under a system of division of labor.
Economics is itself a specialization. It is that specialization within the division of labor that studies the division-of-labor system. But along with such subjects as mathematics, natural science, philosophy, history, and the classics, economics is something that deserves a prominent place in the education of every intelligent person. It must be understood not only as an important part of the individual’s comprehension of the universe around him, but in order to make possible the continued existence of material civilization. For in the long run, it is the ideas of the educated public that determine the laws and social institutions a country adopts. Only if the educated public has a serious grasp of economic principles can a country hope to have or maintain laws and institutions conducive to the division-of labor.
In the absence of such knowledge of economics, a modern nation like the United States is in the position of an ignorant crowd wandering among banks of computers or other complex machinery and randomly pushing buttons here and pulling levers there. For its people live in the midst of the division of labor, their lives depend on it, yet they do not understand it and are taking actions with respect to it whose effects they do not comprehend. In just this way, our contemporaries feel free to advocate such things as fiat money, price controls, confiscatory taxation, and even the abolition of private ownership of the means of production altogether—all with no comprehension whatever of the effects on the-division-of-labor system.
In the absence of a widespread knowledge of economics among the educated public, it is only a question of time before a nation destroys itself. And that is precisely what the United States is doing today and has been doing for some time.
Over the last two centuries, a number of brilliant books have appeared that provide a more or less systematic exposition of economics, starting with Adam Smith’s The Wealth of Nations and continuing up to Ludwig von Mises’ Human Action, the last edition of which appeared in 1966. Unfortunately, for various reasons, none of these books is suitable for a beginner.
To make matters worse, there are simply no decent textbooks of economics. What passes for economic texts at the colleges and universities are books written in total ignorance of the contributions of the great economists. Today’s textbooks are an exposition of the ideas of a relative handful of authors: principally, Marshall, Keynes, and Joan Robinson, often supplemented with a dose of Marx and Veblen. The ideas of the real economists—Smith, Ricardo, Say, the two Mills, McCulloch, Bastiat, Senior, Menger, Jevons, Bohm-Bawerk, and Mises, to name some of the most important—are simply ignored.
And when they are mentioned at all, it is only long enough to dismiss them with ridicule. For example, Adam Smith’s demonstration of the existence of a harmony of self-interests in a free society is dismissed as resting on a postulate of divine intervention. Say’s Law of Markets, which demonstrates the impossibility of a general overproduction is dismissed as claiming that if refrig erators are brought to Eskimos, they will be demanded, because “supply creates its own demand.” All that the great economists have proved with respect to the role of saving, the operations of the price system, the causes of economic progress and decline, of inflation, unemployment, and depressions—all this is simply ignored and evaded in the textbooks. And in its place is presented a loose collection of meandering assertions and illogical connections heavily interspersed with diagrams, equations, and statistics—all tending to the conclusion that economics and the manifestos of the left-wing of the Democratic Party are one and the same.
A Brilliant Analysis
It is in the light of this background that Henry Hazlitt’s Economics in One Lesson, recently published in its third edition, must be appreciated.
Henry Hazlitt is himself a great economist and ranks among those whose names I have mentioned. He possesses a profound and thorough knowledge of the classics of the subject and of all of its principles and finer points. He possesses a brilliantly logical mind and an unsurpassed ability to present the most complex material clearly and simply, so that almost anybody can understand it. All of these qualities shine forth on practically every page of the third edition of Economics in One Lesson. (The third edition does not differ in any fundamental way from the previous editions. The chapter on rent control, added in the second edition, has been extended, and a valuable new chapter has been added reviewing the course of events since the publication of the first edition over thirty years ago.)
Economics in One Lesson introduces the reader to economics by a highly stimulating and exciting method. From the very first page, it offers a profound challenge to the ideas that most people hold about economic activity and to their method of thinking about it. For example, most people think of war and destruction as causes of economic prosperity by allegedly creating additional demand and employment. Hazlitt shows clearly and convincingly why this is not so. And in so doing, he immediately begins to captivate the reader by overcoming what must otherwise be horrifying philosophical contradictions, such as the desire for both peace and prosperity.
Tracing the Consequences
Hazlitt states that the essential lesson of economics, the key to correct thinking about the subject, is that “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.” In teaching this lesson, Hazlitt widens the intellectual horizons of his readers and teaches them to think of the effects of things on the division-of-labor system, something they would otherwise be unaware of.
In content, Economics in One Lesson covers the highly important subjects of unemployment, government spending, taxes, credit, machinery, tariffs, subsidies, the price system, price and rent controls, minimum wage laws, labor unions, inflation, and the function of saving. Its method is always the development of economic principles in relation to major economic problems. There is hardly a page of the book that does not make several important points. A fundamental theme of the book is that the freedom of the individual peacefully to pursue his own interests serves both his interests and the longrun interests of all other members of the economic system. This is always the specific conclusion that we see illustrated when we think as economists.
In my teaching career, I have often used Economics in One Lesson as an introductory textbook. Several times, I have used it as practically the only textbook. And despite its brevity, I have had no difficulty in discussing its content for an entire semester. The book is so rich that even after having read portions of it many times, I continue to find points in it that I had previously overlooked. Moreover, students actually read the book, understand it, and change their ideas because of it.
Despite its overwhelming virtues, there are a few things that I must criticize concerning the book. Two points of a theoretical nature are its failure to incorporate the insight of the classical economists that the demand for labor comes out of savings, not consumption, and its failure to recognize with Bohm-Bawerk and Wieser that there are important cases in which cost of production is the direct determinant of prices, though never their ultimate determinant. In addition, there are occasional minor and uncalled for concessions made to the opponents of sound economics and capitalism, which have the effect of sometimes undercutting the force of the brilliant arguments advanced, such as the statement on page 141 concerning a need for labor unions to prevent workers from being underpaid in certain cases.
These criticisms notwithstanding, Economics in One Lesson is a superlative book. It is the finest introduction to economics in existence and page for page there simply is no finer book on economics, period. As I have written elsewhere, Economics in One Lesson has been an inspiration and a standard for my own writings. It has been instrumental in teaching me not just a valuable intellectual content, but, no less important, the correct method for thinking about all economic problems. For the sake of the survival of material civilization, one can only hope that the current, third edition of Economics in One Lesson will be read by and will influence the thinking of millions in the years to come.