Yet when the government comes to repay the debt it has accumulated for public works, it must necessarily tax more heavily than it spends. The Protectionist Fallacy It rests on the very different assumption that the individual employer is eager to increase his own profits to the maximum. Each private lender risks his own funds. Functional wages are those that tend to bring about the highest volume of employment and the largest payrolls. The bridge exists. Special interests, as the history of tariffs reminds us, can think of the most ingenious reasons why they should be the objects of special solicitude. The money rate can, indeed, be kept artificially low only by continuous new injections of currency or bank credit in place of real savings. The fact that there is more and cheaper coffee for everyone is lost sight of; what is seen is merely that some coffee growers cannot make a living at the lower price. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. There is a mysterious “leak” somewhere. Fundamentally what happens in an exchange economy is that the things that A produces are exchanged for the things that B produces.[2]. It would be idiotic to go on piling up mountains of surplus shoes, simply because we could do it, while hundreds of more urgent needs went unfilled. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than as producer, are considered. A young hoodlum, say, heaves a brick through the window of a baker’s shop. For the competition of workers for jobs, and of employers for workers, does not work perfectly. Less wealth is created. Real wealth, of course, consists in what is produced and consumed: the food we eat, the clothes we wear, the houses we live in. Because we have permitted the British to sell more to us, they are now able to buy more from us. The lobbies of Congress are crowded with representatives of the X industry. It is perhaps the worst possible form, which usually bears hardest on those least able to pay. Not only must we be causing unemployment with every technological improvement we make today, but primitive man must have started causing it with the first efforts he made to save himself from needless toil and sweat. And the product is then produced and sold at a permanently lower price. Is private industry partially stagnant? But let us assume that the facts in this case are precisely as the sweater manufacturer has stated them. But they are cautious. The second is a reduction in the working week from forty hours to thirty, but with a sufficient increase in hourly wage rates to maintain the same weekly pay for the individual workers already employed. The local banker or his neighbors know him and know his record. This rationing cannot stop with consumers. The Lesson . We can see the men employed on the bridge. Who gains when everyone equally subsidizes everyone else? After all, if windows were never broken, what would happen to the glass business? Now let us take another look. Yet the ardor for inflation never dies. One might pile up mountains of figures to show how wrong were the technophobes of the past. They showed that the rational saver, in making provision for his own future, was not hurting, but helping, the whole community. All credit is debt. To go no further back, let us turn to Adam Smith’s The Wealth of Nations, published in 1776. The net loss to the community is the loss of production, because people are supported for not producing. An increase in sobriety would put thousands of bartenders out of business. But wartime price-fixing, wise or not, is in almost all countries continued for at least long periods after the war is over, when the original excuse for starting it has disappeared. 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. Elementary illustrations like this are sometimes ridiculed as “Crusoe economics.” Unfortunately, they are ridiculed most by those who most need them, who fail to understand the particular principle illustrated even in this simple form, or who lose track of that principle completely when they come to examine the bewildering complications of a great modern economic society. 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. But it does not itself originate the depression. To that task we shall now proceed. The function of profits, finally, is to put constant and unremitting pressure on the head of every competitive business to introduce further economies and efficiencies, no matter to what stage these may already have been brought. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. Those who have the increased money income will be willing to pay these higher prices rather than do without the goods; for they will have more money, and a dollar will have a smaller subjective value in the eyes of each of them. There is a second group, less naive, who see that if the whole thing were as easy as that the government could solve all our problems merely by printing money. They will be less efficient. This symbolizes the net result of the effort to make extra work by arbitrary subdivision of labor. Double the quantity of money and bank credit and you exactly double the “price level”; triple it and you exactly triple the price level. And the results of that have already been discussed. For producers invest in new capital goods—that is, they buy new and better and more ingenious tools—because these tools reduce cost of production. It is an historic irony that when this phrase, the Forgotten Man, was revived in the nineteen thirties, it was applied, not to C, but to X; and C, who was then being asked to support still more X’s, was more completely forgotten than ever. If saving is a sin, dissaving must be a virtue; and in any case he is simply making up for the harm being done by the saving of his pinchpenny brother Benjamin. If wages are forced up in a particular firm, in such competition with others that it cannot raise its prices, the increase will come out of its profits. We can fix it all by government spending. Hazlitt wrote Economics in One Lesson, his seminal work, in 1946. It can best be disposed of, perhaps, by putting before ourselves a somewhat more realistic picture of what actually takes place. The scientists, the efficiency experts, the engineers, the technicians, have solved it. Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. Sometimes, in fact, apologists will freely acknowledge that the percentage of losses will be higher on these government loans than on private loans. As Adam Smith observed in 1776: “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. 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. It is railways and roads and motor cars; ships and planes and factories; schools and churches and theaters; pianos, paintings and books. The proposal for government loans to private individuals or projects, in brief, sees B and forgets A. Others may not become evident for several years. When it becomes obvious that a shortage of some commodity is developing as a result of a price fixed below the market, rich consumers are accused of taking “more than their fair share”; or, if it is a raw material that enters into manufacture, individual firms are accused of “hoarding” it. It will never compensate for its losses during the period when its income and prices had not risen at all, though it had to pay 30 per cent more for the goods and services it bought from the other producing groups in the community, A, B and C. So inflation turns out to be merely one more example of our central lesson. And Benjamin, who continues about the same ratio of spending to saving, provides more jobs than ever, because his income, through investment, has grown. An increased quantity of money comes into existence in a specific way. People live in them, and proudly show their friends through the rooms. The present valuation will often depend upon what people expect the future quantity of money to be. But where there is a relief system under which the general taxpayer is forced to provide for the unemployment caused by excessive wage rates, this restraint on excessive union demands is removed. But the belief that a genuine prosperity can be brought about by a “replacement demand” for things destroyed or not made during the war is none the less a palpable fallacy. “ECONOMICS IS HAUNTED by more fallacies than any other study known to man. The government spenders forget that they are taking the money from A in order to pay it to B. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. The X industry is sick. The private money will be invested only where repayment with interest or profit is definitely expected. Every increase in hourly wages, unless or until compensated by an equal increase in hourly productivity, is an increase in costs of production. 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. What other result could we expect from deliberately erecting artificial obstacles to trade and transportation? It also results in unbuilt private homes, in unmade washing machines and refrigerators, and in lack of innumerable other commodities and services. In most countries it will shrink in total amount. The Lesson Restated25. Everywhere government spending is presented as a panacea for all our economic ills. The power of labor unions to raise wages over the long run and for the whole working population has been enormously exaggerated. You cannot say that the purchasing power has been taken away from the taxpayers. I call him the Forgotten Man. If money that would previously have been used for savings were thrown into the purchase of consumers’ goods, it would not increase employment but merely lead to an increase in the price of consumption goods and to a decrease in the price of capital goods. But this means that signs of a depression have already appeared, and have caused the hoarding, rather than that the hoarding has started the depression. Now in an economy in equilibrium, a given industry can expand only at the expense of other industries. But this would be to overlook the indirect wage costs in the raw materials and purchased parts, in transportation charges, in new factories or new machine tools, or in the dealers’ mark-up. Economics in One Lesson is deceptively prescient and far-reaching in its efforts to dissemble economic fallacies that are so prevalent they have almost become a new orthodoxy. The only exception to this occurs when a group of workers is receiving a wage actually below its market worth. This little act of vandalism will in the first instance mean more business for some glazier. They will spend them for the particular goods and services they want. But as the government extends this price-fixing backwards, it extends at the same time the consequences that originally drove it to this course. But the taxpayers will be allowed to retain the funds that were previously taken from them in order to support the soldiers. But the solution is never to reduce supplies arbitrarily, to prevent further inventions or discoveries, or to support people for continuing to perform a service that has lost its value. These fallacies pervade not merely the arguments of the hired spokesmen of special interests, but the arguments even of some economists who pass as profound. To fix the price of bread, it may fix the wages in bakeries, the price of flour, the profits of millers, the price of wheat, and so on. The . John Bates Clark’s Essentials of Economic Theory will still be found remarkably clear and cogent. But it is improbable that this relative gain would mean an absolute gain. One is to look at the matter only from the standpoint of the farmers that borrow. To that extent they were in advance of many of their present-day critics, who are befuddled by money rather than instructed by it. All that is necessary is for the government to spend enough to make up the “deficiency.”. By 1940, 35,000 people were employed in making electric refrigerators, and 60,000 were in the radio industry. They accuse it of creating scarcity. It is true that this result can follow only in the long run and only if monetary and credit policy permit it. (The exact result would depend upon the accompanying monetary policy.) But the city worker, by precisely the same change, pays 50 cents a bushel more for wheat in an increased price of bread. Here we shall have to say simply that all government expenditures must eventually be paid out of the proceeds of taxation; that to put off the evil day merely increases the problem, and that inflation itself is merely a form, and a particularly vicious form, of taxation. In fact, if I am only one of a substantial number of people supplying that commodity or service, and if free competition exists in my line, this individual restriction will not pay me. And one of the most important things for which others have to find purchasers is their labor services. It is unfortunate for clarity of economic thinking that the price of labor’s services should have received an entirely different name from other prices. The case is different, however, when the State steps in and either buys the farmers’ crops itself or lends them the money to hold the crops off the market. It is true that under an international gold standard discrepancies in balances of imports and exports are sometimes settled by shipments of gold. 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. 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. The protective tariff injured them more than they knew. What did it? By reducing the freight that can be profitably carried, we reduce the value of the investment in transport efficiency. 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. Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. But the longer it is in effect the more its difficulties increase. It is important to keep in mind, finally, that there will not merely be a difference in the pattern of post-war as compared with pre-war demand. Those fallacies all stem from one of two central fallacies, or both: that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups. But it is just as true that everyone’s income—the grocer’s, the landlord’s, the employer’s—is his purchasing power for buying what others have to sell. It is only if they have been successful in the past that they have more money to lend in the future. It is, on the contrary, the consequence of depressions. New stocking frames as they were introduced were destroyed by the handicraft workmen (over 1,000 in a single riot), houses were burned, the inventors were threatened and obliged to fly for their lives, and order was not finally restored until the military had been called out and the leading rioters had been either transported or hanged. There is, it is true (if that for some strange reason is considered an objection), a larger and larger “cake” each year. Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. Nor can the situation be rectified by providing unemployment relief. The reason is that the transaction must then be traced mentally through a few more stages. They may replace a few of the things that wear out first, to protect the small yield on their remaining capital; but in the long run they will not even bother to replace items that fall into obsolescence or decay. 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