Economics in One Lesson

by Henry Hazlitt

  Most politicians continue to ignore the necessity of profits, to overestimate their average or total net amount, to denounce unusual profits anywhere, to tax them excessively, and sometimes even to deplore the very existence of profits.

  The anticapitalistic mentality seems more deeply embedded than ever. Whenever there is any slowdown in business, the politicians now see the main cause as “insufficient consumer spending.” At the same time that they encourage more consumer spending they pile up further disincentives and penalties in the way of saving and investment. Their chief method of doing this today, as we have already seen, is to embark on or accelerate inflation. The result is that today, for the first time in history, no nation is on a metallic standard, and practically every nation is swindling its own people by printing a chronically depreciating paper currency.

  To pile one more item on this heap, let us examine the recent tendency, not only in the United States but abroad, for almost every “social” program, once launched upon, to get completely out of hand. We have already glanced at the overall picture, but let us now look more closely at one outstanding example—Social Security in the United States.

  The original federal Social Security Act was passed in 1935. The theory behind it was that the greater part of the relief problem was that people did not save in their working years, and so, when they were too old to work, they found themselves without resources. This problem could be solved, it was thought, if they were compelled to insure themselves, with employers also compelled to contribute half the necessary premiums, so that they would have a pension sufficient to retire on at age sixty-five or over. Social Security was to be entirely a self-financed insurance plan based on strict actuarial principles. A reserve fund was to be set up sufficient to meet future claims and payments as they fell due.

  It never worked out that way. The reserve fund existed mainly on paper. The government spent the Social Security tax receipts, as they came in, either to meet its ordinary expenses or to pay out benefits. Since 1975, current benefit payments have exceeded the system’s tax receipts.

  It also turned out that in practically every session Congress found ways to increase the benefits paid, broaden the coverage, and add new forms of “social insurance.” As one commentator pointed out in 1965, a few weeks after Medicare insurance was added: “Social Security sweeteners have been enacted in each of the past seven general election years.”

  As inflation developed and progressed, Social Security benefits were increased not only in proportion, but much more. The typical political ploy was to load up benefits in the present and push costs into the future. Yet that future always arrived; and each few years later Congress would again have to increase payroll taxes levied on both workers and employers.

  Not only were the tax rates continuously increased, but there was a constant rise in the amount of salary taxed. In the original 1935 bill the salary taxed was only the first $3,000. The early tax rates were very low. But between 1965 and 1977, for example, the Social Security tax shot up from 4.4 percent on the first $6,600 of earned income (levied on employer and employee alike) to a combined 11.7 percent on the first $16,500. (Between 1960 and 1977, the total annual tax increased by 572 percent, or about 12 percent a year compounded. It is scheduled to go much higher.)

  At the beginning of 1977, unfunded liabilities of the Social Security system were officially estimated at $4.1 trillion.

  No one can say today whether Social Security is really an insurance program or just a complicated and lopsided relief system. The bulk of the present benefit recipients are being assured that they “earned” and “paid for” their benefits. Yet no private insurance company could have afforded to pay existing benefit scales out of the “premiums” actually received. As of early 1978, when low-paid workers retire, their monthly benefits generally represent about 60 percent of what they earned on the job. Middle-income workers receive about 45 percent. For those with exceptionally high salaries, the ratio can fall to 5 or 10 percent. If Social Security is thought of as a relief system, however, it is a very strange one, for those who have already been getting the highest salaries receive the highest dollar benefits.

  Yet Social Security today is still sacrosanct. It is considered political suicide for any congressman to suggest cutting down or cutting back not only present but promised future benefits. The American Social Security system must stand today as a frightening symbol of the almost inevitable tendency of any national relief, redistribution, or “insurance” scheme, once established, to run completely out of control.

  In brief, the main problem we face today is not economic, but political. Sound economists are in substantial agreement concerning what ought to be done. Practically all government attempts to redistribute wealth and income tend to smother productive incentives and lead toward general impoverishment. It is the proper sphere of government to create and enforce a framework of law that prohibits force and fraud. But it must refrain from specific economic interventions. Government’s main economic function is to encourage and preserve a free market. When Alexander the Great visited the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: “Yes, stand a little less between me and the sun.” It is what every citizen is entitled to ask of his government.

  The outlook is dark, but it is not entirely without hope. Here and there one can detect a break in the clouds. More and more people are becoming aware that government has nothing to give them without first taking it away from somebody else—or from themselves. Increased handouts to selected groups mean merely increased taxes, or increased deficits and increased inflation. And inflation, in the end, misdirects and disorganizes production. Even a few politicians are beginning to recognize this, and some of them even to state it clearly.

  In addition, there are marked signs of a shift in the intellectual winds of doctrine. Keynesians and New Dealers seem to be in a slow retreat. Conservatives, libertarians, and other defenders of free enterprise are becoming more outspoken and more articulate. And there are many more of them. Among the young, there is a rapid growth of a disciplined school of “Austrian” economists.

  There is a real promise that public policy may be reversed before the damage from existing measures and trends has become irreparable.

  1Charles D. Hobbs, The Welfare Industry Washington, D.C.: Heritage Foundation, 1978).

  A NOTE ON BOOKS

  THOSE WHO DESIRE to read further in economics should turn next to some work of intermediate length and difficulty. I know of no single volume in print today that completely meets this need, but there are several that together supply it. There is an excellent short book (126 pages) by Faustino Ballvè, Essentials of Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education), which briefly summarizes principles and policies. A book that does that at somewhat greater length (327 pages) is Understanding the Dollar Crisis by Percy L. Greaves (Belmont, Mass.: Western Islands, 1973). Bettina Bien Greaves has assembled two volumes of readings on Free Market Economics (Foundation for Economic Education).

  The reader who aims at a thorough understanding, and feels prepared for it, should next read Human Action by Ludwig von Mises (Chicago: Contemporary Books, 1949, 1966, 907 pages). This book extended the logical unity and precision of economics beyond that of any previous work. A two-volume work written thirteen years after Human Action by a student of Mises is Murray N. Rothbard’s Man, Economy, and State (Mission, Kan.: Sheed, Andrews and McMeel, 1962, 987 pages). This contains much original and penetrating material; its exposition is admirably lucid; and its arrangement makes it in some respects more suitable for textbook use than Mises’ great work.

  Short books that discuss special economic subjects in a simple way are Planning for Freedom by Ludwig von Mises (South Holland, 111.: Libertarian Press, 1952), and Capitalism and Freedom by Milton Friedman (Chicago: University of Chicago Press, 1962). There is an excellent pamphlet by Murray N. Rothbard, What
Has Government Done to Our Money? (Santa Ana, Calif.: Rampart College, 1964, 1974, 62 pages). On the urgent subject of inflation, a book by the present author has recently been published, The Inflation Crisis, and How to Resolve It (New Rochelle, N.Y.: Arlington House, 1978).

  Among recent works which discuss current ideologies and developments from a point of view similar to that of this volume are the present author’s The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies (Arlington House, 1959); F. A. Hayek, The Road to Serfdom (1945) and the same author’s monumental Constitution of Liberty (Chicago: University of Chicago Press, 1960). Ludwig von Mises’ Socialism: An Economic and Sociological Analysis (London: Jonathan Cape, 1936, 1969) is the most thorough and devastating critique of collectivistic doctrines ever written.

  The reader should not overlook, of course, Frederic Bastiat’s Economic Sophisms (ca. 1844), and particularly his essay on “What Is Seen and What Is Not Seen.”

  Those who are interested in working through the economic classics might find it most profitable to do this in the reverse of their historical order. Presented in this order, the chief works to be consulted, with the dates of their first editions, are: Philip Wicksteed, The Common Sense of Political Economy, 1911; John Bates Clark, The Distribution of Wealth, 1899; Eugen von Böhm-Bawerk, The Positive Theory of Capital, 1888; Karl Menger, Principles of Economics, 1871; W. Stanley Jevons, The Theory of Political Economy, 1871; John Stuart Mill, Principles of Political Economy, 1848; David Ricardo, Principles of Political Economy and Taxation, 1817; and Adam Smith, The Wealth of Nations, 1776.

  Economics broadens out in a hundred directions. Whole libraries have been written on specialized fields alone, such as money and banking, foreign trade and foreign exchange, taxation and public finance, government control, capitalism and socialism, wages and labor relations, interest and capital, agricultural economics, rent, prices, profits, markets, competition and monopoly, value and utility, statistics, business cycles, wealth and poverty, social insurance, housing, public utilities, mathematical economics, studies of special industries and of economic history. But no one will ever properly understand any of these specialized fields unless he has first of all acquired a firm grasp of basic economic principles and the complex interrelationship of all economic factors and forces. When he has done this by his reading in general economics, he can be trusted to find the right books in his special field of interest.

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