If you were to read one book on economics in your lifetime, you must read Economics in One Lesson by Henry Hazlitt. Economics in One Lesson doesn’t invent a new theory. It’s not creating a new school of thought like John Maynard Keynes and his General Theory. But it is the single greatest explanation on economics ever written. And unlike Keynes, people actually enjoy reading Hazlitt – mainly, because unlike all other economists, Hazlitt was a journalist and knew how to write effectively.
The lesson is simple – don’t judge an economic policy based on it’s immediate or intended effects. Equally (and sometimes even more) important is to judge an economic policy on the unintended consequences. It’s probably best to simply quote Hazlitt:
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.
Why not let the Federal Reserve lower interest rates temporarily to boost jobs?
According to Hazlitt, sure, that will work in a very short time span, but what you’re sacrificing is savings, future growth, and malinvestment in the future. He would relate it to a kid eating too much candy. You have to consider the policy in the future. You cannot look only at the immediate effect.
The same applies with policies affecting a specific group. Sure, you may want to increase tariffs to protect certain industries, but you’ll hurt and sacrifice consumers to do it. To Hazlitt, this would be a bad policy overall, because we are ALL consumers.
The good economist doesn’t merely take into account what is seen from an economic policy. A good economist understands the unseen or the unintended and long-term effects of policy.
You, as a student of economics, can apply this to everything. It’s a radical form of trade-offs and opportunity costs. We see it all around us today with the government’s policy on COVID-19. There have been many unintended consequences of shutting down businesses and a $6 Trillion stimulus. Some of those we are already seeing. Unemployment is reaching Great Depression levels.
What will be the inflation cost of the stimulus?
What will be the mental health challenges our society faces from isolation?
I don’t have the answer to all of these. But thanks to Hazlitt, you should be asking yourself about the unintended consequences and the long-term effects of COVID-19 policies.
For Hazlitt, the economy is an organic creature. If a policy hurts one group to support another, then that would be similar to cutting off your legs in order to only work out your arms. It’s a bad policy – you can’t skip leg day. In another metaphor on the long-term consequences, it would be like an alcoholic curing his hanger over with more alcohol. A sound economic policy doesn’t require sacrificing other groups or the future.
If you want to learn economics, if you love economics but want a refresher, then Economics in One Lesson may be the best book out there for you.
If Adam Smith is the father of economics, Henry Hazlitt is the cool, relatable uncle. He brings difficult economic concepts into layman’s terms. No other book has taught economics to generations of people more than Economic in One Lesson. In 2020, it is as relatable as ever. Until we get super computers that show all the unintended cost of a policy, this is the most important lesson in economics.