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SEMINARS

Pre-Seminar Reading Packet

2016 Economics of Business Success

O P E N I N G N I G H T D I S C U S S I O N

I, Pencil

1. What was your initial reaction to watching this video?

2. Despite his simplicity, the Pencil claims that "not a single person on this earth knows how to make me". What

do you think, is this true? Explain why or why not.

3. The Pencil claims that not one person involved in the production process completes their task because they

want a pencil. How is a pencil created if not a single person who contributes to its production 'wants it'?

4. If there was a central planner in full control of pencil production, what do you think would be the result?

Why?

From Poop to Profits


2. Do you have an entrepreneurial experience or idea others might find strange?

3. How did Brad take a good idea and turn it into a successful business?

4. entrepreneurship?

A Taste of Chocolate


2. What kind of seemingly normal objects do we take for granted that actually enrich our lives?

3. Why was the chocolate that Jimmy tasted when he was 9 so special? What did it mean?

4.

success not have been possible in communist China?

2016 Economics of Business Success

E C O N O M I C S I N O N E L E S S O N D I S C U S S I O N

The Lesson

1. What is the one lesson that Henry Hazlitt says is essential to the art of good economics?

2. What is the common error that politicians and bad economists often commit when talking to the public about

policy proposals?

3. n could help us better think about

a policy or issue?

The Broken Window

1. What was your initial reaction to reading this chapter?

2. What was the effect of broken window? Did the hoodlum create or destroy wealth?

3. What was the rationale behind public works programs during the Great Depression, and did they work? Why

or why not? How is this similar to the story of the broken window?

The Curse of Machinery

1. What argument do people often make about machines and unemployment? What is Henry Hazlitt's response

to this claim?

2. Should we limit the jobs that we allow machines to replace?

3. What does Hazlitt concede with regards to people being forced to change fields?

Saving the X Industry

1. Should certain industries be saved or protected by government policy? What does Henry Hazlitt argue? Do

you agree or disagree? Why?

2. What might be the long-term consequences on society if the government decides to save the X industry?

Introduction BY LAWRENCE W. REED

Eloquent. Extraordinary. Timeless. Paradigm-shifting. Classic. Six decades after it first appeared, Leonard Read’s “I, Pencil” still evokes such adjectives of praise. Rightfully so, for this little essay opens eyes and minds among people of all ages. Many first-time readers never see the world quite the same again. Ideas are most powerful when they’re wrapped in a compelling s t o r y . Leonard’s main point—economies can hardly be “planned” when not one soul possesses all the know-how and skills to produce a simple pencil—unfolds in the enchanting words of a pencil itself. Leonard could have written “I, Car” or “I, Airplane,” but choosing those more complex items would have muted the message. No one person—repeat, no one, no matter how smart or how many degrees follow his name—could create from scratch a small, everyday pencil, let alone a car or an airplane. This is a message that humbles the high and mighty. It pricks the inflated egos of those who think they know how to mind everybody else’s business. It explains in plain language why central planning is an exercise in arrogance and futility, or what Nobel laureate and Austrian economist F. A. Hayek aptly termed “the pretence of knowledge.” Indeed, a major influence on Read’s thinking in this regard was Hayek’s famous 1945 article, “The Use of Knowledge in Society.” In demolishing the spurious claims of the socialists of the day, Hayek wrote, “This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.” Maximilien Robespierre is said to have blessed the horrific French Revolution with this chilling declaration: “On ne saurait pas faire une omelette sans casser des oeufs.” Translation: “One can’t expect to make an omelet without breaking eggs.” A consummate statist who worked tirelessly to plan the lives of others, he would become the architect of the Revolution’s bloodiest phase—the Reign of Terror of 1793–94. Robespierre and his guillotine broke eggs by the thousands in a vain effort to impose a utopian society with government planners at the top and everybody else at the bottom. That French experience is but one example in a disturbingly familiar pattern. Call them what you will—socialists, interventionists, collectivists, statists—history is littered with their presumptuous plans for rearranging society to fit their vision of the common good, plans that always fail as they kill or impoverish other people in the process. If socialism ever earns a final epitaph, it will be this: Here lies a contrivance engineered by know-it-alls who broke eggs with abandon but never, ever created an omelet.

None of the Robespierres of the world knew how to make a pencil, yet they wanted

to remake entire societies. How utterly preposterous, and mournfully tragic! But we will miss a large implication of Leonard Read’s message if we assume it aims only at the tyrants whose names we all know. The lesson of “I, Pencil” is not that error begins when the planners plan big. It begins the moment one tosses humility aside, assumes he knows the unknowable, and employs the force of the State against peaceful individuals. That’s not just a national disease. It can be very local indeed. In our midst are people who think that if only they had government power on their side, they could pick tomorrow’s winners and losers in the marketplace, set prices or rents where they ought to be, decide which forms of energy should power our homes and cars, and choose which industries should survive and which should die. They should stop for a few moments and learn a little humility from a lowly writing implement. I,PEN

CIL

While “I, Pencil” shoots down the baseless expectations for central planning, it provides a supremely uplifting perspective of the individual. Guided by Adam Smith’s “invisible hand” of prices, property, profits, and incentives, free people accomplish economic miracles of which socialist theoreticians can only dream. As the interests of countless individuals from around the world converge to produce pencils without a single “master mind,” so do they also come together in free markets to feed, clothe, house, educate, and entertain hundreds of millions of people at ever higher levels. With great pride, FEE publishes this new edition of “I, Pencil” to mark the essay’s timeless message for a new generation. Someday there will be a centennial edition, maybe even a millennial one. This essay is truly one for the ages.

- Lawrence W. ReedPresident • FEE

Atlanta, GA • May 2015

I, Pencil BY LEONARD E. READ

I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write. Writing is both my vocation and my avocation; that’s all I do. You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery —more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, the wise G. K. Chesterton observed, “We are perishing for want of wonder, not for want of wonders.” I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple. Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year. Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser.

INNUMERABLE ANTECEDENTS Just as you cannot trace your family tree back very far, so is it impossible for me to name and explain all my antecedents. But I would like to suggest enough of them to impress upon you the richness and complexity of my background. My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. I,PEN

CIL

Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink! The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents. Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill’s power! Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation. Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this “wood-clinched” sandwich. My “lead” itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [Sri Lanka]. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots. The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats. My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are. Observe the labeling. That’s a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black? Why, even the processes by which the lacquer is made a beautiful yellow involve the skills of more persons than one can enumerate! My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain. Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” I,PEN

CIL

the part man uses to erase the errors he makes with me. An ingredient called “factice” is what does the erasing. It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies [Indonesia] with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.

NO ONE KNOWS Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me? Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum. Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

NO MASTER MIND There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred. It has been said that “only God can make a tree.” Why do we agree with this? Isn’t it because we realize that we ourselves could not make one? Indeed, can we even describe a tree? We cannot, except in superficial terms. We can say, for instance, that a certain molecular configuration manifests itself as a tree. But what mind is there among men that could even record, let alone direct, the constant changes in molecules that transpire in the life span of a tree? Such a feat is utterly unthinkable! I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree. I,PEN

CIL

The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand— that is, in the absence of governmental or any other coercive master-minding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely. And here is the reason: Each one acknowledges that he himself doesn’t know how to do all the things incident to mail delivery. He also recognizes that no other individual could do it. These assumptions are correct. No individual possesses enough know-how to perform a nation’s mail delivery any more than any individual possesses enough know-how to make a pencil. Now, in the absence of faith in free people—in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity—the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental “masterminding.”

TESTIMONY GALOREIf I, Pencil, were the only item that could offer testimony on what men and women

can accomplish when free to try, then those with little faith would have a fair case. However, there is testimony galore; it’s all about us and on every hand. Mail delivery is exceedingly simple when compared, for instance, to the making of an automobile or a calculating machine or a grain combine or a milling machine or to tens of thousands of other things. Delivery? Why, in this area where men have been left free to try, they deliver the human voice around the world in less than one second; they deliver an event visually and in motion to any person’s home when it is happening; they deliver 150 passengers from Seattle to Baltimore in less than four hours; they deliver gas from Texas to one’s range or furnace in New York at unbelievably low rates and without subsidy; they deliver each four pounds of oil from the Persian Gulf to our Eastern Seaboard—halfway around the world—for less money than the government charges for delivering a one-ounce letter across the street!

The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.

I,PEN

CIL

Preface to the First Edition

This book is an analysis of economic fallacies that are at last soprevalent that they have almost become a new orthodoxy. The

one thing that has prevented this has been their own self-contradic-tions, which have scattered those who accept the same premises intoa hundred different “schools,” for the simple reason that it is impos-sible in matters touching practical life to be consistently wrong. Butthe difference between one new school and another is merely that onegroup wakes up earlier than another to the absurdities to which itsfalse premises are driving it, and becomes at that moment inconsistentby either unwittingly abandoning its false premises or accepting con-clusions from them less disturbing or fantastic than those that logicwould demand.

There is not a major government in the world at this moment,however, whose economic policies are not influenced, if they are notalmost wholly determined, by acceptance of some of these fallacies.Perhaps the shortest and surest way to an understanding of econom-ics is through a dissection of such errors, and particularly of the cen-tral error from which they stem. That is the assumption of this vol-ume and of its somewhat ambitious and belligerent title.

The volume is therefore primarily one of exposition. It makes noclaim to originality with regard to any of the chief ideas that itexpounds. Rather its effort is to show that many of the ideas which

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now pass for brilliant innovations and advances are in fact mererevivals of ancient errors, and a further proof of the dictum thatthose who are ignorant of the past are condemned to repeat it.

The present essay itself is, I suppose, unblushingly “classical,”“traditional,” and “orthodox”: at least these are the epithets withwhich those whose sophisms are here subjected to analysis will nodoubt attempt to dismiss it. But the student whose aim is to attain asmuch truth as possible will not be frightened by such adjectives. Hewill not be forever seeking a revolution, a “fresh start,” in economicthought. His mind will, of course, be as receptive to new ideas as toold ones; but he will be content to put aside merely restless or exhibi-tionistic straining for novelty and originality. As Morris R. Cohen hasremarked: “The notion that we can dismiss the views of all previousthinkers surely leaves no basis for the hope that our own work willprove of any value to others.”1

Because this is a work of exposition I have availed myself freelyand without detailed acknowledgment (except for rare footnotes andquotations) of the ideas of others. This is inevitable when one writesin a field in which many of the world’s finest minds have labored. Butmy indebtedness to at least three writers is of so specific a nature thatI cannot allow it to pass unmentioned. My greatest debt, with respectto the kind of expository framework on which the present argumentis hung, is to Frédéric Bastiat’s essay Ce qu’on voit et ce qu’on ne voit fas,now nearly a century old. The present work may, in fact, be regardedas a modernization, extension, and generalization of the approachfound in Bastiat’s pamphlet. My second debt is to Philip Wicksteed: inparticular the chapters on wages and the final summary chapter owemuch to his Commonsense of Political Economy. My third debt is to Ludwigvon Mises. Passing over everything that this elementary treatise mayowe to his writings in general, my most specific debt is to his exposi-tion of the manner in which the process of monetary inflation isspread.

xii Economics in One Lesson

1 Reason and Nature (New York: Harcourt, Brace & Co., 1931), p. x.

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When analyzing fallacies, I have thought it still less advisable to men-tion particular names than in giving credit. To do so would haverequired special justice to each writer criticized, with exact quotations,account taken of the particular emphasis he places on this point or that,the qualifications he makes, his personal ambiguities, inconsistencies,and so on. I hope, therefore, that no one will be too disappointed at theabsence of such names as Karl Marx, Thorstein Veblen, Major Douglas,Lord Keynes, Professor Alvin Hansen and others in these pages. Theobject of this book is not to expose the special errors of particular writ-ers, but economic errors in their most frequent, widespread, or influen-tial form. Fallacies, when they have reached the popular stage, becomeanonymous anyway. The subtleties or obscurities to be found in theauthors most responsible for propagating them are washed off. A doc-trine becomes simplified; the sophism that may have been buried in anetwork of qualifications, ambiguities, or mathematical equationsstands clear. I hope I shall not be accused of injustice on the ground,therefore, that a fashionable doctrine in the form in which I have pre-sented it is not precisely the doctrine as it has been formulated by LordKeynes or some other special author. It is the beliefs which politicallyinfluential groups hold and which governments act upon that we areinterested in here, not the historical origins of those beliefs.

I hope, finally, that I shall be forgiven for making such rare refer-ence to statistics in the following pages. To have tried to present sta-tistical confirmation, in referring to the effects of tariffs, price-fixing,inflation, and the controls over such commodities as coal, rubber, andcotton, would have swollen this book much beyond the dimensionscontemplated. As a working newspaper man, moreover, I am acutelyaware of how quickly statistics become out-of-date and are super-seded by later figures. Those who are interested in specific economicproblems are advised to read current “realistic” discussions of them,with statistical documentation: they will not find it difficult to inter-pret the statistics correctly in the light of the basic principles they havelearned.

I have tried to write this book as simply and with as much freedomfrom technicalities as is consistent with reasonable accuracy, so that it can

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be fully understood by a reader with no previous acquaintance with eco-nomics.

While this book was composed as a unit, three chapters havealready appeared as separate articles, and I wish to thank The New YorkTimes, The American Scholar, and The New Leader for permission to reprintmaterial originally published in their pages. I am grateful to Professorvon Mises for reading the manuscript and for helpful suggestions.Responsibility for the opinions expressed is, of course, entirely myown.

Henry HazlittNew York

March 25, 1946

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Part One: The Lesson

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CHAPTER 1

The Lesson

1

Economics is haunted by more fallacies than any other study knownto man. This is no accident. The inherent difficulties of the sub-

ject would be great enough in any case, but they are multiplied a thou-sandfold by a factor that is insignificant in, say, physics, mathematics,or medicine—the special pleading of selfish interests. While everygroup has certain economic interests identical with those of all groups,every group has also, as we shall see, interests antagonistic to those ofall other groups. While certain public policies would in the long runbenefit everybody, other policies would benefit one group only at theexpense of all other groups. The group that would benefit by suchpolicies, having such a direct interest in them, will argue for them plau-sibly and persistently. It will hire the best buyable minds to devote theirwhole time to presenting its case. And it will finally either convince thegeneral public that its case is sound, or so befuddle it that clear think-ing on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a sec-ond main factor that spawns new economic fallacies every day. This isthe persistent tendency of men to see only the immediate effects of agiven policy, or its effects only on a special group, and to neglect toinquire what the long-run effects of that policy will be not only on that

3


special group but on all groups. It is the fallacy of overlooking second-ary consequences.

In this lies almost the whole difference between good economicsand bad. The bad economist sees only what immediately strikes theeye; the good economist also looks beyond. The bad economist seesonly the direct consequences of a proposed course; the good econo-mist looks also at the longer and indirect consequences. The badeconomist sees only what the effect of a given policy has been or willbe on one particular group; the good economist inquires also what theeffect of the policy will be on all groups.

The distinction may seem obvious. The precaution of looking forall the consequences of a given policy to everyone may seem elemen-tary. Doesn’t everybody know, in his personal life, that there are allsorts of indulgences delightful at the moment but disastrous in theend? Doesn’t every little boy know that if he eats enough candy hewill get sick? Doesn’t the fellow who gets drunk know that he willwake up next morning with a ghastly stomach and a horrible head?Doesn’t the dipsomaniac know that he is ruining his liver and short-ening his life? Doesn’t the Don Juan know that he is letting himselfin for every sort of risk, from blackmail to disease? Finally, to bringit to the economic though still personal realm, do not the idler andthe spendthrift know, even in the midst of their glorious fling, thatthey are heading for a future of debt and poverty?

Yet when we enter the field of public economics, these elementarytruths are ignored. There are men regarded today as brilliant econo-mists, who deprecate saving and recommend squandering on anational scale as the way of economic salvation; and when anyonepoints to what the consequences of these policies will be in the longrun, they reply flippantly, as might the prodigal son of a warningfather: “In the long run we are all dead.” And such shallow wisecrackspass as devastating epigrams and the ripest wisdom.

But the tragedy is that, on the contrary, we are already suffering thelong-run consequences of the policies of the remote or recent past.Today is already the tomorrow which the bad economist yesterdayurged us to ignore. The long-run consequences of some economic

4 Economics in One Lesson


policies may become evident in a few months. Others may notbecome evident for several years. Still others may not become evidentfor decades. But in every case those long-run consequences are con-tained in the policy as surely as the hen was in the egg, the flower inthe seed.

From this aspect, therefore, the whole of economics can bereduced to a single lesson, and that lesson can be reduced to a singlesentence. The art of economics consists in looking not merely at the immediate hutat the longer effects of any act or policy; it consists in tracing the consequences of thatpolicy not merely for one group but for all groups.

2Nine-tenths of the economic fallacies that are working such dread-

ful harm in the world today are the result of ignoring this lesson.Those fallacies all stem from one of two central fallacies, or both: thatof looking only at the immediate consequences of an act or proposal,and that of looking at the consequences only for a particular group tothe neglect of other groups.

It is true, of course, that the opposite error is possible. In consid-ering a policy we ought not to concentrate only on its long-run resultsto the community as a whole. This is the error often made by the clas-sical economists. It resulted in a certain callousness toward the fate ofgroups that were immediately hurt by policies or developments whichproved to be beneficial on net balance and in the long run.

But comparatively few people today make this error; and those fewconsist mainly of professional economists. The most frequent fallacyby far today, the fallacy that emerges again and again in nearly everyconversation that touches on economic affairs, the error of a thou-sand political speeches, the central sophism of the “new” economics,is to concentrate on the short-run effects of policies on special groupsand to ignore or belittle the long-run effects on the community as awhole. The “new” economists flatter themselves that this is a great,almost a revolutionary advance over the methods of the “classical” or“orthodox” economists, because the former take into considerationshort-run effects which the latter often ignored. But in themselves

The Lesson 5


ignoring or slighting the long-run effects, they are making the farmore serious error. They overlook the woods in their precise andminute examination of particular trees. Their methods and conclu-sions are often profoundly reactionary. They are sometimes surprisedto find themselves in accord with seventeenth-century mercantilism.They fall, in fact, into all the ancient errors (or would, if they were notso inconsistent) that the classical economists, we had hoped, had oncefor all got rid of.

3It is often sadly remarked that the bad economists present their

errors to the public better than the good economists present theirtruths. It is often complained that demagogues can be more plausi-ble in putting forward economic nonsense from the platform than thehonest men who try to show what is wrong with it. But the basic rea-son for this ought not to be mysterious. The reason is that the dema-gogues and bad economists are presenting half-truths. They are speak-ing only of the immediate effect of a proposed policy or its effectupon a single group. As far as they go they may often be right. In thesecases the answer consists in showing that the proposed policy wouldalso have longer and less desirable effects, or that it could benefit onegroup only at the expense of all other groups. The answer consists insupplementing and correcting the half-truth with the other half. But toconsider all the chief effects of a proposed course on everybody oftenrequires a long, complicated, and dull chain of reasoning. Most of theaudience finds this chain of reasoning difficult to follow and soonbecomes bored and inattentive. The bad economists rationalize thisintellectual debility and laziness by assuring the audience that it neednot even attempt to follow the reasoning or judge it on its meritsbecause it is only “classicism” or “laissez-faire,” or “capitalist apologet-ics” or whatever other term of abuse may happen to strike them aseffective.

We have stated the nature of the lesson, and of the fallacies thatstand in its way, in abstract terms. But the lesson will not be drivenhome, and the fallacies will continue to go unrecognized, unless both



are illustrated by examples. Through these examples we can movefrom the most elementary problems in economics to the most com-plex and difficult. Through them we can learn to detect and avoid firstthe crudest and most palpable fallacies and finally some of the mostsophisticated and elusive. To that task we shall now proceed.

The Lesson 7


Part Two: The Lesson Applied


CHAPTER 2

The Broken Window

Let us begin with the simplest illustration possible: let us, emulat-ing Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of abaker’s shop. The shopkeeper runs out furious, but the boy is gone. Acrowd gathers, and begins to stare with quiet satisfaction at the gapinghole in the window and the shattered glass over the bread and pies.After a while the crowd feels the need for philosophic reflection. Andseveral of its members are almost certain to remind each other or thebaker that, after all, the misfortune has its bright side. It will makebusiness for some glazier. As they begin to think of this they elabo-rate upon it. How much does a new plate glass window cost? Fifty dol-lars? That will be quite a sum. After all, if windows were never bro-ken, what would happen to the glass business? Then, of course, thething is endless. The glazier will have $50 more to spend with othermerchants, and these in turn will have $50 more to spend with stillother merchants, and so ad infinitum. The smashed window will go onproviding money and employment in ever-widening circles. The logi-cal conclusion from all this would be, if the crowd drew it, that the lit-tle hoodlum who threw the brick, far from being a public menace, wasa public benefactor.

11


Now let us take another look. The crowd is at least right in its firstconclusion. This little act of vandalism will in the first instance meanmore business for some glazier. The glazier will be no more unhappyto learn of the incident than an undertaker to learn of a death. Butthe shopkeeper will be out $50 that he was planning to spend for anew suit. Because he has had to replace a window, he will have to gowithout the suit (or some equivalent need or luxury). Instead of hav-ing a window and $50 he now has merely a window. Or, as he wasplanning to buy the suit that very afternoon, instead of having both awindow and a suit he must be content with the window and no suit.If we think of him as a part of the community, the community haslost a new suit that might otherwise have come into being, and is justthat much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss ofbusiness. No new “employment” has been added. The people in thecrowd were thinking only of two parties to the transaction, the bakerand the glazier. They had forgotten the potential third party involved,the tailor. They forgot him precisely because he will not now enter thescene. They will see the new window in the next day or two. They willnever see the extra suit, precisely because it will never be made. Theysee only what is immediately visible to the eye.



CHAPTER 7

The Curse of Machinery

1

Among the most viable of all economic delusions is the belief thatmachines on net balance create unemployment. Destroyed a

thousand times, it has risen a thousand times out of its own ashes ashardy and vigorous as ever. Whenever there is long-continued massunemployment, machines get the blame anew. This fallacy is still thebasis of many labor union practices. The public tolerates these prac-tices because it either believes at bottom that the unions are right, oris too confused to see just why they are wrong.

The belief that machines cause unemployment, when held withany logical consistency, leads to preposterous conclusions. Not onlymust we be causing unemployment with every technological improve-ment we make today, but primitive man must have started causing itwith the first efforts he made to save himself from needless toil andsweat.

To go no further back, let us turn to Adam Smith’s The Wealth ofNations, published in 1776. The first chapter of this remarkable book iscalled “Of the Division of Labor,” and on the second page of this firstchapter the author tells us that a workman unacquainted with the use ofmachinery employed in pin making “could scarce make one pin a day,and certainly could not make twenty,” but that with the use of this

33


machinery he can make 4,800 pins a day. So already, alas, in AdamSmith’s time, machinery had thrown from 240 to 4,800 pin makers outof work for every one it kept. In the pin-making industry there wasalready, if machines merely throw men out of jobs, 99.98 percent unem-ployment. Could things be blacker?

Things could be blacker, for the Industrial Revolution was just inits infancy. Let us look at some of the incidents and aspects of thatrevolution. Let us see, for example, what happened in the stockingindustry. New stocking frames as they were introduced were destroyedby the handicraft workmen (over 1,000 in a single riot), houses wereburned, the inventors were threatened and obliged to fly for theirlives, and order was not finally restored until the military had beencalled out and the leading rioters had been either transported orhanged.

Now it is important to bear in mind that insofar as the rioters werethinking of their own immediate or even longer futures their opposi-tion to the machine was rational. For William Felkin, in his History of theMachine-Wrought Hosiery Manufactures (1867), tells us that the larger part ofthe 50,000 English stocking knitters and their families did not fullyemerge from the hunger and misery entailed by the introduction of themachine for the next forty years. But in so far as the rioters believed,as most of them undoubtedly did, that the machine was permanentlydisplacing men, they were mistaken, for before the end of the nine-teenth century the stocking industry was employing at least 100 menfor every man it employed at the beginning of the century.

Arkwright invented his cotton-spinning machinery in 1760. Atthat time it was estimated that there were in England 5,200 spinnersusing spinning wheels, and 2,700 weavers—in all, 7,900 personsengaged in the production of cotton textiles. The introduction ofArkwright’s invention was opposed on the ground that it threatenedthe livelihood of the workers, and the opposition had to be put downby force. Yet in 1787—twenty-seven years after the inventionappeared—a parliamentary inquiry showed that the number of per-sons actually engaged in the spinning and weaving of cotton hadrisen from 7,900 to 320,000, an increase of 4,400 percent.



If the reader will consult such a book as Recent Economic Changes, byDavid A. Wells, published in 1889, he will find passages that, except forthe dates and absolute amounts involved, might have been written byour technophobes (if I may coin a needed word) of today. Let mequote a few:

During the ten years from 1870 to 1880, inclusive, theBritish mercantile marine increased its movement, in thematter of foreign entries and clearances alone, to theextent of 22,000,000 tons . . . yet the number of menwho were employed in effecting this great movement haddecreased in 1880, as compared with 1870, to the extentof about three thousand (2,990 exactly). What did it? Theintroduction of steam-hoisting machines and grain eleva-tors upon the wharves and docks, the employment ofsteam power, etc. . . .

In 1873 Bessemer steel in England, where its pricehad not been enhanced by protective duties, com-manded $80 per ton; in 1886 it was profitably manufac-tured and sold in the same country for less than $20 perton. Within the same time the annual production capac-ity of a Bessemer converter has been increased fourfold,with no increase but rather a diminution of the involvedlabor. . . .

The power capacity already being exerted by thesteam engines of the world in existence and working inthe year 1887 has been estimated by the Bureau of Statis-tics at Berlin as equivalent to that of 200,000,000 horses,representing approximately 1,000,000,000 men; or at leastthree times the working population of the earth.

One would think that this last figure would have caused Mr. Wells topause, and wonder why there was any employment left in the world of1889 at all; but he merely concluded, with restrained pessimism, that“under such circumstances industrial overproduction . . . may becomechronic.”

The Curse of Machinery 35


In the depression of 1932, the game of blaming unemploymenton the machines started all over again. Within a few months the doc-trines of a group calling themselves the Technocrats had spreadthrough the country like a forest fire. I shall not weary the reader witha recital of the fantastic figures put forward by this group or with cor-rections to show what the real facts were. It is enough to say that theTechnocrats returned to the error in all its native purity that machinespermanently displace men—except that, in their ignorance, they pre-sented this error as a new and revolutionary discovery of their own.It was simply one more illustration of Santayana’s aphorism that thosewho cannot remember the past are condemned to repeat it.

The Technocrats were finally laughed out of existence; but theirdoctrine, which preceded them, lingers on. It is reflected in hundredsof make-work rules and feather-bed practices by labor unions; andthese rules and practices are tolerated and even approved because ofthe confusion on this point in the public mind.

Testifying on behalf of the United States Department of Justicebefore the Temporary National Economic Committee (better knownas the TNEC) in March, 1941, Corwin Edwards cited innumerableexamples of such practices. The electrical union in New York City wascharged with refusal to install electrical equipment made outside ofNew York State unless the equipment was disassembled and reassem-bled at the job site. In Houston, Texas, master plumbers and theplumbing union agreed that piping prefabricated for installationwould be installed by the union only if the thread were cut off oneend of the pipe and new thread were cut at the job site. Various localsof the painters’ union imposed restrictions on the use of spray guns,restrictions in many cases designed merely to make work by requiringthe slower process of applying paint with a brush. A local of theteamsters’ union required that every truck entering the New Yorkmetropolitan area have a local driver in addition to the driver alreadyemployed. In various cities the electrical union required that if anytemporary light or power was to be used on a construction job theremust be a full-time maintenance electrician, who should not be per-mitted to do any electrical construction work. This rule, according to



Mr. Edwards, “often involves the hiring of a man who spends his dayreading or playing solitaire and does nothing except throw a switch atthe beginning and end of the day.”

One could go on to cite such make-work practices in many otherfields. In the railroad industry, the unions insist that firemen beemployed on types of locomotives that do not need them. In the the-aters unions insist on the use of scene shifters even in plays in whichno scenery is used. The musicians’ union requires so-called “stand-in”musicians or even whole orchestras to be employed in many caseswhere only phonograph records are needed.

2One might pile up mountains of figures to show how wrong were

the technophobes of the past. But it would do no good unless weunderstood clearly why they were wrong. For statistics and history areuseless in economics unless accompanied by a basic deductive under-standing of the facts—which means in this case an understanding ofwhy the past consequences of the introduction of machinery andother labor-saving devices had to occur. Otherwise the technophobeswill assert (as they do in fact assert when you point out to them thatthe prophecies of their predecessors turned out to be absurd): “Thatmay have been all very well in the past; but today conditions are fun-damentally different; and now we simply cannot afford to develop anymore labor-saving machinery.” Mrs. Eleanor Roosevelt, indeed, in asyndicated newspaper column of September 19, 1945, wrote: “Wehave reached a point today where labor-saving devices are good onlywhen they do not throw the worker out of his job.”

If it were indeed true that the introduction of labor-savingmachinery is a cause of constantly mounting unemployment and mis-ery, the logical conclusions to be drawn would be revolutionary, notonly in the technical field but for our whole concept of civilization.Not only should we have to regard all further technical progress as acalamity; we should have to regard all past technical progress withequal horror. Every day each of us in his own capacity is engaged intrying to reduce the effort it requires to accomplish a given result.



Each of us is trying to save his own labor, to economize the meansrequired to achieve his ends. Every employer, small as well as large,seeks constantly to gain his results more economically and effi-ciently—that is, by saving labor. Every intelligent workman tries to cutdown the effort necessary to accomplish his assigned job. The mostambitious of us try tirelessly to increase the results we can achieve ina given number of hours. The technophobes, if they were logical andconsistent, would have to dismiss all this progress and ingenuity as notonly useless but vicious. Why should freight be carried from NewYork to Chicago by railroads when we could employ enormouslymore men, for example, to carry it all on their backs?

Theories as false as this are never held with logical consistency, butthey do great harm because they are held at all. Let us, therefore, tryto see exactly what happens when technical improvements and labor-saving machinery are introduced. The details will vary in eachinstance, depending upon the particular conditions that prevail in agiven industry or period. But we shall assume an example that involvesthe main possibilities.

Suppose a clothing manufacturer learns of a machine that willmake men’s and women’s overcoats for half as much labor as previ-ously. He installs the machines and drops half his labor force.

This looks at first glance like a clear loss of employment. But themachine itself required labor to make it; so here, as one offset, arejobs that would not otherwise have existed. The manufacturer, how-ever, would have adopted the machine only if it had either made bet-ter suits for half as much labor, or had made the same kind of suitsat a smaller cost. If we assume the latter, we cannot assume that theamount of labor to make the machines was as great in terms of pay-rolls as the amount of labor that the clothing manufacturer hopes tosave in the long run by adopting the machine; otherwise there wouldhave been no economy, and he would not have adopted it.

So there is still a net loss of employment to be accounted for. Butwe should at least keep in mind the real possibility that even the firsteffect of the introduction of labor-saving machinery may be toincrease employment on net balance; because it is usually only in the



long run that the clothing manufacturer expects to save money byadopting the machine: it may take several years for the machine to“pay for itself.”

After the machine has produced economies sufficient to offset itscost, the clothing manufacturer has more profits than before. (Weshall assume that he merely sells his coats for the same price as hiscompetitors, and makes no effort to undersell them.) At this point, itmay seem, labor has suffered a net loss of employment, while it is onlythe manufacturer, the capitalist, who has gained. But it is precisely outof these extra profits that the subsequent social gains must come. Themanufacturer must use these extra profits in at least one of three ways,and possibly he will use part of them in all three: (1) he will use theextra profits to expand his operations by buying more machines tomake more coats; or (2) he will invest the extra profits in some otherindustry; or (3) he will spend the extra profits on increasing his ownconsumption. Whichever of these three courses he takes, he willincrease employment.

In other words, the manufacturer, as a result of his economies, hasprofits that he did not have before. Every dollar of the amount he hassaved in direct wages to former coat makers, he now has to pay out inindirect wages to the makers of the new machine, or to the workersin another capital industry, or to the makers of a new house or motorcar for himself, or of jewelry and furs for his wife. In any case (unlesshe is a pointless hoarder) he gives indirectly as many jobs as he ceasedto give directly.

But the matter does not and cannot rest at this stage. If this enter-prising manufacturer effects great economies as compared with hiscompetitors, either he will begin to expand his operations at theirexpense, or they will start buying the machines too. Again more workwill be given to the makers of the machines. But competition and pro-duction will then also begin to force down the price of overcoats.There will no longer be as great profits for those who adopt the newmachines. The rate of profit of the manufacturers using the newmachine will begin to drop, while the manufacturers who have still notadopted the machine may now make no profit at all. The savings, in



other words, will begin to be passed along to the buyers of over-coats—to the consumers.

But as overcoats are now cheaper, more people will buy them. Thismeans that, though it takes fewer people to make the same number ofovercoats as before, more overcoats are now being made than before.If the demand for overcoats is what economists call “elastic”—that is,if a fall in the price of overcoats causes a larger total amount ofmoney to be spent on overcoats than previously—then more peoplemay be employed even in making overcoats than before the newlabor-saving machine was introduced. We have already seen how thisactually happened historically with stockings and other textiles.

But the new employment does not depend on the elasticity ofdemand for the particular product involved. Suppose that, though theprice of overcoats was almost cut in half—from a former price, say,of $50 to a new price of $30—not a single additional coat was sold.The result would be that while consumers were as well provided withnew overcoats as before, each buyer would now have $20 left over thathe would not have had left over before. He will therefore spend this$20 for something else, and so provide increased employment in otherlines.

In brief, on net balance, machines, technological improvements,economies and efficiency do not throw men out of work.

3Not all inventions and discoveries, of course, are “labor-saving”

machines. Some of them, like precision instruments, like nylon, lucite,plywood, and plastics of all kinds, simply improve the quality of prod-ucts. Others, like the telephone or the airplane, perform operationsthat direct human labor could not perform at all. Still others bring intoexistence objects and services, such as X-rays, radios, and syntheticrubber, that would otherwise not even exist. But in the foregoing illus-tration we have taken precisely the kind of machine that has been thespecial object of modern technophobia.

It is possible, of course, to push too far the argument that machinesdo not on net balance throw men out of work. It is sometimes



argued, for example, that machines create more jobs than would oth-erwise have existed. Under certain conditions this may be true. Theycan certainly create enormously more jobs in particular trades. The eigh-teenth-century figures for the textile industries are a case in point.Their modern counterparts are certainly no less striking. In 1910,140,000 persons were employed in the United States in the newly cre-ated automobile industry. In 1920, as the product was improved andits cost reduced, the industry employed 250,000. In 1930, as this prod-uct improvement and cost reduction continued, employment in theindustry was 380,000. In 1940 it had risen to 450,000. By 1940, 35,000people were employed in making electric refrigerators, and 60,000were in the radio industry. So it has been in one newly created tradeafter another, as the invention was improved and the cost reduced.

There is also an absolute sense in which machines may be said tohave enormously increased the number of jobs. The population ofthe world today is three times as great as in the middle of the eigh-teenth century, before the Industrial Revolution had got well underway. Machines may be said to have given birth to this increased pop-ulation; for without the machines, the world would not have been ableto support it. Two out of every three of us, therefore, may be said toowe not only our jobs but our very lives to machines.

Yet it is a misconception to think of the function or result ofmachines as primarily one of creating jobs. The real result of themachine is to increase production, to raise the standard of living, toincrease economic welfare. It is no trick to employ everybody, even (orespecially) in the most primitive economy. Full employment—very fullemployment; long, weary, back-breaking employment—is characteris-tic of precisely the nations that are most retarded industrially. Wherefull employment already exists, new machines, inventions, and discov-eries cannot—until there has been time for an increase in popula-tion—bring more employment. They are likely to bring more unem-ployment (but this time I am speaking of voluntary and not involuntaryunemployment) because people can now afford to work fewer hours,while children and the overaged no longer need to work.



What machines do, to repeat, is to bring an increase in productionand an increase in the standard of living. They may do this in eitherof two ways. They do it by making goods cheaper for consumers (asin our illustration of the overcoats), or they do it by increasing wagesbecause they increase the productivity of the workers. In other words,they either increase money wages or, by reducing prices, they increasethe goods and services that the same money wages will buy. Some-times they do both. What actually happens will depend in large partupon the monetary policy pursued in a country. But in any case,machines, inventions, and discoveries increase real wages.

4A warning is necessary before we leave this subject. It was precisely

the great merit of the classical economists that they looked for sec-ondary consequences, that they were concerned with the effects of agiven economic policy or development in the long run and on thewhole community. But it was also their defect that, in taking the longview and the broad view, they sometimes neglected to take also theshort view and the narrow view. They were too often inclined to min-imize or to forget altogether the immediate effects of developmentson special groups. We have seen, for example, that the English stock-ing knitters suffered real tragedies as a result of the introduction ofthe new stocking frames, one of the earliest inventions of the Indus-trial Revolution.

But such facts and their modern counterparts have led some writ-ers to the opposite extreme of looking only at the immediate effects oncertain groups. Joe Smith is thrown out of a job by the introductionof some new machine. “Keep your eye on Joe Smith,” these writersinsist. “Never lose track of Joe Smith.” But what they then proceed todo is to keep their eyes only on Joe Smith, and to forget Tom Jones,who has just got a new job in making the new machine, and TedBrown, who has just got a job operating one, and Daisy Miller, whocan now buy a coat for half what it used to cost her. And because theythink only of Joe Smith, they end by advocating reactionary and non-sensical policies.



Yes, we should keep at least one eye on Joe Smith. He has beenthrown out of a job by the new machine. Perhaps he can soon getanother job, even a better one. But perhaps, also, he has devoted manyyears of his life to acquiring and improving a special skill for which themarket no longer has any use. He has lost this investment in himself, inhis old skill, just as his former employer, perhaps, has lost his investmentin old machines or processes suddenly rendered obsolete. He was askilled workman, and paid as a skilled workman. Now he has becomeovernight an unskilled workman again, and can hope, for the present,only for the wages of an unskilled workman, because the one skill he hadis no longer needed. We cannot and must not forget Joe Smith. His isone of the personal tragedies that, as we shall see, are incident to nearlyall industrial and economic progress.

To ask precisely what course we should follow with Joe Smith—whether we should let him make his own adjustment, give him sepa-ration pay or unemployment compensation, put him on relief, or trainhim at government expense for a new job—would carry us beyondthe point that we are here trying to illustrate. The central lesson is thatwe should try to see all the main consequences of any economic pol-icy or development—the immediate effects on special groups, and thelong-run effects on all groups.

If we have devoted considerable space to this issue, it is becauseour conclusions regarding the effects of new machinery, inventionsand discoveries on employment, production and welfare are crucial. Ifwe are wrong about these, there are few things in economics aboutwhich we are likely to be right.



83

1

The lobbies of Congress are crowded with representatives of theX industry. The X industry is sick. The X industry is dying. It

must be saved. It can be saved only by a tariff, by higher prices, or bya subsidy. If it is allowed to die, workers will be thrown on the streets.Their landlords, grocers, butchers, clothing stores, and local motionpicture theaters will lose business, and depression will spread in ever-widening circles. But if the X industry, by prompt action of Congress,is saved—ah then! it will buy equipment from other industries; moremen will be employed; they will give more business to the butchers,bakers, and neon-light makers, and then it is prosperity that will spreadin ever-widening circles.

It is obvious that this is merely a generalized form of the case wehave just been considering. There the X industry was agriculture. Butthere are an endless number of X industries. Two of the most notableexamples in recent years have been the coal and silver industries. To“save silver” Congress did immense harm. One of the arguments forthe rescue plan was that it would help “the East.” One of its actualresults was to cause deflation in China, which had been on a silverbasis, and to force China off that basis. The United States Treasury

CHAPTER 14

Saving the X Industry



was compelled to acquire, at ridiculous prices far above the marketlevel, hoards of unnecessary silver, and to store it in vaults. The essen-tial political aims of the “silver Senators” could have been as wellachieved, at a fraction of the harm and cost, by the payment of afrank subsidy to the mine owners or to their workers; but Congressand the country would never have approved a naked steal of this sortunaccompanied by the ideological flimflam regarding “silver’s essen-tial role in the national currency.”

To save the coal industry Congress passed the Guffey Act, underwhich the owners of coal mines were not only permitted, but com-pelled, to conspire together not to sell below certain minimum pricesfixed by the government. Though Congress had started out to fix “the”price of coal, the government soon found itself (because of differentsizes, thousands of mines, and shipments to thousands of different des-tinations by rail, truck, ship and barge) fixing 350,000 separate prices forcoal!1 One effect of this attempt to keep coal prices above the compet-itive market level was to accelerate the tendency toward the substitutionby consumers of other sources of power or heat—such as oil, naturalgas, and hydroelectric energy.

2But our aim here is not to trace all the results that followed histor-

ically from efforts to save particular industries, but to trace a few ofthe chief results that must necessarily follow from efforts to save anindustry.

It may be argued that a given industry must be created or pre-served for military reasons. It may be argued that a given industry isbeing ruined by taxes or wage rates disproportionate to those of otherindustries; or that, if a public utility, it is being forced to operate atrates or charges to the public that do not permit an adequate profitmargin. Such arguments may or may not be justified in a particularcase. We are not concerned with them here. We are concerned only

1Testimony of Dan H. Wheeler, director of the Bituminous Coal Division. Hearings onextension of the Bituminous Coal Act of 1937.


Saving the X Industry 85

with a single argument for saving the X industry—that if it is allowedto shrink in size or perish through the forces of free competition(always, by spokesmen for the industry, designated in such cases as alaissez-faire, anarchic, cutthroat, dog-eat-dog, law-of-the-jungle compe-tition) it will pull down the general economy with it, and that if it isartificially kept alive it will help everybody else.

What we are talking about here is nothing else but a generalizedcase of the argument put forward for “parity” prices for farm prod-ucts or for tariff protection for any number of X industries. The argu-ment against artificially higher prices applies, of course, not only tofarm products but to any other product, just as the reasons we havefound for opposing tariff protection for one industry apply to anyother.

But there are always any number of schemes for saving X industries.There are two main types of such proposals in addition to those wehave already considered, and we shall take a brief glance at them. Oneis to contend that the X industry is already “overcrowded,” and to tryto prevent other firms or workers from getting into it. The other is toargue that the X industry needs to be supported by a direct subsidyfrom the government.

Now if the X industry is really overcrowded as compared withother industries it will not need any coercive legislation to keep outnew capital or new workers. New capital does not rush into industriesthat are obviously dying. Investors do not eagerly seek the industriesthat present the highest risks of loss combined with the lowestreturns. Nor do workers, when they have any better alternative, gointo industries where the wages are lowest and the prospects forsteady employment least promising.

If new capital and new labor are forcibly kept out of the X indus-try, however, either by monopolies, cartels, union policy or legislation,it deprives this capital and labor of liberty of choice. It forcesinvestors to place their money where the returns seem less promisingto them than in the X industry. It forces workers into industries witheven lower wages and prospects than they could find in the allegedlysick X industry. It means, in short, that both capital and labor are less



efficiently employed than they would be if they were permitted tomake their own free choices. It means, therefore, a lowering of pro-duction which must reflect itself in a lower average living standard.

That lower living standard will be brought about either by loweraverage money wages than would otherwise prevail or by higher aver-age living costs, or by a combination of both. (The exact result woulddepend upon the accompanying monetary policy.) By these restrictivepolicies wages and capital returns might indeed be kept higher thanotherwise within the X industry itself; but wages and capital returns inother industries would be forced down lower than otherwise. The Xindustry would benefit only at the expense of the A, B, and C indus-tries.

3Similar results would follow any attempt to save the X industry by

a direct subsidy out of the public till. This would be nothing morethan a transfer of wealth or income to the X industry. The taxpayerswould lose precisely as much as the people in the X industry gained.The great advantage of a subsidy, indeed, from the standpoint of thepublic, is that it makes this fact so clear. There is far less opportunityfor the intellectual obfuscation that accompanies arguments for tariffs,minimum-price fixing, or monopolistic exclusion.

It is obvious in the case of a subsidy that the taxpayers must loseprecisely as much as the X industry gains. It should be equally clearthat, as a consequence, other industries must lose what the X industrygains. They must pay part of the taxes that are used to support the Xindustry. And consumers, because they are taxed to support the Xindustry, will have that much less income left with which to buy otherthings. The result must be that other industries on the average mustbe smaller than otherwise in order that the X industry may be larger.

But the result of this subsidy is not merely that there has been atransfer of wealth or income, or that other industries have shrunk inthe aggregate as much as the X industry has expanded. The result isalso (and this is where the net loss comes in to the nation consideredas a unit) that capital and labor are driven out of industries in which


Saving the X Industry 87

they are more efficiently employed to be diverted to an industry inwhich they are less efficiently employed. Less wealth is created. Theaverage standard of living is lowered compared with what it wouldhave been.

4These results are virtually inherent, in fact, in the very arguments

put forward to subsidize the X industry. The X industry is shrinkingor dying by the contention of its friends. Why, it may be asked, shouldit be kept alive by artificial respiration? The idea that an expandingeconomy implies that all industries must be simultaneously expandingis a profound error. In order that new industries may grow fastenough it is necessary that some old industries should be allowed toshrink or die. They must do this in order to release the necessary cap-ital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down thegrowth of the automobile industry and all the trades dependent on it.We should have lowered the production of wealth and retarded eco-nomic and scientific progress.

We do the same thing, however, when we try to prevent any indus-try from dying in order to protect the labor already trained or the cap-ital already invested in it. Paradoxical as it may seem to some, it is justas necessary to the health of a dynamic economy that dying industriesbe allowed to die as that growing industries be allowed to grow. Thefirst process is essential to the second. It is as foolish to try to preserveobsolescent industries as to try to preserve obsolescent methods ofproduction: this is often, in fact, merely two ways of describing thesame thing. Improved methods of production must constantly sup-plant obsolete methods, if both old needs and new wants are to befilled by better commodities and better means.


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