How to Think About Economics; G. Reisman

As an important illustration of this dependence, consider. the fact that to the extent there is a division of labor, there is a multiplication of the knowledge that is used in pro duction. In a division-of-Iabor econ omy, such as that of the United States, as many specialized bodies of knowledge enter into production as there are specializations in em ployment. On the other hand, in an economy with relatively little divi sion of labor, such as that of India, in which the great majority of peo ple live as self-sufficient farmers, George Reisman Is Associate Professor of Econom Ics at Pepperdlne University In Los Angeles. He Is the author of a recently published book, The Govern ment Against the Economy (Caroline House, Ottawa, illinois, 1979). This article Is reprinted by permission from the September 1, 1980Issue of The Intellectual Activist. practically all producers possess the same body of knowledge; and thus the knowledge that enters into pro duction is limited essentially to what one mind alone can hold.

The great majority of people, in eluding. the great majority of pre sumably educated people, are not explicitly aware even of the impor tance of the division of labor. Still less are they aware of the fact that the division of labor has definite re quirements for its successful func tioning, indeed, for its very exis tence. The division of labor can intensify and flourish, or it can be largely or even entirely destroyed. Examples are provided by the rise and fall of civilizations-such as the Middle Ages, with its minimal divi sion of labor, and the last two cen turies or more, with their great in tensification of the division of labor. What happens to the division of labor is the result of human choices, specifically, choices of a political na ture. Acting in their political capac ity, men have the power to adopt laws and social institutions that make possible the growth and suc183 184 THE FREEMAN March cessful functioning of the division of labor, or to adopt laws and social in stitutions that are incompatible with the division of labor. The laws and social institutions of the United States for most of its history provide an example of the first kind; those of the late Roman Empire and the Middle Ages, an example of the sec ond kind.

Understanding the Process In order for men to make intelli gent choices respecting the division of labor, they must have knowledge concerning it. They must know in principle what the division of labor accomplishes, what it requires, and what promotes or impairs it. This knowledge is provided by econom ics. Economics is the science that studies the production of wealth un der a system of division of labor. Economics is itself a specializa tion. It is that specialization within the division of labor that studies the division-of-Iabor system. But along with such subjects as mathematics, natural science, philosophy, history, and the classics, economics is some thing that deserves a prominent place in the education of every intel ligent person. It must be understood not only as an important part of the individual's comprehension of the universe around him, but in order to make possible the continued exis tence of material civilization. For in the long run, it is the ideas of the educated public that determine the laws and social institutions a coun try adopts. Only if the educated public has a serious grasp of eco nomic principles can a country hope to have or maintain laws and insti tutions conducive to the division of labor.

In the absence of such knowledge of economics, a modem nation like the United States is in the position of an ignorant crowd wandering among banks of computers or other complex machinery and randomly pushing buttons here and pulling levers there. For its people live in the midst of the division of labor, their lives depend on it, yet they do not understand it and are taking ac tions with respect to it whose effects they do not comprehend. In just this way, our contemporaries feel free to advocate such things as fiat money, price controls, confiscatory taxation, and even the abolition of private ownership of the means of produc tion altogether-all with no com prehension whatever of the effects on the-division-of-Iabor system. In the absence of a widespread knowledge of economics among the educated public, it is only a question of time before a nation destroys it self. And that is precisely what the United States is doing today and has been doing for some time.

Over the last two centuries, a number of brilliant books have ap peared that provide a more or less 1981 HOW-TO THINK ABOUT ECONOMICS 185 systematic exposition of economics, starting with Adam Smith's The Wealth of Nations and continuing up to Ludwig von Mises' Human Ac tion, the last edition of which ap peared in 1966. Unfortunately, for various reasons, none of these books is suitable for a beginner. To make matters worse, there are simply no decent textbooks of eco nomics. What passes for economic texts at the colleges and universi ties are books written in total igno rance of the contributions ofthe great economists. Today's textbooks are an exposition of the ideas of a rela tive handful of authors: principally, Marshall, Keynes, and Joan Robin son, often supplemented with a dose of Marx and Veblen. The ideas of the real economists-Smith, Ri cardo, Say, the two Mills, Mc Culloch, Bastiat, Senior, Menger, Jevons, Bohm-Bawerk, and Mises, to name some of the most impor tant-are simply ignored.

And when they are mentioned at all, it is only long enough to dismiss them with ridicule. For example, Adam Smith's demonstration of the existence of a harmony of self-inter ests in a free society is dismissed as resting on a postulate of divine in tervention. Say's Law of Markets, which demonstrates the impossibil ity of a general overproduction is dismissed as claiming that if refrig erators are brought to Eskimos, they will be demanded, because ~~supply creates its own demand." All that the great economists have proved 'with respect to the role of saving, the operations of the price system, the causes of economic progress and decline, of inflation, unemployment, and depressions-all this is simply ignored and evaded in the text books. And in its place is presented a loose collection of meandering as sertions and illogical connections heavily interspersed with diagrams, equations, and statistics-all tend i.ng to the conclusion that economics and the manifestos of the left-wing of the Democratic Party are one and the same.

J' Brilliant Analysis It is in the light of this back ground that Henry Hazlitt's Eco nomics in One Lesson, recently pub lished in its third edition, must be appreciated. Henry Hazlitt is himself a great E~conomist and ranks among those whose names I have mentioned. He possesses a profound and thorough knowledge of the classics of the sub ject and of all of its principles and finer points. He possesses a bril liantly logical mind and an unsur passed ability to present the most complex material clearly and sim ply, so that almost anybody can un derstand it. All of these qualities shine forth on practically every page of the third edition of Economics in ()ne Lesson. (The third edition does 186 THE FREEMAN March not differ in any fundamental way from the previous editions. The chapter on rent control, added in the second edition, has been extended, and a valuable new chapter has been added reviewing the course of events since the publication of the first edi tion over thirty years ago.) Economics in One Lesson intro duces the reader to economics by a highly stimulating and exciting method. From the very first page, it offers a profound challenge to the ideas that most people hold about economic acti vi ty and to their method of thinking about it. For ex ample, most people think of war and destruction as causes of economic prosperity by allegedly creating ad ditional demand and employment.

Hazlitt shows clearly and convinc ingly why this is not so. And in so doing, he immediately begins to captivate the reader by overcoming what must otherwise be horrifying philosophical contradictions, such as the desire for both peace and pros perity. Tracingthe Consequences Hazlitt states that the essential lesson of economics, the key to cor rect thinking about the subject, is that ~~the art of economics consists in looking not merely at the imme diate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." In teaching this lesson, Hazlitt widens the intellectual ho rizons of his readers and teaches them to think of the effects of things on the division-of-Iabor system, something they would otherwise be unaware of. In content, Economics in One Les son covers the highly important subjects of unemployment, govern ment spending, taxes, credit, ma chinery, tariffs, subsidies, the price system, price and rent controls, minimum wage laws, labor unions, inflation, and the function of saving.

Its method is always the develop ment of economic principles in rela tion to major economic problems. There is hardly a page of the book that does not make several impor tant points. A fundamental theme of the book is that the freedom of the individual peacefully to pursue his own interests serves both his inter ests and the longrun interests of all other members of the economic sys tem. This is always the specific con clusion that we see illustrated when we think as economists. In my teaching career, I have of ten used Economics in One Lesson as an introductory textbook. Several times, I have used it as practically the only textbook. And despite its brevity, I have had no 'difficulty in discussing its content for an entire semester. The book is so rich that even after having read portions of it many times, I continue to find points 1981 HOW TO THINK ABOUT ECONOMICS 187 Economicsin One Lesson by Henry Hazlitt An ArlingtonHousebook, 218 pages,fully indexed.

Revised 1979 edition now in paperback. Also availablefrom: The Foundation for Economic Education, Inc. Irvington-on-Hudson, New York 10533 Clothbound Paperback, single copy 5 copieseach 10 or more, each $8.95 4.95 3.00 2.50 in it that I had previously over looked. Moreover, students actually read the book, understand it, and change their ideas because of it. Despite its overwhelming virtues, there are a few things that I must criticize concerning the book. Two points of a theoretical nature are its failure to incorporate the insight of the classical economists that the de mand for labor comes out of savings, not consumption, and its failure to recognize with Bohm-Bawerk and Wieser that there are important cases in which cost of production is the direct determinant of prices, though never their ultimate deter minant. In addition, there are occa sional minor and uncalled for concessions made to the opponents of sound economics and capitalism, which have the effect of sometimes undercutting the force of the bril liant arguments advanced, such as the statement on page 141 concern ing a need for labor unions to pre vent workers from being underpaid in certain cases.

These criticisms notwithstanding, Economics in One Lesson is a super lative book. It is the finest introduc tion to ·economics in existence and page for page there simply is no finer book on economics, period. As I have written elsewhere, Econom ics in One Lesson has been an inspi ration and a standard for my own writings. It has been instrumental in teaching me not just a valuable intellectual content, but, no less im portant, the correct method for thinking about all economic prob lems. For the sake of the survival of material civilization, one can only hope that the current, third edition of Economics in One Lesson will be read by and will influence the think ing of millions in the years to come. @ A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Survival in the NuclearAge THE DILEMMA of the libertarian is that, in his revolt against any reli ance on the State, he must trust that Marxist states organized beyond his own borders will leave him alone.