Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

Category: Economics
Author: Henry Hazlitt
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by ChillPenguinX   2019-11-17

Gladly. Let's how well I can explain what I've read from Hazlitt and Sowell. Sorry this is so long, but explaining economics takes a lot more words than "I just think everyone who works should get a living wage" does. There's a reason it took society millennia to discover the free market.

So, first, there are two types of price controls: ceilings (rent control) and floors (minimum wage). Price ceilings create a shortage of the good they are placed on because it will simultaneously and artificially increase demand ('it's so cheap now!') and decrease supply ('I can't make a profit anymore'). Price floors create a surplus because it will simultaneously and artificially decrease demand ('I can't pay that much') and increase supply ('look at how much I get for this now!'). The only way a price ceiling won't create a shortage is if the ceiling is higher than market price. The easiest way to see this is to imagine extremes: think about what would happen if the most you could legally charge for a television was $100k vs $100. If it's $100k, well, no effect because no one would charge or pay that much for a TV. If it was $100, well, manufacturers would only be able to sell TVs that they can make for less than that, otherwise they will soon go out of business. Now imagine if the least you could charge was $10 vs $3000. A $10 floor would have no effect, while a $3000 floor would result in far fewer people buying TVs since anyone who can't afford that would get squeezed out.

With that in mind, here's what happens in the long term with rent control. Rent control gets placed on low income housing, and it's typically in a fashion where you can't raise the price on current tenants (or you're limited in how much you can). The first thing this does is incentivize those already in rent-controlled housing to stay put, even in situations where people would typically move out (an old couple becoming empty-nesters, someone who changed jobs and now has to commute further, single adults who no longer want a roommate, celebrities holding onto vacation homes, etc). This decreases the amount of turnover available to people moving into the area or heading out on their own. What also happens is that landlords that own the low income housing (who are often just as or nearly as poor as the tenants) can no longer turn profits at times when demand has increased. There are two effects to this: A) potential builders of new low-income housing are scared off because they won't be able to recoup their initial investment and B) current landlords are unable to use profits to reinvest into their building to update appliances, fix old stuff that's degrading simply due to entropy, etc. These factors result in no new low-income housing getting built (this can be exasperated by zoning restrictions and special interest groups lobbying against new buildings, which happens all the time in San Francisco), and companies/entrepreneurs that do create new housing will favor high-income housing that isn't subject to rent control. Additionally, since the supply of low-income housing keeps shrinking in both size and quality, landlords never have vacancies open for long, which further disincentivizes updating and improving the property. Not only would it be difficult to pay for it, there's no reason to make your property more attractive when consumers' number of choices are so low. All of this results in an extremely low availability of housing (I used to live in SF, and I'd have to sit there refreshing CraigsList waiting for openings, and then a lot of places made you show up with a cashier's check ready to make a deposit to even view the place), and the housing that does open up is offered at a much higher price in order to try to mitigate the losses on rent-controlled housing (artificial inflation caused by the Fed is a factor here as well, but for simplicity's sake, we'll forgo that part) and because they don't have much competition to worry about at all. All of this is why it takes so long for rent control to start doing its damage (it can take a decade or more), and why people don't see the connection between it and the cost of living. Oregon recently passed state-wide rent control, and it's going to be a while before we start seeing the effects, but the bill comes due eventually.

The minimum wage also increases cost of living, but it has a worse effect I'll get into next. If you're running a restaurant (which is tough enough on its own w/o all the government intervention and taxes) and get hit with a minimum wage increase, the cost of your labor is going to go up, which will increase your operation costs if you don't cut staff. If you don't want to cut staff, you have to increase the price of your food. That's a nice, easy way to see how it can increase cost of living, but there's also a ripple effect that's tougher to see and more widespread. If you're paying, say, factory workers minimum wage and can't afford to lower your output, you're going to have to increase the price of your good. Then companies that buy those goods will have to pay more, which will drive up their operating costs, which means that they too may have to increase prices. So, as the minimum wage increases, so too does the cost of living (and, again, artificial inflation plays a role here). Another option is for producers to lower their output, which decreases the amount of wealth creation, and maximizing wealth creation is essential to raising the standard of living for everybody. It is the primary driver of economic progress: the more wealth there is to go around, the more people that gain access to it. It's why free market systems provide such a higher standard of living than socialist systems: when you focus on the distribution of wealth instead of the creation of wealth, the total amount of wealth tends to stagnate and eventually decline (another large part of it is a lack of signals, which I'll get to at the end).

But, the really damning thing about minimum wage is that it effectively makes it illegal for you to sell your labor below a certain price, which completely screws over people that can't yet demand that high of a price (immigrants, teens, etc). The easiest example to follow is that of a teenager looking for their first job: they have no work experience at all and require a lot of training. They may need to learn how to be on work on time, work a cash register, smile at customers, fold a shirt, multitask, prepare food, etc. Businesses that would usually hire teenagers either hire more experienced workers instead or cut the opening altogether. So, now this teen isn't able to get their first job while they're in school, which means they either need to learn skills on their own time, get a degree (and the subsequent debt, but the college debacle in this country is also a-whole-nother topic), or get caught in the welfare trap. This is why minimum wage laws often seem to do great when first implemented (see all the crap written about Seattle) but why those who truly understand free market know that the real cost is going to come down the road when the labor market is overly saturated with unskilled workers.

All of this is why you have to let the free market do its thing. If the supply of housing starts getting low, landlords can raise their prices. This will not only allow them to improve their property, but it will encourage the construction of more housing as entrepreneurs see a potential for profit. After some time, when new housing becomes available and the renters have more choices, landlords will have to drop their prices to stay competitive. The lower rent prices can then encourage new residents to move into the area, and the cycle continues. Prices are not arbitrary and do more than just facilitate exchange: they are signals to the market. High rent is a signal that that area needs more housing to increase the supply, and low rents are a signal that there is plenty of available housing to be filled. The same can be said of wages. Low wages are an indicator that there are too many workers in that industry in that area, and high wages are an indicator that that area needs more workers in that industry. When you remove these important signals, entrepreneurs become more likely to invest resources in areas where they are less needed, and one of the essential functions of an economic system is allocate resources to where they are most desired. (The other signal system central to a free market is profit/loss. If a company is turning a profit, then their output is more valued by society than the resources they used up, and if they are experiencing losses, then society is valuing their output less than the resources they used up. If I buy up a whole bunch of steel to make giant penis statues that no one wants to buy, then I'm wasting steel that could be better used elsewhere.)

by ChillPenguinX   2019-11-17

I don’t, but I’d recommend Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Hazlitt.

by staticjacket   2019-11-17

> Are you contrarian?

Worse, a libertarian

Here are some book recommendations, I’m not breaking down micro-economics for you.

A parable to start: https://en.m.wikipedia.org/wiki/I,_Pencil

https://www.amazon.com/Economics-One-Lesson-Shortest-Understand/dp/0517548232

https://www.amazon.com/Basic-Economics-Common-Sense-Economy/dp/0465002609

https://www.amazon.com/Wealth-Nations-Adam-Smith/dp/1505577128

by br0hemian   2019-07-21

I get painted as a radical in today's backwards world, but anyone who studies economics knows that politically motivated moves like this have no basis in economic reality. You can write whatever laws you want to write, that's not how the value of the dollar is decided. The purchasing power of the dollar adjusts according to its availability - and a number of other factors. Writing a law as simple minded as "you have to pay people more money" takes away from the purchasing power of the dollar. Although probably not the only factor, your rent went up as much as it did largely due to the increase in minimum wage. This is not "corporate greed" it is a functioning economy. It has been done countless times in human history, and yet here we are, actively continuing the bad practice into 2019 and beyond.

I realize this is not the place to get into a huge conversation about this necessarily, so I will stop myself, but if you or anyone is interested in a grounded view on the nature of an economy, I would highly recommend reading Economics in One Lesson by Henry Hazlitt.

by JobDestroyer   2019-07-21

If you're new to econ, I would suggest either Basic Economics, as /u/snatchinyosigns suggested, or "Economics in One Lesson" by Henry Hazlitt.

http://www.hacer.org/pdf/Hazlitt00.pdf

https://www.amazon.com/Economics-One-Lesson-Shortest-Understand/dp/0517548232/ref=sr_1_1?keywords=economics+in+one+lesson&qid=1555251994&s=gateway&sr=8-1

From there, you might want to get into some of the morality-focused books, if you want a short/easy one, I suggest "Anatomy of the State" by Murray Rothbard

https://mises.org/library/anatomy-state

If you want to learn about how an anarcho-capitalist society could work, I'd read Machinery of Freedom by David Friedman

http://daviddfriedman.com/The_Machinery_of_Freedom_.pdf

https://www.amazon.com/Machinery-Freedom-Guide-Radical-Capitalism/dp/1507785607/ref=sr_1_1?keywords=machinery+of+freedom&qid=1555252140&s=gateway&sr=8-1

by ChillPenguinX   2019-07-21

And what about people who dislike her for the lies and economic ignorance she spreads? It never ceases to amaze me that people actually believe that her ideas are feasible. I can just say that X should be free too; that doesn’t magically render X immune to scarcity. Do yourself a favor: read this fantastic book on economics and start being part of the solution instead of the lunacy.

by ChillPenguinX   2019-07-21

Oh yeah, that’s what keeps happening. If you ever want to get a good overview of how everything works, I recommend this book. It’s not too long and speaks in plain language. No charts or equations needed.

by dmfdmf   2018-01-07
Henry Hazlitt's Economics in One Lesson is a good place to start.

https://www.amazon.com/Economics-One-Lesson-Shortest-Underst...

by daniloassis   2017-09-13
One "Old" Book to Learn Economics: Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics [1]

[1] https://www.amazon.com/Economics-One-Lesson-Shortest-Underst...

by pvnick   2017-08-20
The idea that technology will cause widespread job-loss and economic upheaval is such an old fear, and it never works that way. Technological innovations lead to wealth creation 100% of the time, along with more opportunities for more people, even if some jobs are initially replaced with other jobs. "This time is different" is announced everytime, and it's always the same.

This book is very good for anybody wishing to understand basic economic theory and see many examples throughout history of this exact debate taking place over and over and over again: https://www.amazon.com/gp/product/0517548232/ (see the chapter "The Curse of Machinery").

by pvnick   2017-08-20
Henry Hazlitt, one of the economists quoted in the article, wrote a book called Economics in One Lesson [1]. It is a brilliant, and very approachable, piece of writing that should be read by everyone interested in the basics of economic theory.

[1] https://www.amazon.com/Economics-One-Lesson-Shortest-Underst...

by JeffL   2017-08-19
"Economics in One Lesson" by Henry Hazlitt is one of those perfect little books that can greatly expand your world view in one night. I highly recommend it. (http://www.amazon.com/Economics-One-Lesson-Shortest-Understa...)

Also, I second Walden by Thoreau and suggest you read the Fountainhead. The Fountainhead isn't quite as blunt as Atlas Shrugged, but I find it a lot more life affirming and positive.

by dantheman   2017-08-19
There's a lot to economics, one book that I think is really insightful and quite easy to read is Economics in One Lesson. It's main function is to highlight second order effects, or unintended consequences, of legislation on activity.

http://www.amazon.com/Economics-One-Lesson-Shortest-Understa...

by theschwa   2017-08-19
Absolutely the best by far. I know you said no older books, but this one gets it down to basics, and always seems to be an example of "Those who fail to learn from history are doomed to repeat it," is

Henry Hazlitt's Economics In One Lesson http://www.amazon.com/Economics-One-Lesson-Shortest-Understa...

by bushforbrayns   2017-08-19

Your response is very silly. The answer to OP's question is far simpler - no need to call anybody racist - and has to do with economics. Chapter 23 of Henry Hazlitt's Economics in One Lesson explains that the purpose of inflation is to cancel out minimum wage laws. Devalue the currency and suddenly businesses can afford to pay $15/hour to flip burgers. But inflation is worse than that; it necessarily involves a wealth transfer from the poor to the rich (since the wealthiest folks are those closest to the newly minted money). This is very useful to people in power because the effects are largely indirect and invisible.

The Nixon Shock of 1971 removed the exchangability of US dollars and gold, instituting a freely floating currency and unleashing the Federal Reserve's power to devalue the dollar with impunity. This has involved a massive transfer of wealth from the bottom to the top, sucking purchasing power out of the middle class and resulting in the current situation that OP is inquiring about.

This chart shows inequality over time and illustrates what happened since the 70's.

by ashmoran   2017-08-19

Upvoted as I also think a simple right vs left axis is an unhelpful way to describe a complex set of policies.

Regarding an introduction to economics, the best one I've read is Economics in One Lesson. There are other books that work in a more rigorous, step-by-step manner, but every chapter in this is accessible and thought-provoking, and the examples are all concrete, real problems. https://toptalkedbooks.com/amzn/0517548232

by ashmoran   2017-08-19

The advantages of learning about economics go way beyond understanding Bitcoin.

Economics (in the school started by Carl Menger, Ludwig von Mises, etc), is the study of how people act in order to achieve happiness. It asks: given people have certain goals (but without making any judgements on what those are), and limited time and resources to achieve them, how should they act to maximise their satisfaction? Even a man alone on a desert island is acting economically: should he spend another hour making shelter, another hour catching fish, or another hour relaxing in the sun? The economics of trade is built on top of this. Will one person with too much fish, and another with too much wood, discover they're both happier after trading than they were before, even though the total amount of wood and fish in existence has not changed? Indeed, the most important work on economics by Mises is called simply Human Action.

A few years ago I came across a book (Economics in One Lesson ) which began with the following foreword:

>I strongly recommend that every American acquire some basic knowledge of economics, monetary policy and the intersection of politics with the economy. No formal classroom is required; a desire to read and learn will suffice. There are countless important books to consider, but the following are an excellent starting point: The Law by Frédéric Bastiat; Economics in One Lesson by Henry Hazlitt, What Has Government Done to Our Money? by Murray Rothbard; The Road to Serfdom by Friedrich Hayek, and Economics for Real People by Gene Callahan. >If you simply read and comprehend these relatively short texts, you will know far more than most educated people about economics and government. … If you care about the future of this country, arm yourself with knowledge and fight back against economic ignorance.

I did exactly this and read them one by one. I summed up my findings in this blog post. I've found the books in the list above enough to defend against the biggest and most common fallacies you see in the news. I highly recommend reading at least one, if not all of them, and Economics in One Lesson is the one I recommend most.