Henry Hazlitt’s Economics In One Lesson: The Shortest and Surest Way to Understand Basic Economics—originally written in 1946—is still important reading today. Here’s the point of the book:
The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence.
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or public policy;
it consists in tracing the consequences of that policy not merely for one group but for all groups.
He explains:
The bad economist sees only what immediately strikes the eye; the good economist also looks beyond.
The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.
The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.
Hazlitt used the broken window illustration to make his point.
A classic example is raising the minimum wage. This helps workers who will now make more money. But it also means that there will be fewer workers. So the unintended consequence is that more people are hurt than would be helped.
Or consider health care reform. The intention is that more people will have insurance. But the reality will likely be the opposite: two years from now less people will have insurance than they do now.
Confused?
Listen to a couple of economists at the EconLog explain:
If preliminary summaries of Obamacare are true, it looks like individual health insurance will soon be a better deal than employer-provided health insurance. In the individual market, you can now wait until you’re really sick to buy insurance: “Heads I win, tails I break even.” Firms won’t have that gimme – and it seems more valuable than premiums’ tax deductibility. Admittedly, Obamacare imposes a small penalty on individuals who don’t buy insurance, and a moderate penalty on firms that don’t provide it. But it still seems like it will be in the financial self-interest of many firms and their workers to get rid of insurance, and split the (cash savings minus penalties).
As of now, a rational individual would not choose to obtain health insurance, and a rational new business would not offer health insurance. In both cases, that is because the legislation has made it illegal for health insurers to discriminate against people on the basis of health status. So the cost of obtaining health insurance while you are healthy will stay high–in fact, market forces should send it higher–while the cost of remaining uninsured has dropped dramatically.
Is it time to bet that there will be more Americans uninsured two years from now than there are today? Or will the law produce results that are consistent with intentions, regardless of incentives?
My point here is less about the rights or wrongs of health care, but rather the encouragement to use contemporary news as an opportunity to practice critical thinking and good economics as we try to think through the things in the right way.
Update: As commenters are pointing out, the best books on the market for an introduction to economics are in Thomas Sowell’s triology:
- Basic Economics: A Common Sense Guide to the Economy
- Applied Economics: Thinking Beyond Stage One (hardcover: 60% off at Amazon at time of writing)
- Economic Facts and Fallacies
