Day 1 of Robert Wenzel’s 30-day reading list

27 Jun

Henry Stuart Hazlitt (November 28, 1894 – July 9, 1993) was an American economist, philosopher, literary critic and journalist for such publications as The Wall Street Journal, The Nation, The American Mercury, Newsweek, and The New York Times, and he has been recognized as a leading interpreter of economic issues from the perspective of American conservatism and libertarianism – Wikipedia

As per my previous post, I have set out on a task to go through Robert Wenzel’s 30 readings prescribed for an introduction to the Austrian school. The below are my thoughts on the first reading, ‘The Task Confronting Libertarians’ by Henry Hazlitt.

Hazlitt mentions early in the article that libertarians are a minority, and the task laid before them of defending free markets and civil rights is tremendous. It is important to think over this again. We do not realize how pervasive government intervention has become. We regard many activities as unquestionable prerogative of the government- like issuing currency. A lot of conventional brain washing has to be reversed before it may strike someone – why should the government really control the money supply? It is in this sense that libertarians are a minority- what they question has already been settled by the society in favour of the government.

Hazlitt outlines some basic principles which a libertarian can use to defend the free market ideology. They are a nice summary of some standard criticisms against government intervention.

One simple truth that could be endlessly reiterated, and effectively applied to nine-tenths of the statist proposals now being put forward or enacted in such profusion, is that the government has nothing to give to anybody that it doesn’t first take from somebody else.

Any government expenditure has to be met by taxes. A government may borrow, but borrowings too have to be eventually redeemed by the tax payers. In a paper currency system, the government may print money, but printing money is also financed by a covert ‘inflation tax.’ The bottom line- there is no free lunch. We may clamour for government subsidy on petrol, but its our own money that will be used to finance such a subsidy program.

Hazlitt writes,

Thus, it can be pointed out that the modern welfare state is merely a complicated arrangement by which nobody pays for the education of his own children, but everybody pays for the education of everybody else’s children; by which nobody pays his own medical bills, but everybody pays everybody else’s medical bills; by which nobody provides for his own old-age security, but everybody pays for everybody else’s old-age security; and so on.

As noted before, Bastiat exposed the illusive character of all these welfare schemes more than a century ago in his aphorism: “The State is the great fiction by which everybody tries to live at the expense of everybody else.”

Another line of argument against government intervention would be to question “Instead of what?” This would be the opportunity cost argument against government expenditure. For e.g., a tax financed aid program launched by the government would preempt resources from some other use.

The third basic principle of ‘knowing the consequences’ is what I find the most appealing.

Another very important principle to which the libertarian can constantly appeal is to ask the statists to consider the secondary and long-run consequences of their proposals as well as merely their intended direct and immediate consequences.

Lets take an example. The Indian government recently introduced legislation to reserve 25% seats in private schools for students from disadvantaged sections of the society. The ‘direct and immediate’ consequences of this are so attractive that it looks like a great piece of legislation. After all, what could be wrong in giving disadvantaged students access to top class education facilities? Its only when the ‘secondary and long-run consequences’ of this policy are considered that a different picture emerges. What impact will this move have on the supply of quality schooling in India? Does this legislation redeem the government of improving the state of public schools in villages? How will the quality of education be impacted? What does the historical precedent of reservations suggest – like reservations in India’s higher educational institutes? Has the policy worked there against the stated objectives? One also needs to consider the negative effects of the increase in government confidence to introduce such legislation elsewhere. Tomorrow, will the government legislate that out of 4 seats in a car, one seat has to be reserved for a disadvantaged pedestrian?

There are many such questions. One could go on and on. The bottom line being that government intervention, albeit for a noble cause, can bring the baggage of unintended consequences with it. And whats worse is that such unintended consequences only becomes obvious after close examination.

One could mention here an oft repeated point by Milton Friedman – government policy should be evaluated based on its actual impact, not on the basis of its stated objectives.

My own addition to the Hazlitt’s basic principles on how to defend libertarian views-

Its very simple. Replace the word ‘government’ in an argument with the name of a politician – for starters, you can use Lalu Prasad Yadav.

The poor in a society will be looked after by the government.

The poor in a society will be looked after by Lalu Prasad Yadav.

You will immediately see the difference. The first sentence sounds very credible because it evokes images of a paternal body called ‘government’ which looks after its citizens, much like a shepherd looks after his sheep. However, the government is nothing more than the politicians who constitute the government. In this sense, the word ‘government’ is actually an euphemism – an euphemism for corrupt politicians. A point made evident by the second sentence.

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4 Responses to “Day 1 of Robert Wenzel’s 30-day reading list”

  1. Somya Sethuraman June 28, 2012 at 4:20 am #

    a very thought provoking article….but i think the example that you used in the end is misleading…you intentionally chose a corrupt politician to prove your point..not everyone is corrupt..and the government doesn’t constitute of only the corrupt politicians…i am not a firm believer of the free market economy but i am also not completely against it…i would be interested in articles which support and prove that free markets really work, rather than just hear libertarians ridicule the governments…

  2. Anand June 28, 2012 at 12:30 pm #

    Thank you for the post Ravi. Interesting take you have on this. Keep writing, it will be good a get a different perspective on economic ideas and concepts.
    I wrote a long reply but when I tried to post it, wordpress did not register it 😦
    Nonetheless I am trying again. This time I am typing and saving in MS Word first and then pasting it on WordPress (hedging).
    Hazlitt, in essence, argues the following:
    1. Personal freedom/liberty should not be curbed.
    2. There should be no government or there should be a very small government
    3. All Inflation is government made i.e. Inflation is purely a monetary phenomena
    4. We should return to the Gold Standard.
    My Responses are as follows
    1. Unfettered personal freedom can be detrimental to others. As an analogy imagine that no one follows traffic signals under the pretext that traffic lights hinder personal liberty. In such a case no one would ever get anywhere and there would be chaos on the roads. Some people may be run over by some else trying to exercise her/his personal liberty of wanting to drive fast. Therefore, personal freedom/liberty is fine as long as it does not negatively affect someone else. To bring in another analogy, it would irk me if my neighbor blared music in the middle of the night. To argue in terms of economics, what happens if a large trader hoards say pulses/onions. Obviously, that will negatively affect others. Therefore, personal freedom should be allowed as long as it is not detrimental to others.

    2. I am strongly in favour of small governments. There is no role of the government in the service industry (Air India?). However, I also believe that governments are necessary. In the absence of governments who takes care of general administration/roads/law and order? One could argue that these functions could be done by private agencies. But then who pays for these services. One would need to collect money from people who would want to use these services. Some people may refuse to pay (public good problem). Theoretically, even if one is able to collect money, isn’t it like paying taxes to support the government. The government renders a service and hence must be paid. The quality of service could be questioned. Milton Friedman put it aptly when he said – government policy should be evaluated based on its actual impact, not on the basis of its stated objectives. The government could be coaxed into providing better services. But getting rid of the government entirely is impractical.

    3. I thought this debate was settled conclusively. When one argues that inflation is a monetary phenomena it is inherently implied that inflation is a purely demand side phenomena. However, there are numerous examples of situations when inflation is caused by supply side factors (Oil Shocks). How does one explain inflation in rice or cereals with increase in money supply? It is improbable to think of a situation where people start consuming more of rice/cereals when they have more money (excluding people at the margin). Inflation in these items is caused by supply side factors.

    4. The idea of having one authority responsible for money supply stems from the fiat that usually provides confidence in the currency. The entire currency system is hinged on the fiat that backs the currency. This fiat will not be present if too many agencies control/affect money supply. Coming to the point of the gold standard, the official gold holdings are about 32,000 tonnes that translates to about USD 1.7 trillion. Clearly even if all the official gold was used as currency it would not be able to cover all financial payments due today. There are other inherent problems with the gold standard that led to its demise.

    The libertarians are concerned only with efficiency without any regard to equity/equality. While efficiency is necessary, should equity be disregarded to pursue efficiency?
    Keep Posting

  3. Ravi Saraogi June 28, 2012 at 3:56 pm #

    @ Somya – Yes, I intentionally chose a corrupt politician to illustrate my example. Of course not all politicians are corrupt. Similarly, not all government interventions are bad.

    The first few readings may be very theoretical as they illustrate the principles behind the free market economy. As we move on, lets hope we get some readings which take us through some examples.

  4. Ravi Saraogi June 28, 2012 at 5:42 pm #

    @ Anand – Hey, thanks for your comments. Following are my observations regarding the points you raised.

    1. Obviously there cannot be unfettered freedom. Libertarians recognize this. Milton Friedman has a nice quote (by a Supreme Court Justice) in his book Capitalism and Freedom – “My freedom to move my fist must be limited by the proximity of your chin.”

    2. There are different schools even within the Libertarian view. The concept of no government is echoed by a school of thought labelled as anarcho-capitalism. Based on my understanding, what we are talking about here is a small government. The Milton Friedman brand of libertarianism envisages the following roles for the government in a free society- a) Government as rule maker and umpire – basically a body that implements and enforces private property rights, without which a market cannot function b) Action through government in cases of technical or natural monopolies c) Action through government in cases of neighbourhood effects or externalities d) Action through government on paternalistic grounds

    3. I do not have much idea regarding this, so I will refrain from commenting.

    4. This criticism is perhaps the most common against a gold standard. But it has been addressed by several Austrians like Ron Paul and Murray Rothbard. It is in fact not true at all that you need gold equal to today’s paper money to shift to a gold standard. Lets keep this as a topic for a blog post. For starters, you can refer to the an excellent book by Murray Rothbard – What has the Government done to our money? Its an eye opener.

    At the end of the day, I guess for topics like Capitalism vs Socialism, there are no absolute truths. What is important is that we keep an open mind. We still have so much to learn in economics and to feel that we have it all figured out is nothing but foolishness. During my graduation days, I was squarely in the socialist camp (what with heavy doses of Galbriath and Schumpeter). Presently I am impressed with Libertarian ideas. Five years down the line, my views might change.

    I think this is the beauty of economics- centuries have gone by, and yet we have no consensus.

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