Friday, July 25, 2014

One Lesson, Ad Nauseum

John Quiggin tells Crooked Timber readers that he's been working on a book that will reply to Henry Hazlitt’s Economics in One Lesson. Hazlitt's book was one of the first places I looked back in 1997 when I began my quest for the origin of the lump-of-labor fallacy claim. The word "fallacy" and its plural appears in the book twice as often (44 times) as the word "economist" and its plural (22 times).

In Quiggin's interpretation, Hazlitt’s one lesson is that prices are opportunity costs. According to Hazlitt, his one lesson is that economics consists of looking beyond the immediate effects of an action or policy, or "what is seen," to the longer term effects that remain unseen. Quiggin objects that there is nothing specifically economic about Hazlitt's avowed lesson, "it merely assumes what is to be proven, that a complete assessment of policy will yield free-market conclusions."

I posted a short comment on Quiggin's post, pointing out that Frederic Bastiat's "Parable of the Broken Window," which Hazlitt presents as an application of his one lesson, is simply a storified version of "supply creates its own demand." I would like to illustrate that point -- and indicate its connection with the lump-of-labor -- here with a  few excerpts from Economics in One Lesson. On page 15 (2007 edition), Hazlitt made explicit the connection between the broken window fable and Say's alleged Law:
Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.
Again, on page 152:
The real purchasing power for goods, however, as we have seen, consists of other goods. It cannot be wondrously increased merely by printing more pieces of paper called dollars. Fundamentally what happens in an exchange economy is that the things that A produces are exchanged for the things that B produces.
Hazlitt's footnote for the argument cites Benjamin Anderson's "A refutation of Keynes' attack on the doctrine that aggregate supply creates aggregate demand," which Hazlitt later reprinted, with effusive praise for the author, in The Critics of Keynesian Economics.

Hazlitt doesn't use the term "lump-of-labor" in the book, but that fallacy argument recurs frequently. On page 45:
I have referred to various union make-work and featherbed practices. These practices, and the public toleration of them, spring from the same fundamental fallacy as the fear of machines. This is the belief that a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates them.  
Allied to this fallacy is the belief that there is just a fixed amount of work to be done in the world, and that, if we cannot add to this work by thinking tip more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible. This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious. 
Page 49:
The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody.  
The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other. What these relations are we shall later consider.
Page 131:
Most of these policies have been followed under the assumption that there is just a fixed amount of work to done, a definite “job fund” which has to be spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false. There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces. 
But because this false assumption exists, and because the policies of unions are based on it, their net effect has been to reduce productivity below what it would otherwise have been. Their net effect, therefore, in the long run and for all groups of workers, has been to reduce real wages -- that is, wages in terms of the goods they will buy -- below the level to which they would otherwise have risen.
Note that in the last quote, Hazlitt rehearses the same "what A produces constitutes the demand for what B produces" argument that he later credits to B. M. Anderson. Hazlitt's juxtaposition of the "supply creates demand" doctrine and the "fixed amount of work" fallacy was not an idiosyncrasy but standard, textbook usage. 

Raymond Bye's Principles of Economics, first published in 1924 became one of the most widely adopted college introductory economics textbooks in the United States during the interwar period. In it, Bye presented an atypically clear exposition of the "'lump-of-labor' or 'make work" fallacy," which he defines as "very similar to the general overproduction fallacy..." "The reader," Bye assures, "will see the error in this sort of thinking if he understands the true nature of exchange." So what is the "true nature" of exchange?
Every laborer creates a product which is offered in exchange for the products of other laborers. The demand for labor thereby grows as fast as its supply; the one cannot be greater or less than the other, for they are the same thing. Every addition to the labor force of a community gives other laborers work to do providing for the needs of the newcomers, while the latter can find occupation catering to the ungratified desires of those who were already employed.
Of course, "supply creates its own demand" was the classical doctrine that Keynes likened to "an optical illusion, which makes two essentially different activities appear to be the same." No, those "two essentially different activities" Keynes referred to were not producing and consuming. They were "decisions to abstain from present consumption" and "decisions to provide for future consumption," the two of which are activated, Keynes argued, by different motives.
It is, then, the assumption of equality between the demand price of output as a whole and its supply price which is to be regarded as the classical theory’s ‘axiom of parallels’. Granted this, all the rest follows — the social advantages of private and national thrift, the traditional attitude towards the rate of interest, the classical theory of unemployment, the quantity theory of money, the unqualified advantages of laissez-faire in respect of foreign trade and much else which we shall have to question.
Why Say's Law did not "sink without trace" in the wake of Keynes's refutation is the topic of the final episode of the supply creates its own demon series.

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