Fairchild, at the time a professor of economics at Yale University, attacked the ability-to- pay-principle of taxation, which states that the rate at which one is taxed should increase as income increases. And as Read told Hazlitt in the letter, “It is extremely important at this particular moment.”

So why might Leonard Read and the other founders of FEE have wanted to start with that topic?

The answer lies in what the principle truly means to a free society. Like the income tax itself, the ability-to-pay principle threatens the very foundation of a free society. It attacks private property and the wealth creation that comes with it.

Progressive taxation hides behind the mirage of social justice. But the principle itself is vague and lacks any true logical foundation. If followed to its logical conclusion, it would mean complete financial equality among all citizens. For any excess amount that one person has over another, no matter how small, would indicate an ability to pay more in taxes. And as Ludwig von Mises put it, “The only logical stopping place of the ability-to-pay doctrine is at the complete equalization of incomes and wealth by confiscation of all incomes and fortunes above the lowest amount in the hands of anyone.”

This is dangerous and counterproductive for a free and wealthy society. The only realistic way to achieve such equality is to level downwards, making us all worse off. It would cut away all the incentives to be productive. After all, money does not make money. As Murray Rothbard put it,

“To be earned, money must continually be justifying itself in current service to consumers. Personal income, interest, profits, and rents are earned only in accordance with their current, not their past, services. The size of accumulated fortune is immaterial, and fortunes can be and are dissipated when their owners fail to reinvest them wisely in the service of consumers.”

By taking away the profits of those who had previously and successfully satisfied consumers, we are taking away their incentives to do so again in the future. This also takes away the incentives of anyone new from similarly trying to create wealth.

Thus this justification of taxation attacks the very nature of what makes our society wealthy. It undermines our property rights and the incentives to be productive. It is not the justice of a free society but rather of highway robbers. We should be vigilant against anything that attacks the foundation of a free and prosperous society. Leonard Read and the rest of FEE’s founders understood this.

Download Read’s Letter to Henry Hazlitt from December 12, 1945 here. 

Take for example the issue of bureaucracy. Most bureaucracies are seen as terribly inefficient. The average person may even rant about how terrible the DMV or post office is (no matter how much it tries to appear like a normal business). Most people may understand that the problem has to do with incentives, but they will still probably think there is no choice but for the State to perform such functions. They likely believe that making a few changes or putting in the right bureaucrats can fix things.

Today’s document, Henry Hazlitt’s New York Times review of Ludwig von Mises’s Bureaucracy, shows why we come to view bureaucracies as inefficient. They simply lack the knowledge and incentive to perform efficiently no matter how benevolent the bureaucrats may be. As Hazlitt states, “For the main thesis of Professor von Mises is that bureaucracy is merely a symptom of the real disease with which we have to deal. That disease is excessive State domination and control.”

The issue, as Mises puts it, is whether society should be organized on the basis of private ownership or government control of the means of production. Should goods and services be provided by market or State bureaucracies. It’s one or the other; there is no compromise. With each you get a different set of incentives as well as a different ability to collect and use the information necessary to make efficient decisions.

In a totally free market a private firm (or department within) is guided by the profit motive. It has discretion to expand and experiment as it sees fit. If it fails it will know and if it succeeds it will be rewarded. Bureaucracies, on the other hand, are not guided by the profit motive. The quality of their work cannot be judged in monetary terms. They can have little-to-no discretion since their work must be centralized and operate under the detailed controls of their superiors. Market value cannot be attached to their “product.” In other words, they cannot engage in economic calculation.

The irony is that the decentralized market may seem chaotic and out of control, but in reality it produces efficient outcomes. Resources get channeled to where consumers most want them, to the betterment of everyone. On the other hand, the seeming control of centralized State power is actually a mess of inefficiency that is simply unable to achieve the stated ends.

Incentives do matter, and correcting those incentives starts with picking the right institutions for our society to operate under. Once we understand this, we will choose the free market.

Download Hazlitt’s Review of Mises’s Bureaucracy here.  

Today’s document is a review of Henry Hazlitt’s A New Constitution Now from The Nation on December 5, 1942, by an unknown author. It’s titled “Constitutional Practices vs. Constitutional Revolution.” The author seems skeptical of Hazlitt’s main and radical point, but is overall just descriptive. Hazlitt wanted to replace our current system with an English parliamentary system. Why? Because by 1942 Franklin Roosevelt had almost a complete disregard for the Constitution. Presidential power had grown. The constitutional constraints simply were not working. Hazlitt’s case can still be made today.

Hazlitt’s proposal was radical, not because of what he suggests we replace our current system with, but rather because he saw a problem in the first place. The reviewer wrote, “I feel that it indulges in rather too much exaggeration to be as effective as it might have been.” Such attitudes can cause massive problems. It can lead to adoptions of amendments such as the 18^th amendment (Prohibition), which was not meant to restrain the government’s power but to actively extend it. Such attitudes can make a constitution no constitution at all.

The constitutional political economy project, which James Buchanan and Gordon Tullock revived in economics back in the 1960s, is no easy task. Politicians are not so noble as Ulysses, and are unwilling to bind themselves to the mast. And as Tullock pointed out, any government strong enough to create the chains to bind themselves are strong enough to break them anyway. The fact that Hazlitt saw the need for a constitutional revolution back in 1942, and that the case can still be made today, are not good signs.

Hazlitt’s solution, a parliamentary system, might not be the way to go either. As he admitted later in life, his proposal didn’t explain how to check the parliamentary power. No one has produced a real solution for how to maintain a limited government. Maybe there is no way. As Ludwig von Mises put it, “The state is the negation of liberty.” The State’s tool is coercion after all. Hazlitt was right about one thing though: The first step is to admit there is a problem.

Download the book review of A New Constitution Now here. 

The closest the Soviet Union came to actual pure socialism was the period known as War Communism, 1918 to 1921. This period is unanimously seen as a disaster, even among socialists. Production fell in most if not all industries, and millions starved to death. From then on the Communist Party struggled to keep hold of both their Marxist ideology and their power. Naturally the latter took precedence, and as a result the price system, which they originally wanted to abolish, took on a larger and larger role. Henry Hazlitt discusses Josef Stalin’s struggle with exactly this problem in today’s document, the October 20, 1952, Newsweek Business Tides column, “Stalin as Classical Economist.”

The Soviets certainly liked to keep up appearances. At a glance the Soviet economy looked centrally planned. The planning board for each industry set output levels, and the State owned de jure all means of production. A closer look, however, revealed a different story. As Boettke and Anderson pointed out, the Soviet economy was closer to that of a mercantilist economy, a heavily regulated market economy effectively run by rent-seeking government officials and factory managers. De facto, the factory managers were the owners and residual claimants. They paid the State for the right to run the factory, and in return the State created a monopoly for them, just as in the mercantilist system of old.

Middlemen, known as the Tolkachi, worked on behalf of the State enterprises to sell surplus commodities on the one hand and purchase needed products on the other. They essentially created a market that allowed for economic calculation not possible under a pure socialist system.

This system of course was highly inefficient and unstable, but it allowed the Soviets to stay in power a lot longer than would have been possible under their socialist dream. As Hazlitt put it, “[B]ureaucratic price fixing is a farce, a fraud, and a disaster, . . . economic planners are presumptuous blind men groping in the dark, and . . . there is no substitute for free markets.” In reality, as Hazlitt shows of Stalin, the Soviet rulers were simply putting on a show. Playing the role of the productive socialist economy was capitalism itself.

Download Hazlitt’s “Stalin as Classical Economist” here. 

Thus Hazlitt is a perfect individual to trust when it comes to advice on what individuals interested in economics and freedom should read. It is no surprise that throughout his life, as a writer for many prominent newspapers and magazines, including the New York Times  and Newsweek, Hazlitt’s advice would be sought by eager readers. This prompted him to write The Free Man’s Library. Published by D. Van Nostrand Co. Inc. in 1956, the book contained 550 titles on the philosophy of liberty, covering a wide range of topics: from why free trade and free markets work to the evils of excessive State power. The Free Man’s Library, however, doesn’t simply list the books but also provides a critical description of each work.

Today’s document (sorry for the faded quality) is a short list of the best economics books in The Free Man’s Library.  Hazlitt hoped “that it will answer most inquires by readers along these lines.” He presents his own Economics and One Lesson (no sense being modest with such an amazing book!) and Faustino Ballve’s Essentials of Economics as the best introductory books. Wilhelm Röpke’s Economics of the Free Society is listed as the best intermediate work. The best works critical of government intervention are Röpke’s A Humane Economy and F. A. Hayek’s The Road to Serfdom. The dangers of inflation are explained in Gottfried Haberler’s Inflation: Its Causes and Cures and Hazlitt’s own What You Should Know About Inflation.

Finally, he presents four books he thinks are the best comprehensive and advanced works on the principles of economics. To anyone who knows Hazlitt’s work the first two should be no surprise: Human Action and Murray Rothbard’s Man, Economy, and State. A third is Hayek’s The Constitution of Liberty. The last is Philip Wicksteed’s 1910 book, The Common Sense of Political Economy.

All these books deserve to be read more than they are today, particularly Wicksteed’s, which developed a system of political economy from reflection on and careful study of the everyday conduct of human beings. Economics concerns all people whether they know it or not. Thus we need to understand the economy as a system. Understanding this is more likely to make us free.

Download Hazlitt’s best of The Free Man’s Library here. 

A large motivation in the early days of economics as a discipline was to fight that fallacy. The mercantilists were seen as the villains in Adam Smith’s work, and this continued into the nineteenth century and up to today. Today’s document, a Henry Hazlitt Newsweek Business Tides column from March 13, 1961, helps to show how alive and well protectionism was in the 1960s.

So why is protectionism a fallacy? First, wealth is not money. When we buy goods and services from abroad, the money leaves the country but something we value even more replaces it; trade is mutually beneficial. Wealth is an increase in the things that make us better off, money is our medium of exchange. Second, when domestic producers are outcompeted by foreign producers this frees up domestic producers to make something else that we were not able to make before. Now we get the goods we purchased abroad plus other goods we value. Society sees a net gain, not a loss. And finally, trade is two-sided. When we buy something from abroad with dollars, in the long run those dollars must come back, either through the purchase of domestic goods or investment in domestic industries. So buying foreign goods eventually stimulates domestic production.

As a result protectionist policies hurt domestic consumers. The extent of the division of labor is reduced, and resources are made more scarce. With the scope production narrower than it would have been, we are less, not more, wealthy.

Economists have long pointed out the absurdities of protectionism. Frederic Bastiat, in one of the most famous and best allegories in economics, ironically “called for” measures to protect French candlestick makers from unfair competition from —  the sun! If we are to protect domestic producers from other foreign competitors why not stop one that competes with them for half the day?

Clearly this would be an absurd use of resources and would make everyone worse off.

This is why nineteenth-century economists had such an affinity for the smuggler. As Nassau Senior put it, “[T]he smuggler is a radical and judicious reformer.” In countries which excessively prohibit the importation of foreign goods, he said, “the smuggler is essential to the well-being of the whole nation.” Economists such as Senior saw those who defy these bad laws as our only protection against the ruin these laws bring.

Protectionism may sound like a good idea but it misses most of the picture. In reality it helps a few at the expense of everyone else. It is pretty obvious that the sun is not our enemy, but neither are foreign producers of the goods we love to consume. If they can be consumed at lower cost than domestic producers can provide them, then this is a good thing.

Download “Protectionism” by Henry Hazlitt here. 

Rothbard articulates the economic way of thinking in a clear and straightforward way, making economic theory accessible to a wide variety of individuals. His discussion on price formation (not determination) is significant for understanding Austrian price theory. His elaborations on capital, production and entrepreneurship, money’s role in the business cycle, monopoly and competition, the role of the State, and political economy are all indispensable for economists to better understand the world outside our windows. Peter Boettke and Christopher Coyne have also pointed out the vital insights Rothbard contributed to the socialist calculation issue in Man, Economy, and State.

The bottom line is, despite being a principles text, Man, Economy, and State made important analytical contributions to economics. It also is taken for granted just how knowledgeable Rothbard was of mainstream economics of the time, which is illustrated by his footnotes. These footnotes deserve as much attention by scholars as the main text.

“It is in fact the most important general treatise on economic principles since Ludwig von Mises’ Human Action in 1949.” These closing words of Hazlitt’s review help to clearly illustrate my point. Hazlitt was not one to make such a statement lightly. Human Action was of earth-shattering importance for individuals like Hazlitt. Just as in 1962, both books are still as important today, along with F. A. Hayek’s Individualism and Economic Order and Israel Kirzner’s Competition and Entrepreneurship. These are the texts that anyone who claims to have mastered Austrian economics needs to have read and absorbed.

Download Hazlitt’s review of Man, Economy, and State, “The Economics of Freedom” here.

In today’s document, Henry Hazlitt’s 1962 Business Tide Column article for Newsweek entitled “Worth the Price?”, the question of whether the Space Race was worth the price is addressed. It is particularly interesting to see Hazlitt’s perspective given it was written before we had reached the moon. Hazlitt ultimately sounds as if the price is far too high and the reason deals with the inability of the government to properly assess the costs and benefits of engaging in the space exploration.

For many, if space exploration was to occur at all, it needed to be conducted by the state. The costs are simply too great and the ability to transform the possible benefits, such as scientific and technological discoveries, were too difficult to transform into “profits” for private businesses to undertake. But with a new space race starting to develop this claim is becoming less true. The new race seems to be between NASA and private companies attempting to reach Mars. Back in 2007 NASA stated the goal of putting a man on Mars by 2037 and recently the private company SpaceX, which is already attempting commercial space travel, stated their goal of establishing a means of getting to and from Mars.

As technology is improving the discovery process of the market is in full swing with entrepreneurs finding new ways of improving and satisfying the desires of his fellow man. And space exploration seems to be in the cards.

The difference between NASA and the private companies is in the price. With NASA we need to ask, like Hazlitt did some 50 years ago, is it worth the price? But with the private company, no such question exists because the market, through the profit and loss mechanism, provides the answer. Going to Mars is a risk; it may or may not be worth the price. With NASA the government takes our money whether we like it or not and there are no signals to say whether it was truly what people want or not. With private companies, however, if the venture is not worth it, they would know because they would have lost money. Money, which was voluntarily provided at the investor’s own risk. If it pays off then the rewards will be in the form of profits and others will follow suit, further reducing the costs and increasing the availability for others.

Asking whether something, particularly expensive as space exploration, is worth the price is an important question. And it is a question we should have a real answer for. So, maybe this, as with so many things, is another example of the state overstepping its bounds.

Download Hazlitt’s “Is it Worth the Price?” here.

In today’s document, a letter from John Maynard Keynes to Henry Hazlitt dated September 17, 1931, Keynes reluctantly declines Hazlitt’s offer to participate in a series of articles entitled “If I were dictator.” Hazlitt’s project seems to never have come to fruition (though it is possible I was simply unable to find it). Still, what would it have been like with Lord Keynes as dictator? Despite the fact that, at the time of this letter, Keynes had yet to publish his General Theory, a book Hazlitt himself spent much effort attacking, the idea of dictator Keynes would raise many eyebrows.

In spite of the positions Keynes took throughout his career, the widespread view in academia is that Keynes was a model classical liberal, who many profess to be the “savior” of capitalism. Keynes even viewed himself as a defender of a free society. How he differed from most classical liberals was a result of him trying to update the essential liberal principles to the more modern economic conditions.

Still, many may find it difficult to square this with many of his strange beliefs. In 1933 he endorsed, though with reservations, the social “experiments” of the 1930s of Germany, Italy, and Russia. In the introduction to the General Theory he admits his approach to economic policy is better suited to a totalitarian state, such as the one run by the Nazis. He said the Soviet Union was a book “which every serious citizen will do well to look into.” And Keynes’s new economics presented in the General Theory gave the state more control over the economy.

If it were up to me I would certainly not want to see the dictatorship of Lord Keynes. He was far from a “model” classical liberal, in fact he was a statist, a defender of mercantilist ideas, and apparently had a little too much sympathy for some of the 20^th centuries most ruthless regimes. Keynes was undoubtedly a brilliant man but in the battle of ideas of the 20^th century a true classical liberal would have to say F. A. Hayek was right and Keynes was wrong. Still, it is a shame Keynes had to turn down Hazlitt’s invitation to participate because at the very least what he had to say would have definitely been interesting.

Download the September 17, 1931 Letter from J.M. Keynes to Henry Hazlitt here.

As economist Wilhelm Röpke put it, “When demanding assistance from the state, people forget that is a demand upon the other citizens merely passed on through the government, but believe they are making a demand upon a sort of fourth dimension which is supposed to be able to supply the wants of all and sundry to their hearts’ content without any individual person having to bear the burden.”

It is as if the state has become an entity that owes us all a living, and its ability to provide that living is almost magical. Individual’s expectations of what the state can do seem to belong more in a Harry Potter novel than reality. As English historian T. B. Macaulay put it, “it is supposed by many that our rulers possess, somewhere or another, an inexhaustible storehouse of all the necessaries and conveniences of life, and from mere hardheartedness, refuse to distribute the contents of his magazine among the poor.”

In reality, we all live in a world of scarcity. Everything we do has trade-offs. This is why Milton Friedman said there is no such thing as a free lunch. When a resource is used in one manner, then the next highest valued use, or the opportunity cost, is given up. Who pays for the goods and services we have in this life, no matter how essential to our lifestyles, is not irrelevant. How resources are allocated is also not irrelevant. If one does not pay for something, but gets it provided nonetheless, then there is a good chance that good will be overused and wasted, and this is no accident.

Sending other peoples money is easy. Why should you care how much it costs as long as you can get the highest value out of what you get? And when we spend other people’s money on other people, we again, don’t care about the cost but also put much less concern into the value others get out of it. In contrast, when we spend our own money we typically want the highest value for the lowest cost we can find. This is why a world in which the consumers foot the bill is more likely than not going to be more efficient and wealthy (and even for the least well off).

The common belief in what the government can provide is indeed a delusion. There is no forth dimension. The government’s ability to provide so-called essentials comes at a cost and is typically very inefficient. If we leave the responsibility to the individuals, the world will work much better than most seem to think. Remember, this is not an argument against charity. There is nothing wrong with voluntarily helping those in need. But a world where individuals are forced to provide for others is unsustainable. We must abandon the fantasy that the state operates outside of constraints and scarcity. We must wake up to the reality, whether we like it or not, that prosperity is created by the desire of man to improve his own lot in life. And, in general, this requires personal responsibility.

Download Henry Hazlitt’s “The Fourth Dimension” here.

Planning, even for freedom, inevitably leads to a totalitarian state due to the problems of economic calculation and bureaucratic inefficiencies. The efforts to plan, from both the right and left, were the real danger. Thus, Hayek was offering a warning to the countries of the west to avoid the paths taken by both Nazi Germany and the USSR. The analysis within the book traced out the unintended undesirable consequences of attempting democratic planning. Even these civilized attempts can end up with the result of a totalitarian state.

The book was written for the British audience and thus little was expected of it in the United States. In fact, Hayek, with the help of Fritz Machlup, attempted to find an American publisher with much difficulty. Three publishers rejected the book before the University of Chicago Press agreed to publish the it with just 2,000 copies in the first printing. When the book came out, however, it quickly sold out thanks to a laudable review by Henry Hazlitt on the front page of the New York Times book review section.

Over the years Hazlitt was often asked to tell how he helped make The Road to Serfdom a hit. Today’s document is a letter from Henry Hazlitt explaining just how this happened. The book became an even bigger hit after a condensed version appeared in The Readers Digest, again thanks in part to Hazlitt, as well as a cartoon version that appeared in Look.

Recently the book is once again seeing an increase in sales thanks, in part, to Glen Beck’s promotion. Both friends and foes, however, often miss the important message of the book. It frequently gets written off as an argument from the extreme right. Conservatives do use the book to attack the welfare state. This is different from the type of socialism Hayek was referring to; he meant the nationalization of the means of production, not extreme wealth redistribution through taxes and welfare programs. Though, in the preface to the 1976 edition Hayek did admit he believes such a system would lead to the same problems but in a longer and different way described in the book.

This does not make Hayek’s argument conservative. In fact, while Hayek did believe a certain level of conservativism was necessary in any stable society, it is not a social program and contains many dangerous tendencies that are paternalistic, nationalistic, and power-adoring and as a result put it much closer to socialism than classical liberalism. In many ways Hayek is right. Conservativism is by its very nature bound to protect the established privilege and to lean on the power of government to protect such privilege. The classical liberal tradition, on the other hand, is the denial of all privileges.

The point is that the road to serfdom is a result of us giving up our own ability to run our own lives. Once we accept the top-down authoritarian worldview we create a sickness in ourselves, which leads to more trouble than even the most well-intentioned social planner would ever want. Ideas have consequences and planning, as Hayek traced out, leads to consequences few of us are willing to accept. As John Papola and Russ Roberts put it, what we want is the plans of the many not the plans of the few. Hayek’s book is only a warning but we should listen before it’s too late.

Download the Henry Hazlitt letter from January 30, 1975 about his role in the success of the road to serfdom here.

Take, for just one of many possible examples, the current drive for stricter immigration laws. Recently Alabama governor Robert Bentley has signed the nations strictest immigration law. The issue is certainly one many Americans take very seriously. One concern many have with allowing more immigration is the loss of American jobs to foreign workers. This logic is not wrong but rather is incomplete. This is a consequence of looking only at the immediate direct effects rather than all the effects in the long run. As Bastiat put it, we need to see the seen, as well as the unseen.

If asked almost everyone would clearly prefer more to less, but by supporting tougher immigration individuals are advocating a desire for less. Meaning they desire to have fewer in the labor force by keeping foreign workers out. Why? Well, mostly out of a false premise. They view the number of jobs as a fixed pie, if an immigrant takes a job then that is one job an American cannot have. They also see that this would also mean lower wages for those “lucky” Americans who still have their jobs. The more labor that enters the market, the more wages are depressed.

These presumptions are, however, false. Immigrants do not steal domestic jobs. This is because in the long run higher number of labor frees up individuals to move on to producing different and new goods and services that were not possible when there were fewer in the labor force. The pie is not fixed; in fact, more labor allows the pie to grow. Wages also don’t end up being depressed either. Why? Well, most immigrants don’t substitute for domestic skill sets, they complement them, again this frees up domestic labor to produce different goods and services, as a result we all become more productive.

Not surprisingly, empirically this is what economists find: over the last 50 years the work force has grown dramatically, but unemployment rates have remained relatively constant. People currently see our high unemployment rate and blame the wrong cause. More labor, from foreign sources, will allow us to produce more at a lower cost. The high unemployment is due to our misguided monetary policy that produced malinvestment. Many are unemployed because producers are struggling to reallocate resources back to what consumers are actually demanding (see this article for more on this). If anything, the more immigrants who join the labor force the faster we can recover.

The problem, as Bastiat pointed out, really boils down to which group the law should care about, producers or consumers. As producers we desire goods on the market to be scarce because it means we can receive higher prices for them. As consumers we want the opposite. The two are critically opposed to one another. As a result only one can be for the betterment of society. And a wealthy society is one where individuals are able to satisfy as many of their desires as possible. This can only be done the more abundance there is. The answer then should be obvious when we think about it in this way.

One thing is clear: Bastiat was and still is very relevant. There should be no doubt Bastiat’s writings have had an important impact on the world and it is up to us to make sure he still continues to do so.

Download Henry Hazlitt’s “Bastiat for ‘65” here.

Many individuals in favor of liberty simply retire from the social and political world into their own occupations and let the light slowly extinguish. Luckily, there are always the brave few who fight to keep the idea of liberty alive and well. They hold their candles up and fight the battle of ideas in order to make the world a better place, or, at the very least, attempt to make the world a better place. Undoubtedly, the world should be indebted to these individuals for keeping the hope alive, for these individuals are necessary to achieve any sort of liberty.

There is, however, another direction a libertarian can take. In the words of Murray Rothbard, “he can stay in the world, enjoying himself immensely at this spectacle of folly.” In other words, he can lampoon the society, which is turning its back upon the path it should be on. This is a cynical approach, but probably more important than is often realized. Rather than attempting to extend your flame, you mock the system and those who remain in the dark, while having fun doing it.

This was the path taken by the journalist H.L. Mencken. Many write Mencken off as merely a conservative, but as Henry Hazlitt pointed out, this is far from the truth. Mencken was a very principled libertarian. Behind the words he used to lampoon society’s follies, he consistently championed liberty and the dignity of the individual. His attacks upon the welfare state, censorship, prohibition, etc. were more than the grumblings of a crotchety cynic; they were a consistent defense of liberty through pointing out the errors of others.

Mencken used to refer to politics as a carnival of buncombe, which means unacceptable behavior. As he once said, “a good politician is quite as unthinkable as an honest burglar.” And he took great enjoyment in this, as, “A national political campaign is better than the best circus ever heard of, with a mass baptism and a couple of hangings thrown in.” The whole process is a result of what the people want. To Mencken democracy meant the right of the majority to suppress or persecute a nonconformist minority. As he said, “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” This was the system we asked for and the results were what we deserved.

The world could do with another Mencken. Of course its crucial to have those who expound the importance of liberty, but it is also important to have someone point out the absurdity of our current ways. After all, at best another Mencken will influence others to fight for liberty, and at worst we can at least enjoy the show. For Mencken may only have been a journalist, but as Hazlitt pointed out, he knew what he was talking about.

Download Mencken: A Retrospect by Henry Hazlitt here.

Richard Cornuelle wrote several books on voluntary society. His first, and most known, was 1965s Reclaiming the American Dream. In this book he builds on Alexis de Tocqueville to illustrate how a society of free and responsible individuals live, participate, and prosper in caring communities through commercial activities. Friedrich Hayek even relied on Cornuelle’s argument in this book while writing his three-volume set Law, Legislation, and Liberty.

In his second book De-Managing America (1975) he rejects the idea that society should be managed by some central authority. Instead, he inserts, society should be the outcome of voluntary interactions of individuals and communities, because decentralization could more effectively mobilize and correct human action. Managers, or politicians and bureaucrats, whom we have come to rely on, are much more clueless and helpless than we have ever imagined, resulting in many of our problems.

The “sickness” of America is our ever-growing size of government. This is Richard C. Cornuelle’s argument in his 1983 book Healing America. The fruits of increasing statism have resulted in larger bureaucracies and increasing taxes, which is continually putting a heavy burden on the productive private sector and causing a decline in the quality of community services. The answer is not more statism but a drastic reduction in the size and scope of the state. Today’s document is the review of this book by Richard Ebeling that appeared in the January 1984 Laissez Faire Review.

Richard Ebeling explains that Cornuelle’s solution is for society to come to a better understanding of how voluntarism works, so we can intellectually and ideologically defeat the case for more government involvement in our lives (also see here, for why Peter Boettke believe this book can also help us solve our current crisis).

Richard Cornuelle’s lifetime liberty work has already made a lasting impression. Now it is up to us to continue to read his wonderful books, so we come to a better understanding of voluntarism and perhaps one day live in a voluntary world he wrote so clearly about and understood so well.

Thank you, Richard C. Cornuelle, for all you have done and for the lasting impression you will continue to have.

Download the Ebeling Review of Richard C. Cornuelle’s Healing America here.

Today’s document is a negative review of Henry Hazlitt’s book The Inflation Crisis and How to Resolve It by Marilyn Vencel, published in the Wilton Bulletin in September 1978, and two letters to the editor in response, one from Hazlitt’s friends Richard and Viola Turner and another from Hazlitt himself. Vencel’s review is mostly vicious and empty rhetoric, as the Turners point out, but at its heart is the complaint that Hazlitt’s theory on inflation is simplistic. Ironically, in making this argument she oversimplifies Hazlitt’s arguments to the point of distorting his position.

Now it stands to reason that a complex theory isn’t correct merely because it is complex. And similarly, a simple theory isn’t necessarily wrong because it is simple. After all, there is danger in overcomplicating matters. As Occam’s razor states, “Entities should not be multiplied unnecessarily.”

But there is another problem. Hazlitt’s argument against inflation uses basic economic theory, which is not really simple. Basic economic theory describes a complex order of economic forces at work, matching the most willing suppliers and the most willing demanders in order to realize mutual gains from exchange. It shows us markets work extremely well but only in the correct institutional context. Leonard Read’s “I, Pencil” tells us exactly why this is far from simple. And Hazlitt’s work on inflation tells us exactly why inflation distorts market signals.

Hazlitt’s book was of course put in simple terms. After all it was written for a popular audience, and the solution of “stop printing more money” is simple, but it is not a description of a simple theory. Inflation’s distortion of market signals is real and has negative consequences. Hazlitt’s book shows us why those consequences, such as the undermining of production incentives, are not something to brush aside. Institutions matter, and the rules regarding money are particularly important. Sound money is crucial for market forces to function properly. When one understands basic economic theory, one intuitively sees why inflation is undesirable, but that doesn’t mean the theory is simplistic.

Download the Wilton Bulletin review of Hazlitt’s The Inflation Crisis and How to Resolve It here.

“In this age of the great struggle in favor of freedom and the social system in which men can live as free men, you are our leader. You have indefatigably fought against the step-by-step advance of the powers anxious to destroy everything that human civilization has created over a long period of centuries…. You are the economic conscience of our country and of our nation.”

Henry Hazlitt spent his career in journalism promoting the works of the Austrian School of economics. What separated Hazlitt from the rest, and lead Mises to call him our leader, was his understanding of economics. Although he had not been an economist by training or profession, his work proved he understood the economic concepts better than many with doctorate degrees. Through his work in journalism and organizations like the Foundation for Economic Education and the Mont Pelerin Society he was able to spread the ideas of liberty and economics to audiences that would not dare to pick up professional journals or technical tomes, like Human Action.

Today’s document, a letter from the Canton Supply Company to Hazlitt on April 17, 1951, illustrates how Henry Hazlitt spread important ideas of liberty through his work. The letter is a piece of fan mail praising Hazlitt for his book The Great Idea, which was republished later as Time Will Run Back. This book is a distinctive and often forgotten work by Hazlitt. It is different because in the form of a fictional novelit attempts to illustrate the knowledge problems associated with socialism. While few may find the tale of dystopia where an ignorant young man inherits the role of dictator of a world communist system to be classic literature, it is nevertheless a brilliant economic step-by-step reasoning from the failure of communism back to the success of a purely free market.

Henry Hazlitt’s book explains why socialism as a means is impossible for achieving the desired ends of an advanced material society. The idea that socialism fails to connect the means with the desired ends come from Mises’s “Economic Calculation in the Socialist Commonwealth” and Hayek’s “The Use of Knowledge in Society.” While in debates on the merits of socialism college students commonly respond “but socialism is perfect in theory,” Mises and Hayek illustrate why this socialism is complete nonsense even in theory. Sadly, Mises and Hayek were not known to be good communicators. Hazlitt, on the other hand, was a skilled, clear, and entertaining writer. He may be gone, but because his work lives on he is, in many ways, still our leader.

Download the Canton Supply Company to Hazlitt letter of April 17, 1951 here.

Joseph Kennedy is, of course, most famous for being the father of President John F. Kennedy and Senator Robert F. Kennedy, but a close second is known for taking part in the notorious trade in which he (possibly) made his family’s fortune; namely bootlegging alcohol during the Prohibition.

Alcohol prohibition is largely considered a failure today and for good reason; see for example, Douglas Roger’s review in the Freeman of Daniel Okrent’s fantastic book Last Call: the Rise and Fall of Prohibition. The negative consequences of America’s noble experiment stretched far and wide. The quality of liquor went down, potency went up, and as result the emerging black markets created environment of secrecy, corruption, and violence, etc. The 18^th amendment even bred contempt for the law, which led many to refer to the 1920s as the lawless decade.

Kennedy’s story, however, shows that not everyone found prohibition to be so bad. Many, like Kennedy, gained greatly from the temperance movement’s ploy. These bootleggers, rumrunners, gangsters, and others operating in the black market not only didn’t find the law a disadvantage but also openly supported it, even financially. This is what Bruce Yandle referred to as the bootleggers and Baptists theory of regulation. All regulation is supported not just by those who viewed as moral, but also by those who stand to gain at the expense of others.

Prohibition transformed the market for alcohol into a violent and dangerous trade by weakening property rights and driving its activities underground. Supporters of various prohibitions today, such as the prohibition of drugs and tobacco, should learn a lesson from this story. We must, as Frederic Bastiat warned, look at not only what is seen but also what is unseen. Sure people are gaining from these laws, but is this at the expense of everyone else? We need to ask whether these laws are achieving the real desired ends or helping to line the pockets of some while harming many others. Lets face the facts, just like alcohol before, drugs have not gone anywhere and violence has increased. No matter what your feelings on such substances are, there must be a point where you step back and say, “this is just not working and not worth it.”

Download the Kennedy to Read Letter here.

*This post is dedicated to my very good friend and colleague Douglas Rogers. The world has been robbed of a great mind. Doug’s work on organized crime was an important part of seeing the unseen effects of all prohibitions. He was also a passionate teacher of economics and advocate of liberty. I feel wealthier for having known him and I am sure I’m not alone.

Even in spite of this, it is still amazing to see today’s document (which is difficult to read so I apologize), as it is difficult to think of a correspondence between two people more different on so many margins. The document is a letter from Bolshevik revolution leader Leon Trotsky to free market journalist Henry Hazlitt on November 12, 1931. The letter has Trotsky responding to Hazlitt’s request for an article meant for the Nation, which Hazlitt was managing editor. At the time Trotsky was in exile in Turkey. It was nine years before he was assassinated with an ice axe in Mexico.

Trotsky did publish one article in the Nation entitled “The French Revolution Has Begun!” in 1936. Whether this is the article discussed in the letter, however, is not certain. Still, Hazlitt publishing the work of an intellectual opponent is a good idea, particularly by someone of Trotsky’s reputation and standing. As, M. Uritsky, another Bolshevik revolution leader, once said, “Now that the great revolution has come one feels that however intelligent Lenin may be he begins to fade beside the genius of Trotsky.” The stronger the arguments for socialism that we can take down, the better chance we have for strengthening our ideas, which makes it more likely they will be understood by more individuals.

Another reason not to worry is that Austrian economics is particularly apt at arguing against the major flaws of socialism and communism. Mises had demonstrated the impossibility of socialism by 1920. And some 15 years after this letter, Hayek, in 1945 would show why Mises’s argument was still relevant for a not so pure form of socialism, such as the Soviet Union.

Download the Trotsky to Hazlitt Letter of November 12, 1931 here.

Or read the text here:

Kadikoy, Turkey

November 12, 1931

Mr. Henry Hazlitt,

Managing Editor, the Nation,

New York, N.Y.

Dear Mr. Hazlitt,

In reply to your letter of September 23^rd, can advise that I hope that I hope to deliver an article of the kind you want for the Nation, but this I cannot do at the present time.

Just now I am very busy completing the last chapters of the second volume of my “History of the Russian Revolution”, which I must finish by the 1^st or December of this year.

In January, if nothing interferes, you will receive my manuscript. I must warn you however, that I will write in Russian because I do not have anyone here who can translate it into English or American.

Very truly yours,

L. Trotsky

This is certainly a useful tool but what makes supply and demand so amazing is the human action and process of exchange that takes place, which makes it work. Supply and demand is a starting point of analyzing human action. In today’s document, a letter from F. A. “Baldy” Harper to Henry Hazlitt on April 3, 1946, Harper illustrates this well through an example of unintended consequences of rent control.

Supply and demand tells us that if a rent control policy is enacted below the market price, which is a price control, there will be a shortage. Meaning landlords are not allowed to raise the rent to the market-clearing price. There is a shortage because at this lower rent more people will want to rent apartments than people are will to supply. This is all we can say using the simultaneous equations of supply and demand but this is far from the end of the analysis. Many more questions are important. What does this do to the incentives of the landlords? The renters? What further unintended consequences will this produce? Etc.

In this letter to Hazlitt, Harper points to one unintended consequence that effects the very people the price control is meant to help. The policy is meant to give renters a lower price so more can rent apartments but what happens is it compels individuals to sell the houses to homeowners rather than renting it out. Thus cutting out the renters all together. This example Harper raises is just one of many. Rent control affects people in many ways from quantity of housing available to quality (many studies have even shown pictures of bombings from world war II and rent controlled housing side by side, with it being difficult to tell which is which!). And rent control is, itself, just one example of disturbing the market process.

The laws of supply and demand have amazing explanatory power but its important to remember why. It is not simply a story of X marks the spot but the consequences of human action as people respond to the incentives of market forces at work. It is for this reason the lessons of economics should never be ignored.

Download the April 3, 1946 letter from Baldy Harper to Henry Hazlitt here.

Still, even FEE has long given Bastiat credit for the quote. In today’s document Leonard Read writes, in a September 16, 1952 letter, to Rose Wilder Lane, one of the great classical liberals of the 20^th century herself, asking her for the source. It is doubtful she found it. Still, while it is still possible Bastiat is the originator, we do know there is a quote from Otto T. Mallery, a late 19^th century liberal, in his “Economic Union and Enduring Peace” which states, “If soldiers are not to cross international boundaries, goods must do so. Unless the Shackles can be dropped from trade, bombs will be dropped from the sky.” So, the question remains, are we falsely attributing Mallery’s words to Bastiat? Or did Mallery get it from Bastitat or somewhere else?

Regardless of its source these words ring true. The idea can be traced back even further to the 18^th century in Montesquieu’s 1748 work L’esprit des Lois or the Spirit of the Laws. In this work Montesquieu discusses the civilizing effect commerce has upon societies. Further, in a more modern context, Ludwig von Mises in Human Action discusses the importance of social cooperation, which Henry Hazlitt also uses as the foundation of his book the Foundations of Morality; trade has the effect of increasing social cooperation by allowing us to specialize and expand the division of labor. This is beneficial for everyone in society because it allows us to do more than is possible if everyone was in isolation. In other words, trade allows us to work together for our own benefits. We become dependent, in a good way, upon each other, which allows for greater cooperation and wealth. Take this away and conflict is the likely alternative outcome.

So irrespective of who said it, the lesson is clear and important: free trade not only increases the wealth of different societies, it might also be necessary for peaceful interaction.

Download the September 16, 1952 letter from Leonard Read to Rose Wilder Lane here.

In regards to Economics in One Lesson, I am not alone. In fact, Ayn Rand’s main competition very well may be Hazlitt’s fantastic introduction to economics. The book is revolutionary to so many because it corrects the misconceptions so many of us have towards the subject of economics. And, it not only points out the correct way to think about economics, it also shows just how entertaining and important it is, and in only one lesson!

Today’s document, a letter to Leonard Read on February 18, 1982, shows Hazlitt discussing one of the books that “almost” revolutionized his way of thinking, namely Ludwig von Mises’s Socialism. He says “almost” because he was never inclined toward socialism but it did change the way he thought about it. This should not be surprising if one knows Mises’s argument against this so-called “perfect in theory” economic system. Most see socialism’s weaknesses from the incentive problems they cause (which are certainly real) but Mises shows it is doomed to failure before it even starts. Socialism is impossible! Due to the central ownership of the means of production there is can be no exchange, without exchange there can be no prices, and without prices there can be no rational economic calculation. The lack of economic calculation makes it impossible for socialism to achieve the material wealth promised by the socialist dream. So, in Socialism (which expands upon his 1920 article “Economic Calculation in the Socialist Commonwealth“) Mises demonstrates not only that socialism is not perfect in theory but strictly impossible. Thus, Mises argument against socialism is certainly most likely to have a revolutionary impact on most people’s thinking, even if they were already against socialism.

While Socialism was certainly not the direct influence on Economics in One Lesson, that would be Bastiat’s essay “What is Seen and What is Not Seen,” it is clear to see why the lesson is so important. The economic system as a whole is very important, getting these institutions right is crucial. Thus, all the more reason to think about what happens in the long run and for everyone. If only we could get more people to read these revolutionary books.

Download the Letter from Hazlitt to Read on February 18, 1982 here.

The birth of Public Choice as a field within economics can be traced back to the publication of James M. Buchanan and Gordon Tullock’s 1962 book the Calculus of Consent (although economists such as Duncan Black were working on voter models as far back as 1948). Anyone familiar with Austrian economist Ludwig von Mises cannot fail to see his influence on the Calculus of Consent. In fact, many Austrian ideas can be viewed as precursors to Public Choice analysis; F.A. Hayek’s analysis of how the “worst get on top” is just one example.

In today’s document, a letter dated March 17, 1948 from F.A. “Baldy” Harper to Henry Hazlitt, contains some very Public Choice thoughts. Harper, who was the main economist working for FEE at this time and who went on to found the Institute for Humane Studies, is discussing some of his thoughts on the House Agricultural Committee shelving the oleo tax repeal bill. This would repeal a major tax on oleo, better known as margarine. He points out how the public is overwhelmingly against the tax, 79% in some polls (interestingly even a large number are farmers). Clearly special interest groups have a strong influence despite public opposition, in this case its, most likely, in the form of butter producers.

Harper points to the flaws in incentives created by the structure of the committee system. The way he sees it, the job of screening the bills is delegated to committees, in this case the agricultural committee. The members of the committee must be predominantly person’s “sent to congress to protect our interests”, in this case agriculture. The incentive of such a system is to favor the special interests. Harper is merely speculating, as he is really suggesting that someone, sometime, should analyze this deeper. But in his mere speculation he is anticipating much of the work Public Choice economists would soon be doing.

Download the Harper to Hazlitt letter from March 17, 1948 here.

Hazlitt’s points about Johnson’s arguments are interesting and well worth reading, particularly about Johnson’s final argument about immigration. Immigration is certainly a topic even free market advocates find controversial today. Many libertarians and classical liberals disagree on the subject but few will disagree about the effects of the minimum wage law. Today, many non-libertarians have made the argument for higher wages to keep immigrants out (see David Henderson’s freeman article attacking the economic fallacies of such a proposal) but the fact remains, no matter your feelings toward immigration, such proposals are economically unsound.

Johnson states, “Immigrants and children of immigrants make up the mass of those most cruelly sweated. *** A nation-wide living wage might at first produce unemployment, but in the long-run, chiefly in consequence of the check it would give to immigration, the slack would be taken up by the natural development of industry.” Much of this anti-foreign bias is built around the fallacy that immigration hurts the economy by bringing down local wages. If all else were constant this might be true. An increase in supply, holding everything else constant, would lower wages. The problem with this logic is that immigrant labor brings offsetting effects. With their wages comes a demand for goods and services, which creates new jobs. Of course it is an empirical question as to which effect is greater. Conservative estimates suggest that immigrants have a net gain of 20 million dollars to the economy.

So, no matter what your opinion on immigration maybe, it is important not to throw economic theory out the window. Economics is a value free science and can only tell us what is, not what should be. In looking at these types of questions we should agree with Hazlitt that one should favor arguments that look for the truth and not simply assume we are correct at all costs. The lesson here: in social questions argue like a judge not an attorney.

Download Hazlitt’s letter on minimum wage here.

There were, however, also some points of disagreement. Rand labeled her philosophy Objectivism. This stood in contrast to the radical subjectivism of Mises’ work within the Austrian tradition. For example, money (even the gold standard) for Mises derives its value from the subjective preferences of individual agents but for Rand gold is an objective value. This can be seen in many of the speeches made by characters in Atlas Shrugged. The character Fransico d’Anconia, in his famous speech on money in the chapter the Aristocracy of Pull says, “Gold was an objective value, an equivalent of wealth produced.” Another point of departure was on ethics. Mises was also a utilitarian, which Rand (whose philosophy was rights-based) despised, even referring to Mises “as that old fool.”

In this letter to National Review editor William F. Buckley Jr., Henry Hazlitt tells the very amusing tale of Mises and Rand’s first meeting. Given these disagreements from these two very passionate thinkers it is not completely surprising to hear that their first meeting did not go very smoothly. The story has gotten around Libertarian circles for a long time, but in this letter Hazlitt sets the story straight.

Download the Letter From Henry Hazlitt to William F. Buckley Jr.

The difference is in the desire to achieve such an end. Lenin wanted the fall of the Capitalist system in order to usher in the Communist revolution. Hazlitt, on the other hand, makes the point that Lenin was right more as a warning. During this time the currency, in bank deposits and outside currency, was growing and Hazlitt warns readers of the hidden costs of such a monetary policy. The point is very similar to his main thesis in his book Economics in One Lesson,

“The art of economics consists of looking not merely at the immediate 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.”

Hazlitt wanted to show the hidden costs of monetary interventions into the market system and how they are particularly destructive.

The other interesting aspect of this rough draft, and relevant today given the current crisis, is how the whole first page is a paraphrase of John Maynard Keynes. The article can be seen as an attack on the Keynesian system. Keynesians wanted to steer the economy in the short run which ignores Hazlitt’s one lesson. After all, Hazlitt was no fan of the Keynesian system and he still uses Keynes’ own words to make a large part of his argument. It goes to show how far Keynes went from The Economic Consequences of the Peace to the General Theory.

Download “Lenin Was Right”.

It takes some sophistication to follow Henry Hazlitt’s economics lesson and trace the consequences. Under the new supply and demand conditions, if prices cannot rise beyond a certain arbitrarily set level, supplies will run short, since people have no incentive to conserve and entrepreneurs have no incentive to divert goods from where they are relatively plentiful to the stricken area where they are relatively scarce.

Similarly, most people think the minimum-wage law is a good thing because they dislike that unskilled workers are paid very low wages. What could be more humanitarian than to set a floor beneath which wages cannot fall? If they thought like economists, they would realize that a mandatory minimum wage set above the marginal productivity of unskilled labor creates unemployment or less-desirable jobs for the workers it is intended to help.

But lately an idea has been floating around that anyone should be able to see through because it has no superficial logic whatsoever. It goes like this: The government hasn’t been able to spend $500 billion fast enough to stimulate the economy, so the only thing to do is . . . give the government even more money.

Huh? How does that make sense?

The Obama administration, for now, seems to grasp the weakness of this reasoning, but the same cannot be said for some members of Congress. There is talk of a second “stimulus” package. We shouldn’t discount the possibility that the congressional backers of a new bill know it’s a ridiculous idea but that they stand to benefit from passing it anyway. That’s how incentives work in the political system.

The first “stimulus” package under Obama was no such thing. As has been noted many times, any money the government spends must be acquired from somewhere in the economy first through borrowing or taxation. While moving money around may stimulate a given activity, it comes at the price of the other activities to which that money would have been directed. And since bureaucrats, not entrepreneurs, direct the “stimulus” projects, this redirection of scarce capital is detrimental to consumer welfare. If the projects served consumers and thus were profitable, they would have been undertaken privately and more efficiently than bureaucracies could have accomplished them.

The money in the earlier bill was supposed to be used for what we were assured were “shovel-ready projects.” But the truth seems to be that precious few were shovel-ready. They won’t get started for a year or more.

Edward Lazear writes in the Wall Street Journal, “By June 26, about $56 billion [out of about $500 billion] was spent on the stimulus from the American Recovery and Reinvestment Act of 2009, passed Feb. 17. A large proportion of that actually reflects mere transfers from the federal government to state governments, so the amount that has gotten into the economy is significantly lower.”

What Were They Thinking?

Thus even if the “stimulus” plan had been sound in theory, back-loading the spending to such an extent undermined its stated purpose: immediate job creation. It makes you wonder what the bill’s architects had in mind. Did they actually believe what they were saying? If so, their actions make no sense. When the bill passed in February, the unemployment rate was 8.1 percent, Today it is 9.5 and rising. That doesn’t seem terribly stimulating. Obama might claim he saved some number of jobs, but he wouldn’t be able to prove that.

Administration spokesmen are now asking for patience, but they are the ones who created a public expectation of quick stimulus. They have only themselves to blame for the disappointment showing up in the popularity polls.

Outside advocates of stimulus, such as Paul Krugman, will say the unabated rise in unemployment only proves what they said all along: The spending package was too small. But that is not a satisfying rebuttal. First, as noted, if government agencies can’t disburse a half-trillion quickly enough to jolt the economy, logic compels us to conclude that they can’t disburse a trillion. Should they fly around in helicopters and drop the money? (That wouldn’t work — people would do unpatriotic things like save or pay off debts.)

Second, economic theory refutes the Krugmanian claim. Since government can spend only what it has first taken from someone else (by borrowing or taxation), the spending can’t create jobs on net. So even if the government-created jobs were real jobs — in the sense that they ultimately contributed to consumer well-being according to consumers’ own priorities — they were created at the cost of other productive jobs that would have been created in the absence of government intervention. Resources are scarce; government spending displaces private economic activity. There is no way around that.

If the Stimulus I was a bad idea, Stimulus II is even worse.

And we’ve only just begun.

FEE Timely Classic:
“What Spending Deficits Do” by Henry Hazlitt