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. 

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”.

Another thing I constantly heard in grad school was: “We are not interested in your inputs.  We care about your outputs.”  In other words, they were not going to judge my work on the basis of my own efforts, but rather what I produced. The first paper I read in grad school was Milton Friedman’s 1953 classic, “The Methodology of Positive Economics,” which said that the accuracy of a theory did not depend upon the reliability or reality of its assumptions, but rather on the theory’s ability “to predict events.”  To put it another way, the outputs of analysis are much more important than its inputs.

I cannot say I disagree completely with that.  Bad theory will produce bad outcomes, yet when one puts together the so-called market test with outcomes-based theory, something does not make sense.  Why?  There is no worse theory out there than Keynesian theory, yet it is taught in the economics textbooks as though it were an unvarnished truth.

The fundamental tenet of Keynesianism is that there cannot be a simultaneous rise in inflation and unemployment, the Phillips Curve being the Holy Grail.  However, when the U.S. and British economies suffered severe stagflation during the late 1970s, people began to wonder what was happening.

I specifically remember seeing ABC’s economic correspondent, Dan Cordtz, around 1979 say that the theory no longer was working, as inflation and unemployment were increasing at the same time.  It was then that the supply-side theory–cutting taxes and encouraging capital formation and production–appeared, and while I have had some real disagreements with the supply-siders, nonetheless they made some good points.

The Keynesians, led by President Jimmy Carter’s advisers and leftists such as John Kenneth Galbraith, declared such notions as cutting taxes and encouraging capital formation to be nonsense.  The cartoonist Bill Mauldin, after Ronald Reagan adopted the supply-side model for his campaign, had a picture of Reagan throwing gasoline (labeled “tax cut”) onto the raging fires of inflation.  The New Republic declared after Reagan’s election that his policies would lead soon to wage and price controls.  Instead, the Consumer Price Index settled into its lowest increases in more than a decade and the economy grew nicely after the 1982 recession.

One would think that this episode would discredit the Keynesian paradigm, but it seems that the beast has more lives than a magic cat.  Today the economics textbooks are dominated by Keynesian theories and Paul Krugman, who openly espouses the Keynesian paradigm, is the latest winner of the Nobel Prize in economics despite the fact that every Keynesian “solution” that the government has applied to the economy has not stopped the economic freefall.

Surely we are speaking of the failure of the Keynesian paradigm to produce satisfactory “outputs,” yet even such failures have not derailed this ideological train.  Are we supposed to assume that even with its lack of ability to predict anything, that Keynesianism still “passes the market test”?

If one compares the Austrian analysis with that of Keynesianism, one sees that Austrian economics wins hands down.  Not only have the Austrians been precise in their assessment of how the financial bubbles have brought down the economy, but also they have accurately demonstrated–through their theories–that the current government plan of borrow-and-print-money-and-spend-wildly is not going to revive the U.S. economy.

If there is a real “market test” of economic theory, it is the test of accuracy.  That academic economists are not willing to junk their Keynesian theories for something that really works is not “proof” that Keynes was right.  Instead, it demonstrates that many economists prefer to keep their heads in the sand.

Most commentators I have read are treating the “stimulus” as a mechanism through which the government is able to “get money into the hands of consumers” in order to cover a supposed “large hole” in consumer spending until the economy “recovers.”  Thus, according to this reasoning, Obama simply is throwing out a lifeline to people who really can use the money.

However, that is not what is happening, and the sooner we understand what the government is doing, the sooner we can speak out against it.  I am going to make a statement that will seem almost conspiratorial in nature, and I am decidedly not a conspiracy theorist.  Nonetheless, I am going to say it: there will be no recovery, and the government is going to make sure that it does not happen.

Yes, I know this seems counterintuitive.  Everyone supposedly knows that the politicians in power want a strong economy so they can get credit for it.  Sorry, people, but that is not how politicians operate.

First, no politician–no president, senator, representative, or judge–can “provide prosperity.”  At best, they can help create a playing field in which the participants in an economy can face consistent laws, protection of property rights, enforcement of contracts, and the other things that entrepreneurs and business owners need to create a prosperous economy.  In other words, the “positive” role that legislators can play is largely negative in practice; it is those things that legislators and others do not do that often help to determine whether or not a nation’s economy will be prosperous.

Second, politicians love to be seen as doing something.  Look at the press treatment given to those members of Congress who have voted against the “stimulus” and to those few governors who have said they won’t take the cash.  (The editorial page of the New York Times seems to be “Stimulus Promotion Central,” and anyone who opposes this legislation is portrayed either as evil or just plain stupid.)

Third, and most important, politicians do not gain votes by doing nothing for their constituents.  A politician who stands before voters and declares, “I have not voted to send you money, but instead voted to create an arena in which entrepreneurs and business owners can help create a stronger economy without government largess,” is not a politician who is going to win an election.

Politicians cannot help individuals who are able to find work in a recovering economy.  However, if an economy consistently has 10-15 percent unemployment and people have to ask politicians for lots of favors, especially when it comes to employment, that presents a wonderful opportunity for those in power.

Indeed, I believe that this administration plans to institutionalize double-digit unemployment and turn the United States into a European-style social-welfare system in which unemployment is high and the economy grows slowly at best, a condition that has been called “Eurosclerosis.”  To those who claim Americans will not put up with this state of affairs, I remind readers that during the New Deal, Franklin Roosevelt and his political allies won election after election despite high unemployment and slow growth.  A recent Thomas Friedman column approvingly lays the new roadmap to this brave, new economy.

From the new financial restrictions to new draconian environmental policies, the government clearly is going to stand in the way of new economic growth.  The “green jobs” path to greater employment is just a myth.  For every new “green job” created, many other sources of employment are destroyed.

Right now, the government is talking recovery.  A year from now people will be trying to survive, and it always is easier to survive when those in power are on your side.

The mercantilists of the 1600s raised this error to the pinnacle of national policy. Always bent upon heaping up hoards of gold and silver, they made war on their neighbors and looted their treasures. If England was richer than France, it was, according to the mercantilists, because England had more precious metals in its possession, which usually meant in the king’s coffers.

It was Adam Smith, in The Wealth of Nations, who exploded this silly notion. A people are prosperous to the extent they possess goods and services, not money, Smith declared. All the money in the world—paper or metallic—will still leave one starving if goods and services are not available.

The “money is wealth” error is the affliction of the currency crank. From John Law to John Maynard Keynes, great populations have hyperinflated themselves to ruin in pursuit of this illusion. Even today we hear cries of “we need more money” as the government’s monetary authorities crank it out at double digit rates.

The good economist will recognize that money creation is no short-cut to wealth. Only the production of valued goods and services in a market which reflects the consumer’s wishes can relieve poverty and promote prosperity.

Those words are still true, if only because our political and financial “leaders” want us to believe that they can end the current recession if the Federal Reserve System creates “liquidity.”  Thus, we see the Fed doing whatever it can to push more money into the economy.

One reason that the “money is wealth” fallacy has thrived for so long is that many people – including academic economists – fall prey to another fallacy, the fallacy of composition (discussed last week).  In the case of money, it is especially pernicious.

Assume, for example, that I had a printing press in my house which could crank out undetectable counterfeit money.  I could print huge amounts and purchase whatever I pleased.  No doubt, I would be better off (as long as the authorities did not discover what I was doing), but others would be made worse off.

First, and most important, is the nature of money.  Money is a good that is used to trade for other goods, and by making trade easier (and more abundant), it is a productive asset.

However, as Adam Smith understood, money itself is not wealth; instead, it is a good that we use in order to obtain wealth.  (Pieces of government-produced green paper do not qualify as historical “money.”  Government’s monopoly on money has led to its debasement.)

Second, money follows the same economic laws that govern all other goods.  The more money created, the less its marginal value.  (In other words, money is subject to the Law of Decreasing Marginal Utility.)  Many economists have missed this point.

In typical academic classes, money is described as a quantity variable.  Double the amount of money and the “price level” doubles as well, but the monetary increase has brought about no real harm.  Other academic models note that an increase in the amount of money will increase the amount of wealth (call it “Gross Domestic Product”), even if it also raises the “price levels.”

While such models are easy to teach (and to use for solving math problems), nonetheless they are inaccurate at best and dangerous at worst.  They do not demonstrate what really happens when the amount of money in an economy is increased.  If the process of creating more and more money by fiat (called inflation) goes on unchecked, as it did during the past decade, then not only does the value of money on the margin fall, but its growth triggers an unsustainable boom that ultimately collapses in a bust.

This process has repeated itself time and again, which demonstrates that most policy makers do not understand that money is not wealth.  The lesson still has not been learned.

Next Week: The Fallacy of Production for its Own Sake