Monday, 8 December 2008

Henry Hazlitt on the so-called “free market”

I have recently been reading Economics in One Lesson by Henry Hazlitt, and this section from the end of Chapter XVI particularly caught my attention:

[B]y the greatest miracle of all, this postwar world of super-international controls and coercions is also going to be a world of "free" international trade! Just what the government planners mean by free trade in this connection I am not sure, but we can be sure of some of the things they do not mean. They do not mean the freedom of ordinary people to buy and sell, lend and borrow, at whatever prices or rates they like and wherever they find it most profitable to do so. They do not mean the freedom of the plain citizen to raise as much of a given crop as he wishes, to come and go at will, to settle where he pleases, to take his capital and other belongings with him. They mean, I suspect the freedom of bureaucrats to settle these matters for him. And they tell him that if he docilely obeys the bureaucrats he will be rewarded by a rise in his living standards. But if the planners succeed in tying up the idea of international cooperation with the idea of increased State domination and control over economic life, the international controls of the future seem only too likely to follow the pattern of the past, in which case the plain man's living standards will decline with his liberties.

8 comments:

John said...

The problem is that the free market as it is known has caused its own temporary, at least, demise.

Once you surrender your principles to the state due to your own inefficiencies and corruption that's it.

Anonymous said...

John, it wasn't the free market. It was the U.S. Congressmen, who wanted to increase the number of house owners over the amount at which the number of house owners would have settled on free market. Therefore they persuaded, pressed and forced the banks to lend money for people who couldn't pay it back. That is, they interfered to the function of markets, which means that they can hardly be called "free" anymore. The result is now visible for everyone, but don't blame "free markets" for it, because there isn't any free markets anymore.

dreamingspire said...

And, from his restating his lesson at the end, his thesis is for an era of increasing prosperity. At the very end, he deals with the plight of those who suffer as a result of a change in economic conditions brought about by “the increased supply or new discovery” making them poorer because they lose out - in other words, with the granularity of progress of the free market:
"It is altogether proper – it is, in fact, essential to a full understanding of the problem – that the plight of these groups be recognized, that they be dealt with sympathetically, and that we try to see whether some of the gains from this specialized progress cannot be used to help the victims find a productive role elsewhere."
He was writing in 1946 - but, from just reading those last few pages, I don't see how we apply that today. Or should the oil rich, cash rich nations help the rest of us?

Tom Papworth said...

I think that he is refering to those temporarily put out of work as old industries give way to new (for example, as the makers of CDs and CD players are put out of work as we shift to downloading MP3s). He is talking about temporary unemployment relief, and perhaps retraining, I think.

What he certainly opposes is efforts to keep people in jobs that are no longer useful - either because technology has moved on or demand has shifted.

BTW: I think we are a cash-rich nation!

Kit said...

My favourite line from the book is:

"demand and supply are merely two sides of the same coin"

It maybe stating the bleeding obvious but so few people understand.

John said...

I see our old friend Anonymous is back spouting neocon nonsense. It is true that some of the damage was by the means you state - far and away the most damage was caused by greedy people who persuaded the naive to take on new ARM loans when they had either already paid off their loans or were paying off their loans quite easily. Apparently 80% of the so-called `sub-prime` loans were to this group.

Yes the people were greedy and naive - yet the regulators were lazy and naive.

The idea that the banks were all helpless maidens is laughable - why then did they reparcel these loans to each other on a giant pyramid scheme?

Tom Papworth said...

John,

The bankers certainly deserve their share of the blame for reckless credit expansion. But this would not be possible if government did not underwrite banks through the central bank system.

It is also worth noting that the sub-prime crisis was partially forced on US banks by the Community Reinvestment Act, and partially was a natural response by banks to the excess of liquidity created by central banks imposing artificially low interest rates.

As for “the banks... reparcel[ing] these loans to each other on a giant pyramid scheme”, that was invented by Freddie Mac which is... er... a Government-run agency.

I’ve written about this whole sorry saga before.

dreamingspire said...

Indeed I'm sure that Hazlitt was referring to those temporarily displaced as you say - I have no problem at all with that working of the free market, and have myself participated in the ups and downs (including supplying state of the art equipment to the money markets over 20 years ago - my up was someone else's down, and vice versa later - and usually you can see it coming and individually make your own plans in mitigation). Again, H was in an improving environment where progress was rewarded, and he looked to govt to help those whose route was (hopefully temporarily) down through market forces.
As in my earlier posts, the position now is that something that none of us can personally control or even sometimes mitigate is pushing very many of us down, reducing almost the entire market. Cameron's call again this morning (R4 Today) for a cut in public sector spending suggests to me a further reduction in market size - more people out of work with nowhere to go. You might argue that this is just a savage free market adjustment, but it isn't my competitor who beats me this time, because we competitors are all in it together.
So how about this? Keep public spending more or less the same, but re-orient it. Cameron was, however, right in complaining about waste in the public sector, but you only put that right if you have competent people at the top, and in many areas of the public sector we do not have that luxury. I was myself in front of 3 civil servants last week, as they tried to work out how to make something work better - but they don't have the knowledge, the skills, the support from other parts of their dept, the courage to tell their bosses the same; they are wasting your money and mine. So: politicians, have a faceup with those civil service depts and local authorities that are failing us, and tell them that they must reform their Victorian organisations (and become contrite instead of arrogant) or be pilloried (warn the First Division Association first).