Two works in one volume:
Economics in Three Lessons
Henry Hazlitt’s 1946 book Economics in One Lesson sold more than a million copies. It is perhaps the best selling economics book of all time. In this book, Hunter Lewis, a Hazlitt admirer and student, provides a sequel and update.
The central lesson of Hazlitt’s seminal work is that economic thought and policy must consider all the consequences of an action, not just the immediate or most visible ones. Hazlitt is right that this is the kernel of all good economics. Lewis covers this theme and also introduces two more lessons: how a free and uncontrolled price system creates prosperity and how a controlled or manipulated price system creates only crony capitalist corruption and, ultimately, poverty and economic failure.
The great merit of this work is its brevity and simplicity. Anyone can read and understand it. It is an ideal introduction to economics.
One Hundred Economic Laws
In this groundbreaking work, Lewis does what no one has attempted to do, at least not for many decades. It collects in one place some of the most important laws of economics.
Everyone understands the importance of understanding the laws of physics and other natural sciences. Are there also laws of economics? Can understanding them also make our lives better? Lewis answers with a resounding yes to both questions.
We need the laws of economics to help guide our choices and actions in a very uncertain world. We also need them to protect us from the “thinkers for hire” who, paid by special economic interests, try to persuade us to ignore reality.
This short work is also a complete course in economics. Unlike the dry-as-dust and often irrelevant textbooks forced on high school and college students, it is written in a lively and even sparkling style.
About the Author
Hunter Lewis is co-founder and former CEO of global investment firm Cambridge Associates, LLC and author of 12 books on economics and moral philosophy. He has contributed to the New York Times, the Times of London, the Washington Post, and the Atlantic Monthly, as well as numerous websites such as Forbes.com, RealClearMarkets.com, and many others. He has served on boards and committees of fifteen leading not-for-profit organizations, including environmental, teaching, research, and cultural organizations, as well as the World Bank.
ECONOMICS IN THREE LESSONS
Lesson One: Sustainability
1: Henry Hazlitt’s Invaluable Insight
Lesson Two: The Free Price System
2: The Central Role Played by Free Prices
3: What Prices Do for Us
4: The Role of Profits in Driving Down Prices
5: Who Are the Bosses in a Free Price System?
6: “Spontaneous Order” from Free Prices
7: The Essential Role of Loss and Bankruptcy
8: What About Inequality?
9: Why Greed Is Not “Good” in a Free Price System
Lesson Three: Enemies of the Free Price System
10: Crony Capitalism
11: Laissez-Faire Contra the Cronies
12: Today’s Crony Capitalism
13: The Crony Capitalist Conundrum
14: The Progressive Paradox
15: Where Does This Leave the Poor?
16: How the Fed Fits In
17: The Fed’s Conflict of Interest
18: Who Exactly Is Feeding off the Fed?
19: Keynes’s General Theory: The Crony Bible
20: Saying Goodbye to Crony Capitalism
ONE HUNDRED ECONOMIC LAWS
I: Laws of Economic Analysis
- Law of Analytic Laws
- Corollary A of Law of Analytic Laws: Material Life
- Corollary B of Law of Analytic Laws: Boundaries
- Corollary C of Law of Analytic Laws: Physical Science Myopia
- Corollary D of Law of Analytic Laws: Logic
- Corollary E of Law of Analytic Laws: Mathematics
- Corollary F of Law of Analytic Laws: Economic Data
- Corollary G of Law of Analytic Laws: Predicting the Future
- Corollary H of Law of Analytic Laws: Immutability
- Corollary I of Law of Analytic Laws: Universality
- Corollary J of Law of Analytic Laws: Corruption
II: Laws of Economic Sustainability
- Law of Sustainability
- Corollary A of Law of Sustainability: Unintended Consequences
III: Laws of the Division of Labor
- Law of the Division of Labor
- Corollary A of Law of the Division of Labor: Voluntary Exchange
- Corollary B of Law of the Division of Labor: Private Ownership
- Corollary C of Law of the Division of Labor: (Law of ) Potential Diseconomies of Scale
- Corollary D of Law of the Division of Labor: (Law of ) Diminishing Returns
- Corollary E of Law of the Division of Labor: (Law of ) Potential Economies of Scale
- Corollary F of Law of the Division of Labor: (Law of ) Comparative Advantage, also called Law of Shared Advantage
- Corollary G of Law of the Division of Labor: (Law of ) Absolute Advantage
- Corollary H of Law of the Division of Labor: Deceptive Trade Practices
- Corollary I of Law of the Division of Labor: Scale of Participation
IV: Laws of Prices
- Law of Prices
- Corollary A of Law of Prices: (Law of ) Discovery and Communication
- Corollary B of Law of Prices: (Law of ) Order
- Corollary C of Law of Prices: Honest Prices
- Corollary D of Law of Prices: (Law of ) Supply
- Corollary E of Law of Prices: (Law of ) Demand
- Corollary F of Law of Prices: (Law of ) Supply and Demand
- Corollary G of Law of Prices: (Law of ) One Price
- Corollary H of Law of Prices: (Law of ) Marginal Utility
- Corollary I of Law of Prices: Monopoly
V: Laws of Profits
- Law of Profits
- Corollary A of Law of Profits: Consumer Control
- Corollary B of Law of Profits: Patience
- Corollary C of Law of Profits: “Speculation”
- Corollary D of Law of Profits: Loss and Bankruptcy
- Corollary E of Law of Profits: Change
- Corollary F of Law of Profits: Changing Ideas
- Corollary G of Law of Profits: “Frictional” Unemployment
VI: Laws of Profits and Wages
- Law of Profits and Wages
- Corollary A of Law of Profits and Wages: Union Wage Gains
- Corollary B of Law of Profits and Wages: Mandated Wage Floors or Gains
- Corollary C of Law of Profits and Wages: Say’s Law of Supply and Demand
- Corollary D of Law of Profits and Wages: Balanced Prices
- Corollary E of Law of Profits and Wages: Wage Ceilings
VII: Laws of Economic Equality and Inequality
- Law of Economic Equality and Inequality
- Corollary A of Law of Economic Equality and Inequality: The Problem of Envy
- Corollary B of Law of Economic Equality and Inequality: Inequality “Data” and Its Interpreters
- Corollary C of Law of Economic Equality and Inequality: Greed and Conspicuous Consumption
- Corollary D of Law of Economic Equality and Inequality: The “Trickle Down” Fallacy
- Corollary E of Law of Economic Equality and Inequality: Wealth Taxes
- Corollary F of Law of Economic Equality and Inequality: Wealth “Redistribution”
- Corollary G of Law of Economic Equality and Inequality: Making the Worker the Boss
VIII: Laws of the Division of Labor within the Free Price System
- Summary Law of the Division of Labor within the Free Price System
- Corollary A of Summary Law of the Division of Labor within the Free Price System: Competition within an Overall System of Cooperation
- Corollary B of Summary Law of the Division of Labor within the Free Price System: Growing Networks
- Corollary C of Summary Law of the Division of Labor within the Free Price System: Worldliness Redefined
- Corollary D of Summary Law of the Division of Labor within the Free Price System: Nation Size
- Corollary E of Summary Law of the Division of Labor within the Free Price System: Individualism and Cooperatism
- Corollary F of Summary Law of the Division of Labor within the Free Price System: World Governments Today
IX: Laws of Economic Calculation
- Law of Economic Calculation
- Corollary A of Law of Economic Calculation: Measuring Change
- Corollary B of Economic Calculation: Limits of Calculation
- Corollary C of Law of Economic Calculation: Externalities
X: Laws of Economic Calculation outside Business
- Law of Economic Calculation outside Business
- Corollary A of Law of Economic Calculation outside Business: “Borrowed Prices”
- Corollary B of Law of Economic Calculation outside Business: Halfway Houses between Socialism and a Free Price System
XI: Economic Law of Government
- Summary Economic Law of Government
XII: Laws of Money
- Law of Money
- Corollary A of Law of Money: Gold
- Corollary B of Law of Money: Gresham’s Law
- Corollary C of Law of Money: “Paper” Money
- Corollary D of Law of Money: “Paper” Money and Inflation
- Corollary E of Law of Money: (Law of ) Diversification
- Corollary F of Law of Money: (Law of ) Investment Value
XIII: Laws of Money Prices
- Law of Money Prices
- Corollary A of Law of Money Prices: Stabilizing Prices
- Corollary B of Law of Money Prices: Measuring Prices
- Corollary C of Law of Money Prices: “Elastic” Money Supply
- Corollary D of Law of Money Prices: Real Wealth
- Corollary E of Law of Money Prices: Deflation
- Corollary F of Law of Money Prices: Inflation (Roots of )
XIV: Law of Interest Rates .309
- Law of Interest Rates (on Money Loans)
XV: Laws of Banking
- Law of Banking
- Corollary A of Law of Banking: Fractional Reserves Create Money
- Corollary B of Law of Banking: The Federal Reserve
- Corollary C of Law of Banking: Fed as Price Fixer
- Corollary D of Law of Banking: Reform
- Corollary E of Law of Banking: Bank Privatization
XVI: Laws of Government-Controlled Banking
- Law of Government-Controlled Banking
- Corollary A of Law of Government- Controlled Banking: Government Financing Options 101
XVII: Laws of Spending Versus Saving
- Law of Spending Versus Saving (Law of Fiscal “Stimulus”)
- Corollary A of Law of Spending Versus Saving: “Fiscal Stimulus”
- Corollary B of Law of Spending Versus Saving: Keynesian Financing “Tricks”
XVIII: Law of the Non-Neutrality of Money
- Law of the Non-Neutrality of Money
XIX: Law of the Non-Neutrality of Money, Newly Created Money, “Business Cycles,” and Depressions
- Law of the Non-Neutrality of Money, Newly Created Money, “Business Cycles,” and Depressions
XX: Summary Laws of Economics
- Summary Law of Economics
- Corollary A of Summary Law of Economics
Appendix: Summary List of One Hundred Laws
Index for Economics in Three Lessons
Index for One Hundred Economic Laws
Economics in Three Lessons
Chapter Two: The Central Role Played by Free Prices
Why is the human race so poor? Why do billions still lack enough even to eat? As this author noted in an earlier book, even a small sum of money, such as $10, if compounded at 3% over 1,000 years, would produce a sum equal to twice the world’s wealth today. It should be ridiculously easy, over time, to end human poverty. Why have we failed to do so?
Failure to cooperate, to work together is the obvious answer. There is very little each of us can do alone, but there is endless opportunity in organizing ourselves to work constructively together in an ever broadening circle. Like children, we refuse to do what is clearly in our long-term interest to do. We either think only of the short term, or sacrifice the common and greater good for the immediate benefit of our particular group. Moreover, we cover up and lie about what we are doing, lie both to ourselves and others.
How can we do better? First of all, we must be assured of our physical safety and the safety of our property. How can we consider the long term if our life and property are at risk at any moment from human predators, whether criminal or sanctioned by government? It is difficult to consider the long term if everything we have can be stolen at any moment. But safety and protection from theft is not enough either. In addition, we need an honest system of mutual exchange that everyone can rely on. A corrupt and dishonest economic system does not create wealth; it destroys it.
The most reliable barometer of economic honesty is to be found in prices. Honest prices, neither manipulated nor controlled, provide both investors and consumers with reliable economic signals. They show, beyond any doubt, what is scarce, what is plentiful, where opportunities lie, and where they do not lie.
A corrupt economic system does not want honest prices, honest information, or honest results. The truth may be inconvenient or unprofitable for powerful government leaders or private interests allied with them. Typically, throughout human history, these leaders and special interests have sought to use their power to manipulate and control prices to their own advantage.
Much of the time, powerful price manipulators and controllers are accompanied and assisted by ideologists or theoreticians, special pleaders for hire, as described by Hazlitt. These professional advisors—skilled verbally or in mathematics—confidently argue that dishonest prices are really honest; honest prices are really dishonest; the resulting chaos is really order; and a future filled with jobs and plenty lies ahead with just a few more manipulations or controls. Sometimes the arguments are presented with calculated deceit, sometimes with muddled sincerity.
Can it really be this simple, that job growth and economic prosperity will follow if we provide a safe environment and allow economic prices to tell the truth, free from the self-dealing and self-interested theories of powerful special interests? That is the central thesis of this lesson, and each chapter will explore it from an additional angle. What is needed to pull humanity out of dire poverty is a free price system, one that is neither manipulated nor controlled.
If prices are not free, an economic system cannot be expected to function properly. What happens thereafter will depend on the degree of price manipulation or control. If it is not extreme, the economy may limp along, impaired, not realizing its full potential, but not in overt crisis.
If the undermining of free prices is extreme enough, the system will visibly falter and may even collapse, as in 1929 or 2008. In this case, capital, jobs, and people’s lives are destroyed. Ironically, the crisis often leads to a government response entailing even more price manipulation or control, which guarantees even more trouble, if not immediately, then down the road.
A further irony of all this is that a large majority of professional economists, including those aligned on the political “left” as well as “right,” respond to surveys by indicating that they generally oppose “government price controls.” The problem is that most government price manipulations and controls are not advertised as such. They may be stealthy by design, or they may just take a form that is not easily recognized for what it is. Whatever form they take, they are doing untold damage to the hopes and prospects of anyone who depends on the economy, especially the poor.
One Hundred Economic Laws
The concept of economic law was once a familiar feature of everyone’s education. It was taken for granted that they existed. The difficulty was discovering what they were and elucidating them for the enlightenment and betterment of humanity. They were also assumed to be complex, so that after economists worked them out through abstruse investigations and debates, they would have to be translated for lay people.
In more recent years, another idea has gained ground: that while physical laws certainly do exist and help us manage our lives better, economic laws do not really exist or at least have no predictive value whatsoever. This thesis has been argued in a 2013 Atlantic article by an expert titled “The ‘Laws of Economics’ Don’t Exist.”
This Atlantic article assumes that economic laws must be derived from massive amounts of data, without explaining why this must be so, and claims that we simply lack enough systematic economic history to draw any conclusions. This is wrong for reasons that will shortly be explained.
The author also writes that “I may agree that the war on drugs is flawed, but not because it violates ‘laws of economics,’ …rather because it fails in most of its basic goals.” This is actually contradictory. Laws of economics are based on our own human logic. A public policy or private action that is inconsistent with its most basic goals violates logic, and by doing so, violates economic law as well.
Lawrence Summers, former Treasury Secretary under President Clinton, President of Harvard, and Chief Economic Advisor to President Obama, evidently does believe that economic laws exist. He wrote an article in the Washington Post shortly after President Trump’s election titled “Trump Can’t Repeal the Laws of Economics.” Summers did not, however, give any specific examples of the laws of economics he had in mind.
The ideas that have been organized and presented in this book under the term “economic law” have been developed (and frequently corrected) by numerous economists over the centuries. The most notable contribution by far was made by the twentieth-century economist Ludwig von Mises, although it should be emphasized that he did not present his own ideas as a system of laws, but rather as a treatise that often made reference to underlying laws.
At the onset of Mises’s masterpiece, Human Action, we have this discussion of how the discovery of the concept of economic law changed human history:
The discovery of the inescapable interdependence of market phenomena …[produced] a new view of society….Bewildered…[at first], people…learned…that there is another aspect…[of ] human action…than that of good and bad, of fair and unfair, of just and unjust. In the course of social events, there prevails a regularity of phenomena to which man must adjust his action if he wishes to succeed….[Despite their differences], one must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be—this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action.
Mises’s students Friedrich Hayek and Murray Rothbard also contributed many insights about economic law. Another contemporary and friend, Henry Hazlitt, in turn described many of these same ideas with unparalleled clarity in both books and articles.
In some cases, the names of economic laws were developed long ago, and are now settled. No one would ever call the law of supply and demand anything else, although they might call it the principle of supply and demand or just “supply and demand.”
The law of marginal utility may sound needlessly obscure or jargonish, but has too much history even to think of rephrasing it. As groundbreaking as the law of marginal utility was (and is), it is presented in this book not as a standalone law, but as a corollary (derivative) of another law. The logic behind the laws is often highly interrelated, so the order of presentation matters. In this book, there are twenty principal laws and eighty corollaries, each of which could be considered a law in its own right, which is why the title is One Hundred Economic Laws.
Although for some economic laws (e.g. supply and demand and marginal utility) there is a well-established terminology, in other instances, there is not. The goal in developing terminology for this book has been to keep it clear and free of technical language. The reader should feel free to substitute his or her own terms and descriptions, to challenge whether some of the laws really qualify as laws, and to identify laws that should be added to the list.
Economics is a collaborative and cumulative discipline. This can lead to serious lapses in logic, self-deception, or, worse, deliberate deception. Self-deception may be closely linked to deliberate deception if someone’s personal income, career standing, and prestige depend on promoting untruths, and both forms of deception are particularly acute in economics.
Over the years, no other scientific discipline has been so plagued by “thinkers for hire” lavishly rewarded by special economic interests. But it must be acknowledged that this practice is increasingly spreading within the physical sciences as well, because of the high financial and political stakes in industries closely connected to government, including, among others, drugs, biotechnology, chemicals, energy, and farming.
Even so, there is no place for dismissal, disdain, or mockery in economics. We owe each other a respectful hearing, if only because, being human, we are prone to logical errors, and can learn from listening.
We will now attempt to establish, as briefly as possible, what economic laws are, what they tell us about economic life, and how we can use them to guide our actions and choices in an uncertain world.
It is hoped that most readers will start with the first law and proceed from there through the hundredth. Each law builds a further foundation for what follows. Alternatively, there is a summary list of the one hundred laws at the back of the book without explanation or commentary, but noting the page where explanation or commentary may be found. In this way, readers who wish to browse can pick out particular laws they wish to read about.