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What Every Debater Should Know About Economics

#3 "Hazlitt's Lesson"

Henry Hazlitt, probably this century's greatest journalistic expositor of the economic way of thinking wrote that:

The art of economics consists in 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.⁴

He went on to say that nine-tenths of the economic fallacies that work harm in the world today are the result of ignoring this lesson. While Hazlitt's Lesson is not exactly a separate economic principle, it is a form of mental discipline that must be exercised when constructing or analyzing policy. The Gwartney and Stroup book provides excellent examples of how rent control laws destroy urban housing, protective tariffs and quotas harm American consumers and workers, and jobs programs fail to create a single job overall. In each case the counter-intuitive result is found by consistent application of Hazlitt's Lesson: look not just to the immediate effects on one group, but the long run effects on all groups.

Hazlitt's book, Economics in One Lesson, is still one of the best examples of the economic way of thinking put into practice. Each chapter of only a few pages traces the surprising, but inescapably logical effects of a different government policy and explains why "the law of unintended consequences" has so plagued interventionist attempts to control the economy or engineer society. More often than not, the harm of these policies falls not only on people who were never considered at the time, but on the supposed beneficiaries of the programs.

Debaters and extempers are advised to spend time with each of these books to get a feel for the way Hazlitt's Lesson is put into practice. Examples are the best teacher, here. A few words of practical advice: use three ideas to help you think of unintended consequences that your opponents may not have: opportunity cost, substitutes, and competition. Opportunity cost reminds you that when government creates a beneficiary somewhere there is a cost being paid. Who pays it and how does it affect their choices? The idea of substitutes reminds you that people are born circumventers -close off one avenue or make it more costly, and they will leave that activity and switch to another. How will this adjustment affect other people? Competition reminds you that helping one group harms others that compete with that group. (This, by the way is a useful consideration not only for analyzing the impact of policy, but for evaluating the credibility of evidence sources!)

Today there is great concern about the ease with which medical records can be accessed through computerized networks by people who have no business knowing this sensitive information. Confidential medical information is gathered and consolidated into vulnerable centralized databases partly as an unintended consequence of government policy concerning health insurance. For decades, tax policy has rewarded people who pay for health care through employer-provided health plans and punished them when they pay out of pocket. Employers rationally substituted generous medical benefits for monetary pay as a way to compete for good employees. Soon more than three fourths of all health care spending was paid not out of the pockets of patients, but by third-party payers -insurance companies and government.

When the opportunity cost of visiting a doctor or getting the most costly treatment for a problem was low because someone else was paying, patients tended to make unnecessary trips to the doctor and doctors provided unnecessary treatments. Insurers' natural response to this behavior was to impose restrictions that regulated and rationed the kind of care that would be covered, and to require doctors and hospitals to document their compliance with these rules. Only then did medical records become data to be entered into centralized computer databases, a practice generally resisted by the medical profession.

Although Hazlitt's law is the basis of the economic way of thinking, it provides a useful framework for evaluating foreign policy decisions as well. No where has the "law of unintended consequences" been more distressingly apparent than in American foreign policy since World War II. As we consider expanding the membership in the North Atlantic Treaty Organization (NATO) to put ever more of Europe under the protective umbrella of American and European military forces, we would do well to consider the way such alliances have worked out in the past. The history of post-war U.S. foreign policy in the Middle East illustrates what happens when we fail to look to the long term and to the consequences for all groups.

In 1953 America allied itself with the Shah of Iran to help him overthrow the government of Mohammed Mossadegh and preserve (we thought) security in the region -security for access to its oil and against Soviet influence. Failing to consider the hostility this act might foster against America, the U.S. watched with dismay as a revolutionary torrent built up in Iran converting it's strategic alliance into a violent cauldron of anti-Americanism. By 1979 the Islamic fundamentalist revolution of Ayatollah Ruhollah Khomeini had swept the Shah out of power and taken Americans hostage in the U.S. Embassy in Tehran.

Within a year, Iran went to war with neighboring Iraq, a centuries-old rival. In the early 80s America formed a new de facto alliance to "correct" the errors of the last -this time providing critical aid and legitimacy to Iraqi leader Sadaam Hussein. With the help of the U.S. and American allies who armed Hussein with fighter planes and missiles, Iraq was to become the world's new guardian against Muslim fanaticism. Yet, two years after Iran accepted a cease-fire from Iraq, the huge military establishment that Sadaam had built during the conflict was used to invade Kuwait. To protect the secure flow of Arab oil, America went to war with Iraq, which had been a de facto ally only a few years before.

Since the Persian Gulf War, the U.S. military presence on the soil of Arab allies such as Saudi Arabia has ignited still more hostilities from forces opposed to the American-friendly governments there. The recent devastating bombing of the U.S. Embassies in Tanzania and Kenya were apparently organized and funded by Saudi Osama bin Laden in retaliation against U.S. military presence in his country. While nothing can excuse such acts of terrorism, the failure to understand their origin in America's penchant for "entangling alliances" can only ensure repetitions of this sad history.

In considering the question of enlarging NATO are we taking into account the long-range effects this might have on conflicts in which our new allies could easily become involved? With Bosnia-style ethnic conflicts already brewing between Hungary and Serbia, the loose cannon of Russian-backed Belarus on Poland's flank, and Russia itself touchy about the proposed encirclement of its Kaliningrad enclave by an expanded NATO, security commitments in this region have all the dangers of our Middle East alliances of the past. But where the stakes in the Middle East were mainly about oil, in the Russia/NATO interface there is an even greater concern: the vast, poorly controlled nuclear arsenal of a highly unstable ex-superpower.

⁴ Henry Hazlitt, Economics in One Lesson, 1979, p.17