The Fallacy of the Short Run

Another great article on FEE entitled Not So Fast!: The Fallacy of the Short Run, by William Anderson. In this article, the author discusses, in greater detail, the problems with economic shortsightedness. In the article, he also quotes from Lawrence Reed’s 7 Fallacies of Economics.

"Some actions seem beneficial in the short run but produce disaster in the long run: drinking excessively, driving fast, spending blindly, and printing money, to name a few. To quote the venerable Henry Hazlitt again, “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.”

"Politicians seeking to win the next election frequently support policies which generate short- run benefits at the expense of future costs. It is a shame that they sometimes carry the endorsement of economists who should know better.

"The good economist does not suffer from tunnel vision or shortsightedness. The time span he considers is long and elastic, not short and fixed."

We've been vandalized!

Henry Hazlitt begins his book, Economics in One Lesson, with a simple illustrative story. The story involves an act of vandalism. Some street punk has thrown a brick through the window of a local baker. Townsfolk gather round, as townsfolk often will, and they start talking, as they often do. At first, the folks are angry with the unknown vandal, and feel bad for the baker. However, as they keep talking, they decide that the act of vandalism is actually a benefit to the community. The baker must now pay the glazier to replace the glass, the cost will be a few hundred dollars. Then, the glazier will have more money, and he will spend that in the community, maybe even hire a new employee with the increased business. That money, in turn will be spent somewhere else, and so on, and so on throughout the community. Wonderful!

But, what about the baker? Maybe he had planned to buy a new suit with that $200.00. But, now he must pay for a new window, and buy a new suit. Or, maybe he will not be able to buy the suit at all. If so, then the tailor will not be paid. Either way, the baker is damaged because he has lost the ability to spend his money as he will, because of the vandal's actions. And, truly, the community is no better off in the long run if the glazier gets paid rather than the tailor.

The shortsightedness of the townsfolk's response to the vandalism is the root problem of all bad economic theory. From a family's poor economic choices to a big government trillion dollar inflate and stimulate plan, the problem is the inability to see beyond the "short run."  The long term effects of these decisions, and the potential unintended consequences, are never considered. And I think more importantly, the long term effects of economic meddling cannot be anticipated. So, when we are told that an act of vandalism, or an act of unprecedented borrowing, will provide a quick fix to the economy, we should stop and think. What about the long term?

Free to Choose

Free to Choose, by Milton Friedman, is the book that started my journey into understanding.  My lovely wife bought me a Barnes and Nobel gift card for my birthday a few years ago, and I bought the audio version of the book.  I don't really know why I bought it, I had never even heard of it before.  I must have looked a little silly, riding on the train in the morning, with my mouth hanging wide open.  I could not believe the things that I was hearing.  It was like I was seeing the world for the first time.  It's hard to explain, and it's a little corny to say, but it changed my life.

I would get to work, and try to corner some other associate to explain the amazing things I had discovered on the train ride to work.  They would look at me like I was some kook.  I won't be able to do any better here.  All I can say is, read it.  Just read it, that's all.  I guess that's not all, you can also listen to it like I did.  Or, I recently discovered that a TV series, based on the book, is available to watch anytime online.  Click here to go to the website.  Find it and read, listen to or watch it.

Inflation

Here's the thing, if I could count, I would not have gone to law school. No, seriously, I'm pretty good at basic math, but my quest to understand economics sometimes hurts my brain. I have published a few posts about inflation, in an attempt to help me understand it better.

Honestly, I think that I'm making it too hard. On the FEE website this morning they published "A Letter to a Ten-Year-Old." I guess that a ten-year-old wrote a letter to the Foundation for Economic Education asking what inflation was. This response was drafted by Beth Hoffman in 1981. This was a great article, very short, and the most important thing I learned from the article was that my understanding of economics is approximately at a ten-year-old level.

In the letter, Ms. Hoffman refers to another article, "Inflation In One Page", written by Henry Hazlitt. Again, a simple one page explanation. This is economics that even I can understand.

Economics 101

For a fun, quick and easy summary of economics and a lesson regarding the power of free markets, I, Pencil is a must read. "Ghost written" by Leonard E. Read, the story recounts the origin of one "Mongol 482," an ordinary lead pencil made by Eberhard Faber Pencil Company. The story is told in Mongol 482's own words. Early in the story, Mongol 482 makes the fantastic claim that "no person on the face of this earth knows how to make me." At first, that sounds outrageous. Maybe if he were the Hubble telescope, but a regular number 2 pencil? However, at the end of sixteen short pages, every reader will be convinced of the truth of Mongol 482's statement, and convinced of the power and virtue of a free market.

What is Economic Development?

Lawrence W. Reed hits another home run with his article entitled "The Perversion of Economic Development."  This article was originally published in February of 1996, and recently appeared on the FEE website.  This is just another example of how timeless these economic truths really are.  With all this talk in the news about how the government should come to our rescue by stimulating the economy, we might forget what true economic development is.

"In recent decades, economic development has come to mean something other than the spontaneous, entrepreneurial phenomenon that built America. It is often thought of as a kind of activist, public-policy responsibility of state and local governments...."

"The bottom line is what every American with a good sense of history really ought to know: economic development is what happens when government protects life and property and otherwise leaves us alone."  (emphasis added) Click here to read the entire article.