The Hazlitt Series
This latest stewardship post is a continuation of our monthly exploration and modern application of the economic writer Henry Hazlitt, and his seminal work, Economics in One Lesson. This work draws heavily upon the insights of the great French economist Frederic Bastiat. His key insight was to look at that which is not seen. So, for example, do not simply look at the benefits of a trade restriction of say wool, but also look at the costs to the rest of the economy. Hazlitt updates this insight with a more modern take to look not just at the short-run effects on a small group, but also the long-term effects for the whole economy. Hazlitt then applies this lesson to a variety of topics. Each installment will pay homage to this superbly clear economic thinker and writer by applying each of his applications to our world today.
The Fallacy
The fallacy in this month’s topic is that if you demobilize the armed forces, and/or greatly reduce the civilian government workforce, that massive unemployment will result. In short, the dominant Keynesian framework will ask, “where will the purchasing power come from?”. The armed forces issue was one that loomed large in Hazlitt’s heyday, as the very real issue of demobilizing the US military after WWII was a hot topic.
In the end the worry was much ado about nothing as the economy, as is well known, roared back to life after the demobilization in 1946. A good overview of both the pre-demobilization worry, and the reality can be found here. The reasons for this surprising boom (a surprise only to the economically illiterate) are precisely the ones Hazlitt lays out in this chapter.
The Reality
In the case of a demobilization of the military, or mass reduction in the civilian governmental workforce, there are two scenarios to look at. They both arrive at the same result. First, if the budget is balanced (HA!!!) then taxpayer money ceases to support the government personnel, then the taxpayers will keep the funds that were previously redirected toward the government employees. They will then use that money to purchase other goods and services. Or they may invest that money, which results in capital formation (the making of more and better tools), which will increase the productive capacity of the economy. In short, this newly freed nongovernmental demand will rise and provide jobs for the newly freed nongovernmental labor force.
If, on the other hand, the budget is out of balance, the result is the same. Assume, for the sake of argument, that there is some benefit to a deficit (it is irrelevant as I pointed out here. The same budget deficit (deficits are addressed in a later Hazlitt post) can be maintained by reducing the level of taxes commensurately to keep the deficit the same. Then the same dynamic of redirecting the resources previously spent on governmental employees can be redirected to new lines of production, as was discussed above.
So, whether we are discussing troops or bureaucrats, the dynamic is the same. If the troops are not needed (dismantling the empire would make at least half redundant), then their retention is a waste. As for civilian bureaucrats, there are a few that might take care of the one or two things that government could possibly do, the rest would be sheer waste. By redirecting these resources back to taxpayers, these people get goods and services they really wanted, and provided for in a much more efficient manner. How do we know that these are the goods and services they really wanted? We know this because it took government coercion to get them to direct the resources toward the government in the first place.
The “purchasing power” of government employees is matched (or less) by the number of resources that were coerced out of the taxpayers. The key difference, as we discussed in previous Hazlitt posts here, and here, is that the economy will be producing more goods and services that are truly valued by consumers. You could apply the same “purchasing power” argument to a thief, which would bring the whole scenario into sharper relief.
Applying the Lesson
The application of this lesson is in how we respond to the fallacious arguments of obviously self-serving government employees, and I would add, government contractors. When faced with the bogus argument that the economy will tank if we fire a bunch of government employees, and/or dramatically reduce government spending, we can respond with the logical truth that those resources will get quickly shifted to more productive uses.
We have the added advantage of pointing to the historical reality of what happened after WWII. The economy did not tank the way the Keynesians said it would. We were not mired in another Great Depression. There was a short period of adjustment, but the economy rallied in fine order.
So, there we have it. Logic and experience on the side of freeing up the economy by eliminating unneeded government employees, and expenditures. Those employees will get new jobs that produce goods and services desired by consumers. Consumers will get a return of real purchasing power to put toward those things they really want. A win-win scenario. As always in the practice of good stewardship, God’s people should be all about trusting Him enough to use the brains He gave us. This is what will produce a more peaceful, and prosperous world.
Praise Be to God
