Henry Hazlitt Got This Wrong

One of the best books on economics of all time is Henry Hazlitt’s Economics in One Lesson.  Many libertarians will say that they got their start with Hazlitt, or at least their start in learning economics.

I recently released a book titled Free Market Economics Made Easy.  I am not trying to compete with Hazlitt.  If anything, I think my book can be a good supplement.

With that said, there is something that Hazlitt gets wrong in his book.  Chapter XXIV (24) is titled “The Assault on Saving”.  With Keynesian economics still dominating today, his chapter is as timely as ever.  Unfortunately, despite the chapter title, he makes a big error when writing about savings.

Hazlitt compares two individuals – one who saves a good portion of his income (Benjamin) versus one who consumes all of his income.  In talking about the saver, Hazlitt states: “But let us see what Benjamin actually does with this other $25,000.  He does not let it pile up in his pocketbook, his bureau drawers, or in his safe.  He either deposits it in a bank or he invests it.  If he puts it either into a commercial or a savings bank, the bank either lends it to going businesses on short term for working capital, or uses it to buy securities.  In other words, Benjamin invests his money either directly or indirectly.”

We could probably get on the subject of fractional reserve banking based on the above citation.  But it gets worse than this.

Hazlitt continues, “Mere hoarding of hand-to-hand money, if it takes place irrationally, causelessly, and on a large scale, is in most economic situations harmful.  But this sort of hoarding is extremely rare.”

Hazlitt is flat out wrong on this.  I address this with a chapter specifically on hoarding money in my book.  I argue that hoarding money is not at all harmful to the economy.  If it is harmful to anyone at all, it is the hoarder.

Let’s use an example.  If you knit a sweater and then sell that sweater for $25, then you have produced a product that is worth $25 to someone.  For the sake of simplicity, we will ignore the cost of the yarn used to knit the sweater.

Now let’s say that you take the $25 that you earned through your labor and you bury it in your backyard.  Better yet, let’s say you take the $25 in cash and throw it in your fireplace to be burned.  Is this bad for the economy?

It is bad for you because you now have $25 less.  You expended your labor to make a sweater and you were entitled to your $25 to consume on something else.  That $25 represented your redemption for the value you produced with the sweater.

The fact that you burned your 25 dollars does not directly impact the person who purchased the sweater.  The buyer deemed himself better off with a sweater than the $25, so it shouldn’t make any difference to him what you do with the money.

But you produced a 25 dollar value for society and didn’t get anything in return.  You essentially gave a sweater to society.  You could have consumed something in return, but you burned your money instead.

You could have given the sweater away, which would have benefited one person.  Instead, you essentially benefited the entire economy by $25 at your own expense.  Obviously, in a large economy, this is a drop in the ocean.  But it has the impact of bringing down consumer prices for everybody else, even if by an immeasurable tiny fraction of a penny.

So while Hazlitt is correct that capital investment is important to grow an economy, it doesn’t mean that hoarding money is harmful.  Hoarding money means that people are not redeeming things despite having contributed to the economy.  They are giving their labor or their things to others, and they are not getting an equal amount back.

I was surprised to stumble across this mistake by Hazlitt.  I still wouldn’t hesitate to recommend his book to anyone though.  In his day, he was a shining light in a world of statist thought.

If you want to read my take on free market economics, you can get the e-book for free if you are reading this before Sunday, April 30, 2017 at 11:59 PM.  Since it is currently free, you can hoard your money and help the economy with consumer price deflation.

My book can benefit those with little knowledge of economics, but I also believe it will help clear up some thinking even for those who are more hardcore libertarians and consider themselves to be well educated in the issues, especially economics.

If you missed the book promotional or you want to order the paperback, I still encourage you to pick up a copy.  However, I won’t claim you are helping the economy by spending your money.

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