Asymmetrical Information

From the desk of Jane Galt:

Economics in One Lesson

Economics in One Lesson: 50th Anniversary Edition

By Henry Hazlitt

I get a fair number of emails asking me to recommend books about economics. You can't do better than this one.

One of the hardest things about learning economics is learning to look beyond your first order intuitions to second order effects. A classic example of this is supply side arguments for tax cuts. Supply siders say that tax cuts increase the incentive to work, by allowing workers to keep more of their money, and thereby grow the economy. Intuitively, this makes sense. Yet, surprisingly, there is little empirical evidence for this proposition. This starts to make sense if you add in other, slightly less obvious intuitions about our demand for work vs. leisure, a detailed explanation of which can be found here.

Hazlitt does an excellent job of puncturing common economic fallacies by leading the reader, in simple, easy-to-understand language, through the second order effects.

It's also a fascinating read for the historically minded. Some of the fallacies he punctures are no longer in common currency, but a surprising number of them are, such as the belief that tax cuts targeted at lower income brackets are magically better for the economy because, the advocates tell us, the poor spend their money, while the rich save it; or the idea that the government can grow the economy over the long term by running a deficit, which is used by both right and left to justify their pet policy boondoggles.

The book is not flawless. Hazlitt is a strict classical economist, which makes him rather more rigid on some topics than is current in economic thought. His discussion on money, in particular, leaves something to be desired; he uses a model of money that's far too simple, and this makes him an inflation hawk to put the Bundesbank to shame. On the other hand, one has to remember that Hazlitt was a practicing economist from World War II to the late seventies, the heydey of well-meaning idiots who wanted to print their way to prosperity. When inflation is in the double digits, it's better to be hawkish than lax -- but the reader would be well advised to remember that money is a very, very complex topic, and he's not necessarily giving you the whole story.

Nonetheless, the beginning amateur economist can't do better for a useful, simple primer. It's sufficiently broad to help you understand many of the policy topics of hte day, yet sufficiently simple that you can read and understand it in your spare time. Take it with you through the newspaper and see if it doesn't help you figure out what all those talking heads are blathering about.

Posted by Jane Galt at December 19, 2002 10:22 PM | TrackBack | Technorati inbound links