Thou shalt not steal (Exodus 20:15).
Hazlitt's version of the lesson was different from mine.
What was the lesson, according to Hazlitt, that he was trying to make? Here is his first paragraph of Chapter 24:
Economics, as we have now seen again and again, is a science of recognizing secondary consequences. It is also a science of seeing general consequences. It is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run.
The trouble with this summary is this: most members of scientific guilds claim exactly the same thing that Hazlitt claimed for his version of economics. They claim to follow the implications of the science's truths. They claim to look at the overall picture, which they call the general view, which is supposedly based on general laws. They also claim to deal adequately with specific cases. So, what is it that distinguishes economic science from political science or educational science or psychology or sociology or physics?
I gained a different lesson from Hazlitt's book: Follow the money . . . backwards.
This phrase, "follow the money," came into the American vernacular because of the movie, All the President's Men (1976). This was a movie on President Nixon's forced resignation in 1974, which came because of two diligent reporters for The Washington Post, Woodward and Bernstein. This three-word phrase was the recommendation given to the reporters by an anonymous tipster whom they called "Deep Throat." (That was in turn a reference to a famous pornographic movie of the era.) What is not widely understood is this: the two reporters do not remember their source ever saying this. The phrase does not appear in their book. The screenwriter, William Goldman, is probably the source.
I regard my four-word phrase as the essence of Bastiat's general analytical principle: the broken window. What he told us in 1850 was simple: follow the money . . . backwards. Every time somebody recommends that the government intervene in order to protect an industry, or a special group, and the advocate does this in the name of helping the general public, we can be sure that the person making the recommendation has not followed the money backwards. Anyway, he has not told the general public the truth, the whole truth, and nothing but the truth. He may persuade the public, and he may also persuade politicians, that the state should intervene to help this group in the name of helping the general public. But if an economist follows the money backwards, he will find that the claim regarding the benefits for the general public is false. The only reason why the promoter successfully makes this claim is because the public refuses to follow the money backwards.
If you follow the money backwards, you will find out that there were benefits associated with that money before the window was broken. The promoter who wants the government to intervene wants the voters to follow the money forward to all the benefits the money will produce. The money will stimulate the economy, he says. But if we follow the money backwards to the person who owned it prior to the envy-driven action of the person who threw a stone through the window, we will find that there were other things that the window's owner preferred to do with the money.
In chapter 23, "The Assault on Saving," we discover a more fundamental truth than might have been the case in 1850. The money was already being used for productive purposes. Today, an individual has the money in a bank. The bank is providing services for this deposit. The bank is also lending the money to a borrower. The money is being used for one set of purposes, and these purposes are highest on the list of the person who owns the money. So, when the stone goes through the window, and the owner calls the window repair shop, he will have to pay for this by taking money out of the bank. This is bad for the person who owned the window. This is bad for the local bank that took in his deposit. This is bad for anybody who expects to get a loan from that bank.
We can easily follow the money forward. That is the analytical problem. But it takes considerable skill and insight to follow the money backwards. There is no question that of all economists in history, Bastiat was the first to see it, and Hazlitt was the most successful in applying it.
At this point, I am trying to do my fair share of promoting the concept.
The most important economist in history who refused to follow the money backwards was John Maynard Keynes. The 20th century after 1936 was increasingly constructed on the intellectual foundation laid by Keynes in The General Theory. The heart of his analysis was chapter 16, which is the main source in modern times of the assault on saving. Keynes made the mistake that Hazlitt's book is devoted to avoiding: he refused to follow the money backwards. He said that the saver is a liability to the economy, because the money he saves will not be used for consumption.
Keynes was not the first person to make this mistake. Even before him, an economic crackpot known as Major Douglas built a peculiar economic cult that was based on exactly this idea. It was called Social Credit. Keynes recognized the importance of Douglas' contribution, and he actually praised Douglas in The General Theory (pp. 371-72). I have written a book refuting Social Credit, and I am the only person who has: Salvation Through Inflation. I wrote this about 75 years after Douglas wrote his first book. Modern economists ignore him, for good reason, but Keynes did not ignore him. Keynes dressed up Douglas' position with jargon and equations. But, analytically speaking, Keynes' position was Douglas' position.
Here is the problem we face. The entire economics profession has ignored the principle discussed in Hazlitt's book. There are non-Keynesian economists, but none of the economics textbooks goes after Keynes on the obvious point, namely, that the money that the saver supposedly would have wasted on thrift would in fact have increased employment. The textbooks also do not point out the related error, namely, that all the money collected by the government from investors who would otherwise have invested in the private sector is taken out of the private sector. The government does not get this money from heaven. It may get the money from the central bank, but then we have the problems associated with fiat money creation, which is simply legalized counterfeiting.
The critics of Keynes never call central bankers legalized counterfeiters. There is no textbook used in any college or high school that says this. Yet this is the economics of central banking and all fractional reserve commercial banking.
The textbooks do not hammer away at the fundamental error of Keynes regarding thrift. Even Hazlitt did not mention Keynes by name in Chapter 23. In 1959, he wrote an excellent refutation of Keynesianism, The Failure of the "New Economics," but almost nobody has read it.
Here is my conclusion: there is something more involved here than simply economic ignorance. Hazlitt convinced no certified economist by means of Chapter 23. He convinced almost nobody with his book in 1959. He also published a collection of essays by economists who were critical of Keynes, Critics of Keynesian Economics (1960). No one in academia paid any attention to that book, either.
Hazlitt was correct in identifying the fallacy of the broken window as a consummate example of the unwillingness of economists to follow the implications of the science of economics. He was a clear writer. He usually got to the point pretty fast. Yet with respect to the entire economics profession, he had zero influence outside of the Austrian School of economics.
By now, you can see the logic of the broken window fallacy. Why has it not also occurred to the entire economics profession? There is something deeper here than simply economic ignorance. There is something deeper than the absence of high IQ's. Professional economists are intelligent people. The best of them probably are geniuses. Yet this simple concept, first proposed in 1850, was ignored systematically from 1850 until 1946. Then, after 1946, the economics profession systematically ignored Hazlitt's applications of the fallacy of the broken window.
I contend that this is not a matter of ignorance. It is not a matter of people's unwillingness to study economics. What we have here is blindness. It is willful blindness. It is self-conscious blindness. It is an unwillingness to take a simple analytical principle and then follow it to its conclusions.
My conclusion is this: at bottom, the unwillingness of economists to understand this rests on ethical rebellion. It is not a matter of ignorance. It is a matter of ethics. It rests on a violation of the fundamental principle: "Thou shalt not steal."
The modern welfare state, the modern redistributionist state, the modern Keynesian state, the modern socialist state, and the modern communist state, all have this in common: they are based on theft. From top to bottom, from start to finish, they are all based on theft. They are based on this principle: "Thou shalt not steal, except by majority vote."
Because there is larceny in the hearts of people, they want to believe that fiat money can deliver them out of their position of debt. They will pay off their creditors with depreciated money. They also want to believe that their refusal to plan for their retirement should not be held against them. The public should be taxed, so that they will receive retirement money. The same thing is true of their views regarding socialized medicine and its variations around the world. They want to get their hands in other people's wallets, and they will not tolerate a prophet coming before them and saying, "You are all thieves." In Isaiah's day, they did not listen to Isaiah, who warned them: "Thy silver is become dross, thy wine mixed with water." They did not care.
Keynesian economists are court economists. Keynes gained his career's major triumph only when he presented a convoluted defense of existing interventionist, theft-based policies of Western governments to deal with the Great Depression. Only when he became an apologist for national theft on a massive scale did he change the minds of a younger generation of economists.
Keynes was an apologist for theft by the ballot box. The politicians loved his message, and so did a generation of younger economists, who wanted to see the state expanded, and who wanted to see their influence increase by giving advice to politicians and bureaucrats. They saw the tremendous personal leverage that they could gain by invoking the state as an agency of scientific wealth redistribution, but without becoming targets of the criticism that they were socialists or communists.
In other words, I do not think this is primarily an intellectual problem. I think this is primarily a moral problem. This is why I have written this book. I want Christians to understand what is at stake here. This is a war, not simply for the minds of men, but for the souls of men. Economists do not talk this way. They may understand the war for the minds of men, but they categorically reject the idea that they are in any way involved in a struggle for the souls of men. They want economic science to be neutral. Yet the triumph of Keynesianism indicates that economics is not neutral. It rests on the appeal of a particular form of morality. This morality is simple to state: "Thou shalt not steal, except by majority vote."
There is obviously a political problem when special interests appeal to the power of the state to redistribute wealth in their direction. They do not want this discussed in terms of theft, but it really is theft. But there is a much greater problem. The public does not perceive such appeals as organized forms of theft. The voters do not resist. They also want to get their hands into their neighbors' wallets. They are also ready to form a special interest political group to get their hands into their neighbors' wallets.
Then there is the economic problem of motivation. Any special-interest group that is seeking a major redistribution of wealth is intensely interested in persuading politicians of either the validity of their position or at least the political advantages associated with their position. They are highly focused, because there is so much money at stake. In contrast, the public does not pay any attention. The public, which will pay its fair share, meaning its unfair share, of the loot extracted from them, have other concerns. There are so many special-interest groups trying to get into their wallets, that they never focus on stopping a particular group. It is just too much trouble. The payoff is too low. But the payoff is enormously high for the special-interest group. The likelihood of success is so low for any political opposition that political opposition never forms.
My conclusion is based on the principle of following the money. In a cost-benefit analysis, it does not pay the opponents to fight the special-interest group. It is cheaper to organize their own special-interest groups, and try to get their hands on some of the loot.
Hazlitt tried to maintain ethical neutrality in economic analysis. He never described any of the special-interest groups as a form of organized crime. He did not discuss wealth redistribution in terms of systematic theft. When he attempted to refute these policies, he failed to gain academic supporters. He should have known from the beginning that this would be the case. Economics would have told him as much. The special-interest groups have so much to gain. In contrast, opponents of any specific program of wealth redistribution will not be able to gain enough political support to stop the particular special-interest group from getting what it wants. Economically speaking, Hazlitt should have concluded that the book was an exercise in futility. Economics should have told him that the book would not be successful in rolling back the modern Keynesian welfare state.
I do not expect my book to have any affect in slowing down the expansion of the Keynesian welfare state. My goal is longer term. I want to explain to Christians why, after the collapse of the Keynesian state has taken place, this disaster took place.
Because of Keynes' hostility to saving, and because of Keynesianism's lackadaisical attitude toward the expansion of government debt, there is going to be a Great Default. All Western governments are going to default on their welfare state programs. Economically speaking, meaning actuarially speaking, all these old age programs are bankrupt. They will all go belly-up.
There will be enormous pain after this happens. I do not regard myself as some modern Isaiah. Besides, I know what happened to Isaiah. Nobody paid any attention to him. The judgment came, but that was over a century later. But, in retrospect, the message of Isaiah has come down through the millennia. It did not penetrate the thinking of his contemporaries, but it left a cogent record for the rest of us.
I don't think the Keynesian welfare state can be reformed. I think that at some point it can be replaced. But this replacement must be made in terms of ethics, not the broken window fallacy. It does no good to try to roll back any of the 23 variations of the broken window fallacy that appear in this book and in Hazlitt's book. That is because the issue is not primarily intellectual. The issue is primarily ethical.
People cannot follow long trains of reasoning. This certainly applies to economic reasoning. We see this in the case of Hazlitt's book. He was not able to convince any Keynesians to follow the money backwards. They did not rethink Keynesian economics in terms of this fundamental error, which lies at the heart of all Keynesianism. If professional economists refuse to follow the money backwards, and they deny the obvious implications of government debt in undermining the private sector, then why should we expect the average person who might read this book, meaning you, to be able to formulate systematic arguments against any of these policies? Why should I expect you to be able to organize a special-interest group to fight 100 or 200 or 500 or 5,000 special interest-group programs?
After the Great Default, there is going to be a time of reconsideration. People are going to want to know why it happened to them. At that point, perhaps some of the arguments in this little book will penetrate the thinking of a few Christian leaders. But until the pastors are willing to go to the verses that I have exegeted, and then present this exegesis to their congregations, I do not expect a major change. Until these issues are presented in terms of theology, ethics, and justice, I do not think my criticisms of these policies will have any greater effect than Hazlitt's criticisms did.
His book is still in print 70 years after he wrote it. Because of the Web, and because of Kindle, I hope that my book will also stay in print. It doesn't even have to stay in print; it just has to stay on a computer screen. Anybody can press the "print" icon. Staying in print is easy. Attracting readers is not. Motivating readers is not.
What I am saying is this: This is a battle for the souls of men. This is not simply a series of intellectual debates within a particular academic discipline. The modern world rests, economically speaking, on bad ethics. It rests on this principle: "Thou shalt not steal, except by majority vote."
Ideas have consequences. Even more important, behavior has consequences. In Leviticus 26 and Deuteronomy 28, we see that there are economic consequences, good and bad, in terms of the society's adherence to fundamental ethical law. Until people believe this, I do not think it is going to do a great deal of good to follow the money backwards. It is a valuable intellectual exercise, but it is not going to change most people's behavior, especially in the voting booth.
All of the chapters are here: http://bit.ly/CEIOL
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