The Paradox of Henry Hazlitt in Economics in One Lesson

I’m about half way through Economics in One Lesson, and while I appreciate the simplicity of libertarian economics and philosophies, I have come to the realization of the paradox it is in and of itself. At a very high level, the economic philosophy here is that a dollar not spent on product A is spent on product B, which is economically equivalent because those dollars spent on B have equal impact to the industry in which B is produced (employment, wages, production, etc.). However, a dollar collected by government via taxes is not equal, because governments do not spend money as efficiently as the private sector. So at its core, the argument is that the dollar is not always a dollar.

But lets think about this a little more. Where does the dollar spent on private goods end up? It ends up in someone else’s pocket, either via profit, wages, or even taxes. That dollar is eventually spent again in a similar manner, on more goods or services and round and round it goes.

What about the dollar not spent via the private sector and instead collected as a tax? That dollar, he argues, might be spent on wasteful projects, like a bridge that is not needed. While the bridge might be a waste of time, those dollars are still spent on goods and services, which end up in people’s pockets, and go round and round the same economic circle as the dollar spent in the private sector.

Yes, the bridge may equate to little or no productive use, but so does countless private sector spending; wasted on R&D projects for products never to see the market, employee boondoggles, unnecessary upper management, etc. (Did Hazlitt never work for a public company flush with cash?) Again, these are things of little productive value, but the dollars spent still end up in the same vacuum where they can be re-used (unless someones saves the dollar along the way, which is never really addressed in the book so far).

The argument is that a dollar is a dollar when spent in the private sector, but a dollar is not a dollar when it is taxed and spent by government. I’m not an economist by any means, but would love some more interpration on this particular subject.

UPDATE

I have finished the book and overall I appreciate the theory but remain skeptical. Hazlitt does briefly talk about cash saved and says this is baked into the economy and has no real impact. This seems feasible to me. Hazlitt’s theory on trade is also thought provoking and worth the read. Hazlitt states that free trade increases production across the board because it keeps the competition “honest” versus if imported products were being taxed. He also states that any money that goes out of the country for imported goods must come back since that money is only good in the country it originated from. Not sure how productive foreign transactions fees are to an economy, but I suppose there is some truth in this as well.

I am still left very skeptical of the core argument that government tax dollars are ineffectively spent. I would not go so far as to say that the government is perfect when it comes to spending money (far from it), but neither are people or companies outside of the government. And if I waste a dollar on something unproductive, who is to say that dollar won’t be put to productive use in its next life?

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