I’m finding Henry Hazlitt’s Economics in One Lesson rich in application for our day. Here’s
the beginning of Chapter VI, “Credit Diverts Production”:
Government “encouragement” to business is sometimes as much to
be feared as government hostility. This supposed encouragement often takes the
form of a direct grant of government credit or a guarantee of private loans.
Hazlitt spends most of this chapter talking about loans to
farmers. But we can extrapolate this example to similar
good-intentions-with-bad-outcomes that government proposes. I’m thinking about home
loans to people whose incomes didn’t qualify, which led to the housing bubble
of nearly a decade ago. And it probably applies to government school loans, or
any other scheme to make college available (and supposedly affordable, or maybe
even free) to everyone. And of course the Affordable Care Act and any other
interference in the health care industry.
The overarching principle is that government only gets money
from taxpayers, and then government uses money as if they have a right to it,
but no responsibility for wasting it.
Whenever government attempts something beyond the proper role
of government (protection of life, liberty, and property), it causes unintended
consequences—usually exactly opposite to the stated goals of the interference.
So, here is a good chunk of chapter VI, with Hazlitt explaining what happens:
At first glance the case for this type of loan may seem a
strong one. Here is a poor family, it will be said, with no means of
livelihood. It is cruel and wasteful to put them on relief. Buy a farm for
them; set them up in business; make productive and self-respective citizens of them;
let them add to the total national product and pay the loan off out of what
they produce. Or here is a farmer struggling along with primitive methods of
production because he has not the capital to buy himself a tractor. Lend him
the money for one; let him increase productivity; he can repay the loan out of
the proceeds of his increased crops. In that way you not only enrich him and
put him of his fee; you enrich the whole community by that much added output.
And the loan, concludes the argument costs the government and the taxpayers
less than nothing, because it is “self-liquidating.”
Now as a matter of fact that is what happens every day under
the institution of private credit. If a man wishes to buy a farm, had has, let
us say, only half or a third as much money as the farm costs, a neighbor or a
savings bank will lend him the rest in the form of a mortgage on the farm. If
he wishes to buy a tractor, the tractor company itself, or a finance company,
will allow him to buy it for one-third of the purchase price with the rest to
be paid off in installments out of earnings that the tractor itself will help
to provide.
But there is a decisive difference between the loans supplied
by private lenders and the loans supplied by a government agency. Each private
lender risks his own fund. (A banker, it is true, risks the fund of others that
have been entrusted to him; but if money is lost he must either make good out
of his own funds or be forced out of business.) When people risk their own
funds they are usually careful in their investigations to determine the
adequacy of the assets pledged and the business acumen and honesty of the
borrower.
If the government operated by the same strict standards,
there would be no good argument for its entering the field at all. Why do
precisely what private agencies already do? But the government almost
invariably operates by different standards. The whole argument for its entering
the lending business, in fact, is that it will make loans to people who could
not get them from private lenders. This is only another way of saying that the
government lenders will take risks with other people’s money (the taxpayers’)
that private lenders will not take with their own money. Sometimes, in fact
apologists will freely acknowledge that the percentage of losses will be higher
on these government loans than on private loans. But they contend that this
will be more than offset by the added production brought into existence by the
borrowers who pay back, and even by most of the borrowers who do not pay back.
This argument will seem plausible only as long as we
concentrate our attention on the particular borrowers whom the government
supplies with funds, and overlook the people whom its plan deprives of funds.
For what is really being lent is not money, which is merely the medium of
exchange, but capital…. What is really being lent, say, is the farm or the
tractor itself. Now the number of farms in existence is limited, and so is the
production of tractors (assuming, especially, that an economic surplus of
tractors is not produced simply at the expense of other things). The farm or
tractor that is lent to A cannot be lent to B. The real question is, therefore,
whether A or B shall get the farm.
This brings us to the respective merits of A and B, and what
each contributes, or is capable of contributing, to production. A, let us say,
is the man who would get the farm if the government did not intervene. The
local banker or his neighbors know him and know his record. They want to find
employment for their funds. They know that he is a good farmer and an honest
man who keeps his word. They consider him a good risk. He has already, perhaps,
through industry, frugality and foresight, accumulated enough cash to pay a
fourth of the price of the farm. They lend him the other three-fourths; and he
gets the farm.
There is a strange idea abroad, held by all monetary cranks,
that credit is something a banker gives to a man. Credit on the contrary, is
something a man already has. He has it, perhaps, because he already has
marketable assets of a greater cash value than the loan for which he is asking.
Or he has it because his character and past record have earned it. He brings it
into the bank with him. That is why the banker makes him the loan. The banker
is not giving something for nothing. He feels assured of repayment….
Now it is to A, let us say, who has credit that the banker
would make his loan. But the government goes into the lending business in a
charitable frame of mind because, as we say, it is worried about B. B cannot
get a mortgage or other loans from private lenders because he does not have
credit with them. He has no savings; he has no impressive record as a good
farmer; he is perhaps at the moment on relief. Why not, say the advocates of
government credit, make him a useful and productive member of society by
lending hi enough for a farm and a mule or tractor ad setting him up in
business?
Perhaps in an individual case it may work out all right. But
it is obvious that in general the people selected by these government standards
will be poorer risks than the people selected by private standards. More money
will be lost by loans to them. There will be a much higher percentage of
failures among them. They will be less efficient. More resources will be wasted
by them. Yet the recipients of government credit will get their farms and
tractors at the expense of those who otherwise would have been the recipients
of private credit. Because B has a farm, A will be deprived of a farm. A may be
squeezed out either because interest rates have gone up as a result of the government
operations, or because farm prices have been forced up as a result of them, or
because there is no other farm to be had in his neighborhood. In any case, the
net result of government credit has not been to increase the amount of wealth
produced by the community but to reduce it, because the available real capital
(consisting of actual farms, tractors, etc.) has been placed in the hands of
the less efficient borrowers rather than in the hands of the more efficient and
trustworthy.[i]
There’s so much in this example: the broken glass theory,
the story of Davy Crockett[ii]
learning that government shouldn’t be in the business of charity. Hazlitt explains
why government shouldn’t be in the business of economic interference at all.
There will always be those pesky negative consequences.
On the other hand,
trusting the free market, while concentrating our efforts on being better, more
compassionate individuals, might just work out those perceived issues.
[i]
Henry Hazlitt, Economics in One Lesson,
50th Anniversary Edition, Laissez Faire Books, © 1996, pp. 27-31.
[ii]
I the retell this story on the Spherical Model website, in the Economic
section, under the heading “Free-Enterprise Zone.” [ http://sphericalmodel.com/theeconomicworld.html
] I first heard this Davy Crockett
story from Nina Hendee, who tells Texas history stories to school groups at the
family restaurant Taste of Texas. I later found the full story: “Not Yours to
Give,” originally published in The Life
of Colonel David Crockett, by Edward Sylvester Ellis, republished at http://juntosociety.com, © 2002 The Junto
Society.
