The "First Lesson" opens up by stating how economics is hunted by fallacies, those are created because of selfish interests and the tendency of men to see only the immediate effects of a given policy, or only on a special group.

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

By considering only the short term effects of a policy we may reach reasonable conclusions, however we may reach other conclusions by considering long term effects, or maybe another population. Such is the economics's fallacy.

The book proceeds by giving an important example that keeps appearing in many occasions and in different forms, the example goes as follow. Imagine that a young gangster happens to break the window of a shop. Obviously the shop owner is furious but the guy manages to escape and now the shop owner has to pay the damages. You may think that this is a great misfortune for the shop owner, however you start elaborating on the event. The shop owner now has to pay 50$ to a glass manufacturing company, which in turns has to pay the materials and the transportation to another company, which in turns has to pay some other people and so on. By breaking the window, the gangster made more money circulate, provided money and employment in circles, the logic conclusion then would be to say that the boy is not a criminal, but a public benefactor.

However, the shop owner will have 50$ less which he wanted to use for a new suit. Now he has to choose between the window and the suit, preventing money circulating to the suit maker. At the end, no new employment has been added: where employment was created on one area (the window industry), the same amount was removed from another (the suit making industry). Yet, many people don't see what could have been, instead they focus on what they see now which is often misleading.

This broken window fallacy shows itself again and again in the history of economics, such as during a war when everybody talks about the new jobs that the war economy open up, forgetting about all the others that It closes. In particular, during war time you will see a particular diversion of demand to some particular products over others. During reconstruction, Europe had a lot of demand and manpower to rebuild new houses, and less productive capacity for everything else.

The author proceeds by using the same broken window fallacy to explain how government spending is harmful and hostile for an economy. The main idea is similar to what was discussed in the wartime fallacy: if a government uses public money to build a bridge, people may believe that this creates jobs and opportunities, but in fact It just moves jobs from one place to another. The same applies to all types of government spending and to taxes: when the government is taking taxes, It is like breaking the window. Now each citizen has less money to spend and create employment, opportunities were only moved around and the argument that the government is creating new jobs is unreasonable.

But there is a deeper argument against government spending, in particular government "encouragement" to business, and that is risk. When a private company, say a bank, lands money on some company or person, they take the risk of the investment and will be very careful with whom they have business with. Often this is not the case with government spending, and all the risk of bad investments falls on the citizens.

The book gives the example of two farmers: one really respected and with a good track record of success, and another poor with very little to show. They both want to buy a terrain to increase their production, so they ask for money. A bank would judge the situation in favor of the successful farmer since It has less risk and the investment has more chances to pay off. The government instead does different judgments, It may think that giving money to the poor person will make him a productive member of society. This happens everywhere and the risk falls completely on the citizens, not only their money where withdrawn from them through takes, but additionally they are spent poorly.

Moreover, private lenders are selected by cruel market test, If they make mistakes they loose their money and have no more money to lend, they act really carefully. Instead, government lenders "are either those who have passed civil service examinations, and know how to answer hypothetical questions hypothetically, or they are those who can give the most plausible reasons for making loans and the most plausible explanations of why it wasn’t their fault that the loans failed". In short, government loans will reduce production, not increase It.

An entire chapter was dedicated to the misconception that technology will replace human workers, something that has come time and time again and proven wrong every time. The argument against this is noting the fact that machines will make a job faster or cheaper, or both. This in turn will make more money for the manufacturer because of cut costs or increased production. And obviously the manufacturer has to buy the machines, and they are made of other parts from other companies: employment is moved from one group to another.

Therefore, the argument that technology will replace workers is wrong, furthermore the manufacturer / employer can choose to spend the additional revenue either on investing on his business, on other businesses or buying new machinery, which increases employment on those areas.

To be continued…

Travel: Economics, Index