Henry Hazlitt used one idea, that of the seen and the unseen, which he credit to Bastiat, to debunk a whole range of economic fallacies in his book "Economic in One Lesson".

There is another economic idea which I believe can do almost as much to dispel all sorts of economic misconceptions, and that is the productivity theory of wages. That is the idea that the living standards of workers improves as their productivity increases. The same number of workers produces a larger supply of goods available, bringing down prices and increasing their real wages, even if their money wages stay the same of even fall. The dollars they earn are worth more, so even if the number on their paychecks or in their bank accounts remain the same, they are richer.

In the video I posted in another thread, which I will repost again here, listen to Thomas E Woods Jr. explaining the idea. What I am talking about starts at 18:40. (I do recommend the whole video)

Once you understand that it is production and supply that makes people wealthier, the idea that we need to re-inflate housing or commodity prices seems silly.

For those of you who argue the class warfare line that free market economics benefits only the wealthy should consider that it is the free market economists, the Austrians, who are saying that the prices of the goods that workers want to buy have to come DOWN. It is everyone else who is arguing that we need more stimulus to increase prices. Who benefits from that? The rich benefit from higher prices, since that increases profits. The workers a harmed by higher prices. All this stimulus creates a conflict between the interests of two groups of people who should be working together.

In a free market, the interests of the rich involves earning higher profits by lowering the cost of production. The only way to do that long term, consistently, is to increase productivity. The only way for real wages to rise is for productivity to increase so that more is produced, the price of all those goods falls, and the workers' dollars go farther. That is the ONLY WAY!

If, instead, in an inflating economy, you have prices rising as a "stimulus", a way for businesses to profit is to do all sorts of things to grab their share of the stimulus money, and sell products at inflated prices. Of course, workers see prices rise, so they demand higher money wages, which wipes out the artificially higher profits, so the big businesses need more stimulus to earn those artificially high profits. You get a vicious cycle of unproductive activity that leads to ever higher inflation, which the central bank has to stop before it becomes hyperinflation (think of the Wiemar Republic or Zimbabwe), so the whole house of cards collapses.

There are a whole bunch of bad idea that would go right out the window if people simply understood the productivity theory of wages. People would see the foolishness of all sorts of policies like protectionism, minimum wage, labor unions, opposition to automation, hate of "big business" just because its big (apart from the justified hate when they get all sorts of government favors because we live in a mixed economy).

The video I posted also has an excellent, concise explanation of the Austrian business cycle theory, and evidence that the Austrians' policy recommendations work. I repeat that I recommend you watch the entire thing.

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-- Modified on 4/3/2011 6:45:24 AM