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A golden rule to help you evaluate the worth of your policies

Jun 27, 2011 Business Daily, Leadership

“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”

HENRY HAZLITT Economics in One Lesson (1946)

When I was a young lad barely into long trousers, a greenhorn studying A-level economics for the first time, a most formidable gentleman used to intimidate us with his prowess. His name was Professor Terry Ryan, and he was (and is) Kenya’s renowned economist and policy guru. These days, I am honoured to sit on an advisory board alongside Prof Ryan, who is still going great guns – but that’s a story for another day.

I thought of the good professor when I picked up a book by another economics guru. Prof Ryan used to tell us he could summarize all of economics on a single page – which was mind-blowing when we struggled with all the huge textbooks in our curriculum. Henry Hazlitt, however, went one further. In 1946 he wrote the landmark book Economics in One Lesson. When I read the first chapter recently, I saw that Hazlitt, a member of the venerable Austrian school of economic thought, is actually boiling economics down to a single PARAGRAPH.

That paragraph is shown in the box. Look at it again. It gives us a simple rule for deciding whether an economic policy or act is worthwhile: does it impact positively on as many groups as possible in the economy (not just one group); and will its effects stay positive in the long term (not just immediately).

You may applaud now. If only leaders and policymakers thought that clearly (and nobly), perhaps this world would not be in quite the mess it is.

Take a recent example: the global credit crunch of 2008, which triggered a worldwide recession many countries are yet to emerge from. It is now evident that the policy measures that led to this crash broke Hazlitt’s golden rule. Credit rules were relaxed, to promote home ownership in certain countries. Unusual financial instruments were designed, to give the delusion of risk reduction and promote the obscene enrichment of a few bankers. Regulation was lax, in a misguided wish not to get in the way of a short-term boom. The results we all know: global financial meltdown; massive loss of homes, savings and jobs; and collapse of many seemingly robust institutions.

Had Hazlitt been around a few years before the crash, perhaps he would have told us: don’t do this, folks, because it enriches just a few people; and its long-term consequences will be catastrophic. It is not a phenomenon for the greater good for the greater period of time. It is a short-lived con game. And today, taxpayers around the world carry the can for the actions of a reckless cabal.

Certainly, the Government of Kenya would be well advised to apply Hazlitt’s lesson to its policies. Perhaps then we would evaluate more clearly what certain types of infrastructure projects mean for the greater, longer-term good of ALL the people of Kenya.

It also strikes me that organizational leaders would do well to apply Hazlitt’s rule within their entities. How many of us do this: enact only those measures that benefit all members of the organization (or wider ecosystem); and that keep being beneficial for a prolonged period?

In fact we see the opposite all too often: share ownership schemes that enrich a few while deluding the many; brutal layoffs that harm long-term morale; short-lived price cuts and promotions that give the illusion of value; senior executive teams that hoard all the perks and rewards while preaching austerity to everyone else.

So give this long-dead economist some time this week. His rule may help you lead more wisely.

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