Economics

That Which is Seen, and That Which is Not Seen

The French political economist Frédéric Bastiat (1801–50) is not particularly well acknowledged or regarded in the annals of economics. My bible on economic theories and personalities of the past, Mark Blaug’s Economic Theory in Retrospect, does not mention him. A clue to his relative obscurity can be found in an entry by economist Robert F. Hébert in the 1987 edition of The New Palgrave: A Dictionary of Economics:

Generally, judgment on Bastiat has been that he made no original contributions to economic analysis. Cairnes, Sidgwick, and Bohm-Bawerk discounted his pure economics entirely. Marshall said that he understood economics hardly better than the socialists against whom he declaimed. And Schumpeter declared that Bastiat was not a bad theorist, he was simply no theorist at all.

At the same time, Hébert also quotes Schumpeter as calling Bastiat “the most brilliant economic journalist who ever lived”. A mixed review. And he is not without fans. Austrian economists are fond of him. The American Institute for Economic Research sponsors a global network of Bastiat societies, including in Australia, to advance the causes which he espoused: free trade and economic liberty more generally. But the standing of Bastiat in economic circles is somewhat beside my point.

My purpose is not to explore or assess Bastiat’s economic theorising which, in part, goes to the esoterica of value theory. No one cares much about that. What is worth caring about is Bastiat’s exposure of economic fallacies that are brought about by ignoring effects which are not immediately obvious; or, in Bastiat’s words, not seen.

Bastiat was an unabashed free-trader and economic libertarian. Moreover, if the English translations of his works are a guide, he was a clear and punchy writer, fond of simple stories, akin to parables, to make his case, of which “The Broken Window” is the best-known. Critically, he was intent on seeing what others didn’t, or ignored. And it is this identification and dissection of unseen effects of policies and actions which, I suggest, is his abiding legacy to public life; and worth revisiting.

Economic fallacies of his day were in Bastiat’s crosshairs but his insights and arguments have wide and current application. They have not been worn down by time. As Hayek wrote in 1964 in his introduction to Bastiat’s Selected Essays in Political Economy:

If the reader should be inclined to feel superior to the rather simple fallacies that Bastiat often finds it necessary to refute, he should remember that in some other respects his compatriots of more than a hundred years ago were considerably wiser than our generation.

Nothing has changed. Hayek’s assessment remains valid today. I will go to economics first before commenting on Bastiat’s methodology and then branching out to illustrate how this methodology has application beyond economics. In going to economics, I will focus on how Bastiat shines a light on what can accurately be called the “Keynesian fallacy”—even though that particular fallacy was still to make its appearance. Regrettably, it’s ever timely to focus on Keynesianism, which is again plaguing our future by giving imprimatur to governments to engage in massive spending, borrowing and money printing. Hang onto your hats; or, more literally, your gold.

Bastiat was a contemporary of John Stuart Mill. But the two really can’t be compared. Mill’s economics is far more comprehensive, rigorous and sophisticated. On the other hand, Mill is wordy, dense and hard going. Bastiat is not. I am struck by Keynes putting down Mill in The General Theory of Employment, Interest and Money: “Contemporary economists, who might hesitate to agree with Mill, do not hesitate to accept Mill’s doctrine as their premise.” The pointy end of this doctrine, to which Keynes refers is, in his words, “that if people don’t spend money in one way, they will spend it in another”. In other words, there can be no shortage of spending overall. Keynes’s entire thesis comes to very little more than undermining the validity of this doctrine and replacing it with his own.

As we know, Keynes won his battle of ideas; and resoundingly. His alternative doctrine that economies suffer from chronic, and often acute, shortages of spending is accepted throughout the world by almost all economists and, so far as I can tell, by all central banks, government treasury departments and international economic organisations. There are a few holdouts—Austrian economists and some conservative economists—but these are impotent and barely visible in the scheme of things. Like modern-day Christian literalists.

My own view is that Mill set the standard for understanding how economies work. But he requires close reading, which doesn’t necessarily lead to a coincidence of interpretations. His relative inaccessibility, in the less verbose world of the 1930s compared with the 1850s, meant that Keynes could get away more easily with putting him down and cavalierly dismissing him. Who in the aftermath of the publication of the General Theory in 1936 defended Mill’s economics? My recall is that none did.

There were plenty of critics in the learned journals, most of whom eventually admitted defeat—or slunk away in confusion, battered by the growing consensus that Keynes had seen the flaws and rightly changed the course of economic theory. But they did not arm themselves with Mill. He was old hat at the time and, of course, is now in the dustbin of outdated economists. Being right is no guarantee of longevity. Not in the field of economics anyway.

Unlike Mill, Bastiat is hard to misinterpret. Keynes could still have taken him head on if Bastiat had been seen as important but, in that case, Keynes might have been compelled to grapple with the argument. And what is that argument? I will start with the story of “The Broken Window”. Instructive in itself, it also opens a window, figuratively speaking, into Bastiat’s general insistence on the need to consider the “unseen” as well as the “seen” effects of all policies and actions. Hayek lauds this insight as encapsulating the “central difficulty” of undertaking “rational economic policy”.

In the story, the son of a shopkeeper accidentally breaks a window. People tend to say consolingly that without broken windows glaziers would be out of work. But Bastiat points out that the six francs the shopkeeper paid the glazier would have been spent elsewhere on, say, books or shoes to the benefit of those selling these goods. He then goes to the shopkeeper himself. He has forgone six francs without bettering his position. And society as whole has had to employ valuable resources simply to stand still. The lessons of this story are that the shopkeeper’s six francs will not go to waste if not spent on a replacement window and that value comes from making, not destroying things. The story is the first of twelve in That Which is Seen, and That Which is Not Seen (1850). Another is “Frugality and Luxury”, which concerns two brothers, Mondor and Aristus, sharing a rich inheritance.

Mondor spends lavishly and earns the praise of onlookers for benefiting workmen and merchants. Aristus spends prudently while disposing of part of his income charitably and saving the rest. The mistake the onlookers make, Bastiat avers, is to suppose that what is not spent by Aristus is not spent at all. What is not seen is that others spend what is charitably given; and what is saved finds its way, perhaps through bankers, into spending on capital works. In the end Mondor is ruined and becomes a burden on society while Aristus, through his saving, remains wealthy and able to continue to spend and support workers and merchants. Moreover, society as a whole has become more prosperous because of the capital works funded by the savings of Aristus. A happy tale which, as Bastiat points out, means that the moral superiority of frugality over luxury is matched by its superiority in the realm of political economy.

You will notice that Bastiat occupies the world of money. Thus, he is immune from the charge levied by Keynes on classical economists that they thought of money as simply a veil, underneath which the real economy is chugging away regardless. Keynes, on the other hand, saw money as a way people can save without hoarding goods. Hoarding goods means that the goods need to be produced. Thus, saving is as much spending as it is saving. Saving money on the other hand mechanically disconnects the saving process from the producing process. Keynes was right about this but makes too much of it. In fact, he hung his whole theory on it; on what turns out to be a surface phenomenon.

Keynes saw the obvious. People saved and accordingly only spent part of their income, and the richer they became the smaller proportion of their income they spent. A shortage of spending overall would result unless business took up the slack by investing more and more. And why would that automatically happen? Well, it probably wouldn’t, according to Keynes. He didn’t look beneath the surface. Bastiat always did. Best to go back to Aristus.

Bastiat assumes that the money saved by Aristus will be as much spent as the money Aristus directly spends. It will not be buried in the garden but invested or lent for profit. Those taking ownership of the money and paying a premium for doing so will equally attempt to deploy it for profit. Why else would they pay a premium to take ownership of the money?

Now there is a circumstance in which Aristus might have buried the money. That is when his wants are sated, as are those to whom he might give his money. We can safely assume that Bastiat dismissed this possibility. In the conclusion to the first part of his free-trade tract Economic Sophisms (first published in two parts, in 1845 and 1848), he described the idea of there being a “superabundance of products” as one of a number of a “pestilent errors”. Without a doubt, if economists were to ever to think as Bastiat, they would perforce need to rethink the very foundations of their economics. Instead they unconsciously occupy a world akin to that of Mandeville’s fabled bees (1705): a prosperous vibrant community brought to ruin when its members forswear all luxury and excess.

Mandeville’s fable has similar import to Keynes’s essay “Economic Possibilities for Our Grandchildren” (1930), in which he looks forward to a time of plenty when work becomes optional. In both cases demand for goods and services will fall below the level required for full employment. Well, it is now the time of Keynes’s great-great-grandchildren and still no superabundance in sight.

The mistake of taking either piece of fiction seriously is rooted in a distortion of reality. In reality, all countries, societies, communities and most individuals are rife with unsatisfied wants, and ever will be. Two conclusions follow. First, hiccups aside, collective savings will be funnelled one way or another into investments, provided the market is allowed to work; and, vitally, to work its way through difficult times. Second, government (so-called) stimulus spending, which, as we speak, is being urged on all governments to undertake post-pandemic, will disrupt market processes and end up being counterproductive. As Bastiat puts it:

creating labour for the workmen [through public works] serves to justify the most wanton enterprises and extravagance [and] is nothing else than a ruinous mystification … which shows a little excited labour which is seen and hides a great deal of prevented labour which is not seen.

Looking below the surface to understand the hidden effects of public policy, as Bastiat does, doesn’t mean looking into the future. No one has a crystal ball and so many unexpected factors can come into play to mould the future. For example, some say that President Lyndon B. Johnson’s “Great Society” programs in the mid-1960s, designed to ameliorate poverty and disadvantage, led to the current mass of fatherless black American families. Women became married to the government, it is sometimes said. There is some truth in this, no doubt. But how much? It is impossible to disentangle the myriad social and economic trends, the causes and effects, which led to where we are; and this applies quite generally, no matter what state of play we are seeking to explain.

Bastiat does not generally adopt or depend upon a time profile to reveal the unseen. The unseen is as much a creature of now as is the seen. That they play out over time is incidental. His is a logical profile. Of course, time is so pervasive in the way we think that his stories occupy time but that, if you like, is simply a device to separate one effect from another.

Am I dancing on the head of a pin? I don’t think so. We don’t have the luxury of knowing the future when judging policies. Adults (read conservatives as distinct from the Left) look at the logical effects of policies at the time they are being developed. In this important respect, Bastiat’s focus on the unseen is not quite the same thing as the concept of unintended consequences.

Sociologist Robert Merton brought the concept of unintended consequences to the fore in 1936. However, it has a much longer heritage. For example, this is Adam Smith in The Theory of Moral Sentiments in 1759:

Everybody allows, that how different soever the accidental, the unintended and unforeseen consequences of different actions, yet, if the intentions or affections from which they arose were, on the one hand, equally proper and equally beneficial, or, on the other, equal improper and equally malevolent, the merit or demerit of the actions is still the same, and the agent is equally the suitable object either of gratitude or of resentment.

In other words, though a path might be paved with good intentions, if its unforeseen end is Hell, it’s Hell just the same.

Instructively, an unintended consequence, by definition, is unforeseen and lies in the unknowable future. That is not what Bastiat talks about. Unlike an unintended consequence, what is not seen is in fact quite seeable but often studiously ignored. In his world, bad policies and actions can’t hide behind the opaque cloak of an unknowable future. A better analogue to Bastiat’s scrutiny and investigation of the unseen is far-reaching, wide-angled, cost-benefit analysis.

All of Bastiat’s “parables”, and his refutation of various arguments in favour of protectionism in Economic Sophisms, follow a logical trail calculating who benefits and who loses and netting the result. Incidentally, though no longer an unabridged free-trader in the age of mercantilist China and globe-trotting corporations, I am happy to be a fellow traveller with Bastiat, vintage mid-nineteenth century. And, I can’t but agree that the candlemakers in his satirical tale had a poor case in arguing that the sun represented unfair competition and should be blocked.

While times and circumstances have changed radically, Bastiat’s insights and arguments remain compelling in principle and in logic. Yet, what underscores them, his insistence on peeling away the surface in order to interrogate what lies beneath, still so often fails to make the cut across all areas of public policy. That which is seen holds sway. And it’s easy enough to find examples. We may, in fact, be living through the most blatant example of its kind in human history.

In April this year the London School of Economics released an occasional paper: “When to Release the Lockdown: A Wellbeing Framework for Analysing Costs and Benefits”. The importance of this paper is its date (quite early in the pandemic) and its focus on the costs of the lockdown: under headings of loss of income, unemployment, mental health (suicide, domestic violence, addiction and loneliness), confidence in government and schooling. And I will add one that is missing, which is the incidence of illness and death due to delays in obtaining medical assessments and treatments for non-Covid ailments.

None of these costs are at all mysterious or difficult to comprehend. They are surely not unintended consequences. They are known consequences in plain sight; that is, for those willing to look. Yet one of the authors of the occasional paper said this of the UK government’s requirements for lifting the lockdown: “what they are really on about are the number of deaths and the number of cases. They do not take account of the wider reality of this lockdown on wellbeing”.

Months later nothing changes in the UK, in Australia or in most places. A combination of cases and deaths is the defining metric. It is monumentally superficial. To change tack. Before the Wuhan virus pushed Greta Thunberg aside, combating climate change was the great moral challenge of our generation and will, no doubt, resume centre stage when the virus fades away. Again, the proffered solutions, orchestrated and subsidised by governments, occupy a two-dimensional world. Even Michael Moore in his documentary Planet of the Humans was able to put on 3D glasses and identify the glaring defects of the current stable of supposed renewable energy solutions. If Moore can do it, surely governments can? Apparently not.

It is plainly silly to claim that the cost of wind and solar energy is now competitive when it continues to require massive subsidies. It is wilfully deceptive to quote the cost of producing such energy without taking account of a range of ancillary costs—including, but by no means only, the costs of providing reliable back-up power and transmission costs. The issue here has nothing to do with the climate debate per se: whether there is, or is not, an urgent warming problem to solve. It is to do with the need to have the curiosity and intellectual integrity to consider all of the costs and benefits of proposed solutions; to have the type of mindset of Bastiat.

It can’t be an accident. So many things are done by government, like regulatory overreach, without apparent cognisance of their unseen effects. This happens much more rarely in the private sector, presumably because adverse effects in the private sector can’t easily be shifted onto someone else. Governments, on the other hand, are masters at shifting accountability. Notice the similar technique applied by the Governor of New York, Andrew Cuomo, and the Premier of Victoria, Daniel Andrews, in blaming their respective federal governments for their failure to protect people in nursing homes. But I think it goes beyond a blame-shifting mindset. It’s a dullard mindset, I think. A deficiency of imagination; perhaps born of a lack of real-world experience when it comes to many of those in public services advising government, and many in government. And, evidently, it must be an enduring deficiency.

As a further example of many, take the doubling of the dole—called euphemistically “job-seeker payments”—instituted by the Australian government as part of its lockdown suite of policies. A report in the Australian by Rebecca Urban on August 16 described the devastating effect it has had on a remote Aboriginal community. “Covid-Fuelled Grog Violence Hits Remote Kids”, it is titled. Did anyone in the federal government think through the effect that doubling “sit-down money” might have on remote communities already suffering from alcohol-related problems?

A final point. You might think Bastiat’s emphasis on the need to take account of unseen effects is something others have also said in different ways. Perhaps. Yet no one, I think, has said it with more flair and force. And that counts when the message is as much required as ever it was.

Peter Smith wrote “Money Printing in the Age of COVID-19” in the July-August issue.

 

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