Mark Perry on Bastiat

JMM: I was going to quote this post, but it got to the point where I was quoting almost each sentence.  Instead, I’ll just let Mark Perry be his usual brilliant self:

 

Why Bastiat Is as Relevant as Ever on His 216th Birthday

Today marks the 216th anniversary of the birth of the great French classical-liberal economist Frédéric Bastiat (born June 29, 1801) whom economist Joseph Schumpeter called the “most brilliant economic journalist who ever lived.” Celebrating Bastiat’s birthday has become an annual tradition at CD, and below I present some of my favorite quotes from the great liberty-loving, influential French economist.

1. One of Bastiat’s most famous and important writings was “The Candlemakers’ Petition,” which is such a clear and convincing satirical attack on trade protectionism that it often appears in textbooks on economics and international trade. Here’s an excerpt from that famous 1845 essay (emphasis added):

We [French candlemakers] are suffering from the intolerable competition of a foreign rival, placed, it would seem, in a condition so far superior to ours for the production of light that he absolutely inundates our national market with it at a price fabulously reduced. The moment he shows himself, our trade leaves us — all consumers apply to him; and a branch of native industry, having countless ramifications, is all at once rendered completely stagnant. This rival, who is none other than the sun, wages war mercilessly against us.

We ask you to pass a law requiring the closing of all windows, skylights, dormer-windows, outside and inside shutters, curtains, blinds; in a word, of all openings, holes, chinks, clefts, and fissures, by or through which the light of the sun has been in use to enter houses, to the prejudice of the meritorious manufactures with which we flatter ourselves that we have accommodated our country — a country that, in gratitude, ought not to abandon us now to a strife so unequal.

2. In 1845, as a solution to counteract job losses in some French domestic industries (like textiles) due to free trade, Bastiat proposed to the King of France that he “forbid all loyal subjects to use their right hands.” Bastiat predicted that:

…as soon as all right hands are either cut off or tied down, things will change. Twenty times, thirty times as many embroiderers, pressers and ironers, seamstresses, dressmakers and shirt-makers, will not suffice to meet the national demand. Yes, we may picture a touching scene of prosperity in the dressmaking business. Such bustling about! Such activity! Such animation! Each dress will busy a hundred fingers instead of ten. No young woman will any longer be idle. Not only will more young women be employed, but each of them will earn more, for all of them together will be unable to satisfy the demand.

3. Here’s Bastiat’s famous quote on legal plunder (now frequently referred to as “crony capitalism”):

Legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on. All these plans as a whole—with their common aim of legal plunder—constitute socialism.

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong.See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.

Note: As I pointed out last year on CD around this time, the minimum wage law is a form of legal plunder because it takes money from some persons (business owners) what belongs to them, and gives it to other persons (unskilled workers) to whom it does not belong. The minimum wage law clearly benefits some citizens (entry-level workers) at the expense of employers by doing what the workers cannot do without committing a crime of theft. So let’s put aside all of the economic arguments about what economic theory and empirical evidence show regarding the possible employment effects of government-mandated minimum wages, and consider something even more basic and fundamental: the minimum wage is legalized, government-sanctioned plunder/theft from business owners, and therefore on that basis should be considered morally objectionable, unethical and unacceptable.

4. Four days before his death in 1850, Frederic Bastiat sent this message to a friend:

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.

5. When a new railroad line was proposed from France to Spain, the French town of Bordeaux lobbied for a break in the tracks so that “all goods and passengers are forced to stop at that city,” which would, therefore, be “profitable for boatmen, porters, owners of hotels, etc.” Using reductio ad absurdum, Bastiat proposed that if a break in the tracks provided economic benefits and jobs for one town and served the general public interest, then it would be good for breaks in the tracks at dozens and dozens of other French towns, to the absurd point that there would be a railroad composed of a whole series of breaks in the tracks, so that it would actually become a “negative railway.”

6. In his famous essay “What Is Seen and What Is Not Seen,“ Bastiat was one of the first economists to make the very important distinction between the immediate, concentrated and visible effects of legislation, trade protection or regulation and the delayed, dispersed and invisible effects:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

To illustrate the principle of “what is seen and what is not seen,” Bastiat told a story that became known as the “The Parable of the Broken Window,” which was modernized in the 1940s by Henry Hazlitt in his book “Economics in One Lesson.” Here’s a quick summary:

A baker has saved $50 to buy a new suit, but then a young hoodlum throws a brick through the shop owner’s window and the baker now has to spend $50 to replace the window and forego the purchase of the new suit. If one ignored the invisible effects of the broken window, one could then argue that the hoodlum was, in fact, a public benefactor by stimulating business for the window company that now receives $50 to replace the window. But instead of the baker having $50 for a new suit and a window, he now only has the window and no suit. And the invisible unseen party in the parable is the tailor, who would have benefited $50 from selling the baker a new suit, but now loses that business. Observers will see the visible new window but will never see the invisible new suit, because it will now never be made.

Here’s how Bastiat explains the unseen, invisible effects of the shopkeeper spending six francs to replace the broken window:

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

7. “The State [government] is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

~The State in Journal des Débats (1848).

8. “When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”

~Economic Sophisms, 2nd series (1848)

9. “Everyone wants to live at the expense of the State. They forget that the State lives at the expense of everyone.”

~Source unknown

10. “Trade protection accumulates upon a single point the good which it effects [for domestic producers], while the evil inflicted is infused throughout the mass [of consumers]. The one strikes the eye at a first glance [benefits to producers], while the other becomes perceptible only to close investigation [losses to consumers].”

~Source unknown

Bottom Line: Bastiat was truly an economic giant and deserves credit for his many significant and important intellectual contributions to economic thinking that are as relevant today as they were in France in the mid-1800s when Bastiat was writing, including: a) Bastiat was one of the first economists to warn us of the dangers of legal plunder, crony capitalism and trade protectionism, b) he helped us understand the importance of looking at both the unseen and delayed effects of legislation and regulation in addition to the immediate and visible effects, c) he was one of the most eloquent and articulate defenders of individual freedom and liberty who ever lived, d) he was probably the strongest advocate for the consumer in human history, and e) his use of wit, parody, and satire to convey economic wisdom and insights was unparalleled!

Happy 216th Birthday Frederic Bastiat!

Republished from AEIdeas

Mark J. Perry

Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

This article was originally published on FEE.org. Read the original article.

Democracy Dies in Darkness

The Huffington Post ran an article by Kayla Chadwick on political discourse.  The article is a perfect microcosm on why discourse is so contentious in America:

Personally, I’m happy to pay an extra 4.3 percent for my fast food burger if it means the person making it for me can afford to feed their own family. If you aren’t willing to fork over an extra 17 cents for a Big Mac, you’re a fundamentally different person than I am.

…

If I have to pay a little more with each paycheck to ensure my fellow Americans can access health care? SIGN ME UP. Poverty should not be a death sentence in the richest country in the world. If you’re okay with thousands of people dying of treatable diseases just so the wealthiest among us can hoard still more wealth, there is a divide between our worldviews that can never be bridged.

I don’t know how to convince someone how to experience the basic human emotion of empathy. I cannot have one more conversation with someone who is content to see millions of people suffer needlessly in exchange for a tax cut that statistically they’ll never see (do you make anywhere close to the median American salary? Less? Congrats, this tax break is not for you).

I cannot have political debates with these people. Our disagreement is not merely political, but a fundamental divide on what it means to live in a society, how to be a good person, and why any of that matters.

Read the whole thing.

This post is an excellent example of why political discourse is dead in America. The author refuses to discuss matters with anyone who disagrees with them.

This is an insult. It’s an insult to me, and insult to you, and an insult to every other person who doesn’t share this woman’s POV of the world. We are “fundamentally different.” We don’t “experience the basic human emotion of empathy. ” This sort of commentary is dehumanizing by demonizing those of us who dare disagree.

Did it ever occur to her that maybe, just maybe, we have the same goals? That maybe, just maybe, we disagree not because I lack “basic human emotions” or I think children don’t deserve an education or people deserve to die if they don’t have government mandated medical insurance, but because I think there may be better solutions out there?  That maybe, just maybe, my opposition to minimum wage comes not from the fact I don’t want to pay more for a Big Mac but from the mountain of evidence that it doesn’t work?

By assuming my motives to be evil, by assuming me to be less-than-human simply because I disagree with her, shuts down any hope of compromise, any hope of cooperation.  What’s more, it shuts down an avenue for gaining knowledge.  Ali bin Abi Talib once said: “There is no wealth like knowledge, no poverty like ignorance.”  The attitude of Ms. Chadwick will only lead those who share it into poverty.  There’s a big, beautiful world out there to be discovered, but unfortunately they will not explore it because they think it is filled with demons

What Does Protectionism Protect?

What does protectionism protect?

Some claim that it protects jobs, but that’s not true.  By raising the price of the “protected” good, it reduces quantity demanded, thus reducing the need for labor and other inputs in that particular industry.  Plus, by increasing the price of the protected good, it reduces demand from other areas of the economy just to pay for the new price, costing jobs and inputs into those areas as well (eg, if you have $100 and a suit jacket costs you $50, you have $50 to spend on a night out.  If, due to tariffs, the price raises to $100, you now have nothing to spend on a night out if you buy the suit jacket).

Some claim protectionism protects industries/firms; helps them grow.  That’s not true, either.  As Mercatus Center scholar Dan Griswold reminds us: “Protected industries tend be lazy about innovation and customer service because they are shielded from normal market competition – think the U.S. Postal Service.”  Protectionism tends to weaken the protected industries, not strengthens them (this, in turn, could lead to perpetual calls for protection by the industry.  A good example of this is the US sugar industry.  The subsidies and tariffs it receives were only supposed to be temporary, while the new American nation got on her feet.  Almost 300 years later, they’re still around).

Some claim protectionism protects the economy, it “makes us great” by encouraging exports and reducing imports.  This isn’t true either.  As Dartmouth College professor Douglas Irwin reminds us: “a tax [tariff] on imports is equivalent to a tax on exports. Any restraint on imports also acts, in effect, as a restraint on exports.”  Whether you measure economic gain in the number of exports or the total volume of trade, tariffs reduce both, so it can’t encourage economic growth.

So what, then, does protectionism protect?  Nothing, so far as I can tell.  All it does is reduce the number of goods a society can enjoy by increasing prices.  This is why I call protectionism by its proper name: scarcityism.

Institutional Magic

Don Boudreaux and Bryan Caplan have an interesting exchange regarding Caplan’s question on why no libertarian/Progressive alliance has formed on key issues of agreement.  Caplan’s original post is here.  Don’s comment is here.  Caplan’s reply to Don is here.

Both Don and Bryan are people who, when I disagree with them, I think long and hard about why.  Bryan never hesitates to put his money where his mouth is and Don’s reputation of being a careful thinker is well-earned.

That said, I wonder if there isn’t an explanation that is compatible with both their arguments as I understand them.  That explanation comes from magic.

Gordon Tullock explains:

Most traditional institutions are surrounded with what anthropologists call “magic.”  They are thought of in unrealistic terms, the lack of realism having the effect of making us more satisfied with our environment by convincing us that it is better than it really is.  the courts are no exception.  The view that an outcome of the judicial process is “true” is widely held.

The above quote comes from The Logic of the Law as reprinted in Volume 9 of the Liberty Fund’s Collected Works of Gordon Tullock, page 39.

I wonder if it is possible both Don is right that Progressives don’t necessarily see/believe in spontaneous order and that Bryan is right that Progressives see the value, but don’t like the corruption and whatnot that spawns.

Using Tullock’s language from the above quote, I wonder if Progressives are more susceptible to the “magic” of government, seeing it as better than it truly is and are less susceptible to the “magic” of markets, seeing it as worse than it truly is.  And the same is true of libertarians: they see markets as “magic” but government as less so*.  As such, Progressives may be more likely to oversell the benefits of government and the flaws of markets and undersell the value of spontaneous order, even if they know it is there.  Conversely, libertarians may oversell the benefits of markets and flaws of government and undersell the value of government, even if they know it’s there.

I wonder if, at the extremes, Don is right (extreme Progressives, being completely absorbed with the “magic” and seeing spontaneous order as the antithesis of government, completely reject the notion of spontaneous order (and vice versa for libertarians)), but the more moderate/intellectual in both camps see the benefits of each but are still under a “magical spell”.

Perhaps the issue here isn’t that Progressives are simply anti-market or that they simply do not see the benefits of spontaneous order.  Perhaps the issue is the two groups simply have different kinds of magical attunement.

*For the record, I don’t think either Don or Bryan are under such magical spells.

Jobs are a Cost

Hell is the protectionist’s scarcityist’s paradise

Source: http://www.smbc-comics.com/comic/forever-2

Social Welfare and Unanimity

Like James Buchanan, Jean-Jacques Rousseau, and many others before me, I invoke the “unanimity” condition whenever talking about social welfare (aka “the Greater Good”).  The reason for this is simple: only through unanimous agreement can something truly be said to be for the greater good; that it improves social welfare.

Welfare economists (and others) will call me crazy for such a claim.  “Of course that’s not true!” they say.  “Simply look at the benefits the beneficiaries get, the costs the payers pay, and if the benefit is higher than the cost, then it increases social welfare.”  This kind of cost-benefit analysis is important, I’ll grant that, but for the individual, not society as a whole.  Extrapolating to the societal, or collective, level gets messy.  The reason why is simple: valuation of costs and benefits are subjective.  For any given individual, the valuation of the benefit of Good X is likely to be different from the valuation of the cost of Good X.  Aggregating those valuations gets very very tricky and it ultimately leads to judgement calls by the analyst/policy maker.

If we want to make the claim that a collective action benefits the greater good, and we want to be able to say this positively and not normatively (that is, to eliminate judgement calls), then we need to apply the same standards as at the individual level, the most important of which being unanimity.  In an individual action, all parties agree to interact; if there is no unanimous agreement, the interaction does not take place.  If one disagrees, then we can conclude he does not stand to benefit from the interaction.  Extrapolating this to collective action (that is, more than two people interacting), then the only way to positively claim the action benefits the group as a whole is if it is chosen unanimously.

At this point, I provide only assertions and light reasoning.  An upcoming blog post will go much more in depth and I will attempt to prove my assertion, using the reasoning of James Buchanan and Gordon Tullock.  However, this post is long enough as it is and I will bore the reader no further.

A Presumption of Competence

Why free markets?  Why am I prejudiced toward emergent order vs imposed order in economic matters?  Why is my default position against government involvement?  Why do I invoke such a high standard before justifying active government involvement in the economy?

Because the presumption of competence that is prevalent throughout a free society should be applied to economics as well.  The American civil legal system and the concept of Justice, at least in theory, have presumptions of competence built in.  Parties may contract with one another, with only the need for an arbitrator if there is a disagreement or fraudulent behavior.  They don’t need government to direct their contracts; each party is assumed to understand the deal.

Other freedoms are the same way: the freedom of speech presumes that the speaker is competent and that his audience is capable of choosing whether or not to listen.  Freedom of religion presumes each person is capable of finding their own belief system (or not).  Freedom of press assumes each reader is competent to understand ideas.  Freedom to marry presumes each person is competent in choosing a life-partner.

Economics is the same.  When two people complete a transaction, the presumption of competence is with both: each person trades knowing, to the best of his ability, how to improve his situation.

What about externalities?  Externalities may require necessary government involvement, but the presumption of competency still stands.  People in groups are quite clever.  The market institution does an amazing job channeling resources to reducing all costs, not just private costs.  A presumption of competence allows the market institution to work.

Unfortunately, most economic policies (especially the interventionist ones) rely on a presumption of incompetence.  Tariffs, punitive taxes, many kinds of regulations, et cetera all contain a presumption of incompetence: these regulations must be passed because at least one party (typically the consumer) is incompetent for one reason or another to make his/her own choices.*  The justification is usually “the consumer can’t act in his own best interest.”

I defer to the emergent order because of the knowledge problem.  Without overwhelming evidence to the contrary, the presumption of competence on the parts of the actors (and incomplete information on the part of the observer) should be observed.

*A potential objection an interventionist might raise is that these regulations are necessary because of a lack of information on the part of consumer.  For example, FDA regulations and testing are necessary because otherwise firms will just try to pass off placebos or post biased results.  However, prima facie this justification doesn’t make sense for an interventionist policy, rather than an advisory policy.

Emergent Order vs Imposed Order

In my recent post on the law, I had talked a little bit about law as an emergent order.  Commentor Greg G responded:

You have fallen into the trap of simply using the word “emergent” as a compliment for those emergent processes you approve of. Millions of voters select hundreds of thousands of representatives at different levels of government. Different levels of government sometimes make laws that conflict with each other. The elected representatives select many thousand of bureaucrats who participate in determining what the law is. Every single one of these agents has their own decentralized complex set of motives and goals which include calculating to what extent they need to satisfy the desires of the voters.

Greg’s comment deserves a response.

Is the formation of a government an emergent order?  Yes.  If we go with the classically liberal view of government, government was formed in order to protect individual rights in cases where collective action is the least costly action (other theories of government will work in this same manner; we’ll just change the justification.  The only theory that might now work is government by divine right, as that would indicate not an emergent order by human interaction but rather divine intervention).  Government emerged to satisfy certain needs in the same way a firm emerges to satisfy certain needs.

Emergent order arrives peacefully; consensually.

Imposed order, on the other hand, is non-consensual.  It is imposed by force.  Libertarians and classical liberals tend to identify government as the perpetrator of imposed order.  While government is a perpetrator (and perhaps the largest), the problem is not isolated to government alone.  For example, a man who mugs another is imposing order: he is imposing the forcible transfer of goods/currency from one person to another.

When it comes to government, we must be very careful about how we apply classifications.  It’s a complex question, and I’m not sure I understand it fully.  For example, let’s say that, on a constitutional level (that is, when designing the government), the group unanimously agrees that any legislation passed only needs 51% approval.  So, we have an emergent order on how things work.  Using that simple majority, the government makes rules.  Are these rules emergent order or imposed order?  I suspect there is a justice element to the answer.  I also expect there’s a discussion on whether or not the decision-maker is exceeding his mandate.

As with my piece the other day, these are rough ideas which I will need to fill out going forward.  Comments appreciated and encouraged.

What-ifs and Whatnot

Two friends are sitting by a pool on a hot day.  One of the friends, Joe, casually says to Smith (the other): “Smith, it sure is a hot day today.  I hope the sun doesn’t dry up all the water!”

“Don’t be stupid!” says Smith.  “The sun doesn’t cause water to evaporate.  It causes the water level to go higher!”

Joe looks at his friend perplexed.  Smith continues:

“It’s real simple.  The sun hits the water, water gets warmer and starts to evaporate, right?  So the pool master comes out and adds more water to the pool.  On net, the water rises!  Ergo, the sun causes a higher water level!”

Joe, still confused, says “No, that’s not true.  The effect of the sun is to evaporate the water.  The pool master coming in is serendipitous; it’s a ‘what-if’.”

Smith laughs.  “Oh Joe.  Don’t be so dogmatic in your thinking!  Always insisting that the sun causes evaporation!  But I have clearly proven that wrong.  These chemists who constantly insist evaporation occurs because of the sun are just ideologues.”

Joe, rolling his eyes, goes back to his book.

 

And so it is with minimum wage, too.  Minimum wage advocates love to construct all kinds of “what-ifs” to explain why minimum wage has no effect (or even a positive effect) on employment.  But by doing this, they hide the effect of minimum wage behind all sorts of stories and claim, then, they have turned theory on its head.  But constructing what-ifs are easy.  Any storyteller can do it.  But what-ifs and serendipity make poor bases for public policy.

 

On Law and Social Contracts

This post is a departure from my area of expertise (economics) into an area of interest (law and philosophy).