1848 was an interesting year. The Communist Manifesto was published. I have already published the 10 guiding principles of the communist as enumerated by Marx, each one fully embraced by the current leaders of the USA.
Squelched from our text books (in accordance with Plank 10), the same year French economist and statesman Frédéric Bastiat published cutting criticisms of the childlike arguments made by socialists and communists to ravage and plunder the poor. Here is one of Bastiat's multitude of lessons, regarding the folly of government loan guaranties, currently being offered up as a temporary solution to ease our pain by devastating the welfare of our children:
What Is Seen and What Is Not Seen
"Now, in no country is it possible to transfer from one hand to another more products than there are.
Whatever the sum of hard money and bills that circulates, the borrowers taken together cannot get more plows, houses, tools, provisions, or raw materials than the total number of lenders can furnish.
For let us keep well in mind that every borrower presupposes a lender, that every borrowing implies a loan.
This much being granted, what good can credit institutions do? They can make it easier for borrowers and lenders to find one another and reach an understanding. But what they cannot do is to increase instantaneously the total number of objects borrowed and lent.
However, the credit organizations would have to do just this in order for the end of the social reformers to be attained, since these gentlemen aspire to nothing less than to give plows, houses, tools, provisions, and raw materials to everyone who wants them.
And how do they imagine they will do this?
By giving to loans the guarantee of the state.
Let us go more deeply into the matter, for there is something here that is seen and something that is not seen. Let us try to see both.
Suppose that there is only one plow in the world and that two farmers want it.
Peter is the owner of the only plow available in France. John and James wish to borrow it. John, with his honesty, his property, and his good name, offers guarantees. One believes in him; he has credit. James does not inspire confidence or at any rate seems less reliable. Naturally, Peter lends his plow to John.
But now, under socialist inspiration, the state intervenes and says to Peter: "Lend your plow to James. We will guarantee you reimbursement, and this guarantee is worth more than John's, for he is the only one responsible for himself, and we, though it is true we have nothing, dispose of the wealth of all the taxpayers; if necessary, we will pay back the principal and the interest with their money."
So Peter lends his plow to James; this is what is seen.
And the socialists congratulate themselves, saying, "See how our plan has succeeded. Thanks to the intervention of the state, poor James has a plow. He no longer has to spade by hand; he is on the way to making his fortune. It is a benefit for him and a profit for the nation as a whole."
Oh no, gentlemen, it is not a profit for the nation, for here is what is not seen.
It is not seen that the plow goes to James because it did not go to John.
It is not seen that if James pushes a plow instead of spading, John will be reduced to spading instead of plowing.
Consequently, what one would like to think of as an additional loan is only the reallocation of a loan.
Furthermore, it is not seen that this reallocation involves two profound injustices: injustice to John, who, after having merited and won credit by his honesty and his energy, sees himself deprived; injustice to the taxpayers, obligated to pay a debt that does not concern them.
Will it be said that the government offers to John the same opportunities it does to James? But since there is only one plow available, two cannot be lent. The argument always comes back to the statement that, thanks to the intervention of the state, more will be borrowed than can be lent, for the plow represents here the total of available capital.
True, I have reduced the operation to its simplest terms; but test by the same touchstone the most complicated governmental credit institutions, and you will be convinced that they can have but one result: to reallocate credit, not to increase it. In a given country and at a given time, there is only a certain sum of available capital, and it is all placed somewhere. By guaranteeing insolvent debtors, the state can certainly increase the number of borrowers, raise the rate of interest (all at the expense of the taxpayer), but it cannot increase the number of lenders and the total value of the loans."
Friday, April 3, 2009
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I can dispute Bastiat's analysis easily enough. In his problem statement, he assumes a fixed and inflexible number of plows (one) -- or, by allegory, a fixed and inflexible amount of capital.
ReplyDeleteHowever, capital -- like plows -- is a byproduct of work done by the population. The amount of work don, in turn, is driven by demand for the product of the work. In other words, if there's a huge demand for a certain product, then more of that product will be eventually produced to satisfy that demand. On the other hand, if there is little or no demand, then little or no product will ever be produced.
Now, government, having artificially stimulated demand, in effect creates an economic requirement for there to be 2 plows -- instead of just 1. So, someone now has an incentive to produce that extra plow. In the end, both John and James get a plow -- whereas in the original scenario, John would forever be the only one with a plow.
"I can dispute Bastiat's analysis easily enough. In his problem statement, he assumes a fixed and inflexible number of plows (one) -- or, by allegory, a fixed and inflexible amount of capital."
ReplyDeleteHe covers that in the first paragraph. I think he felt that it is obvious, since his conclusion that all government action is divisive and harmful (accepting that some government cost is necessary), that the total goods available can only decrease as a result of government injustices and inefficiencies cited.
his argument does not make sense at all. if a government wants to intervene, it will force Peter to produce more plows, so John and James can each have two.
ReplyDelete"his argument does not make sense at all. if a government wants to intervene, it will force Peter to produce more plows, so John and James can each have two."
ReplyDeleteWouldn't it be better if the market decided how many plows need be created? The government forcing production for a non-existent need does nothing but waste capital and create dislocation of the market.
"I think he felt that it is obvious, since his conclusion that all government action is divisive and harmful (accepting that some government cost is necessary), that the total goods available can only decrease as a result of government injustices and inefficiencies cited."
ReplyDeleteThat would make a good example for the argumentative fallacy of begging the question (petito principii): if we assume that all government action is divisive and harmful, then my argument shows that all government action is indeed divisive and harmful. If Bastiat really had committed such a basic grade-school error of reasoning, then I would turn a very skeptical ear indeed to anything else he might have had to offer...
There are complicating factors that the example in this article does not account for.
ReplyDeleteFor instance: suppose the benefit of lending the plow to John is short term, while the benefit of lending it to James is much longer term -- so long that the lender is unwilling to consider it?
Even if the long term return of lending it to James is likely to be much, much higher, the lender is going to be much more interested in getting a smaller return now. And so he lends to John.
If the government forces the plow to go to James instead of John in the above case, then society winds up benefiting much more in the long run, even if it doesn't get an immediate return.
Governments can afford to make such investments where private entities cannot. Want an example? I'll give you one: the interstate highway system.
Now, the original purpose of the interstate highway system wasn't some lofty goal like an improvement to commerce. Instead, it was intended to be a means of efficient military transport in the event the cold war turned hot.
But I think the value of the system is rather undeniable, given the ability to move goods and people that has arisen from it.
I think it would be difficult to successfully argue that such a system would have been constructed by private enterprise alone. Such a system would be fraught with toll collection inefficiencies, to name but one problem. But I'm open to the possibilities here. I do not know of a single example where private enterprise has on its own constructed such a widespread and expensive interoperating infrastructure (I don't think that even the internet qualifies here).
That said, it's comparatively rare that government interference results in a better outcome than what would have been had without it, but when they get it right, the results can be impressive.
The problem with government in the U.S. isn't that it's the government, it's that the motives of this government have proven to have little to do with the well-being and prosperity of the people. As it happens, that's true of most governments, and is why, more than anything else, they should be given as little power as possible.
"Governments can afford to make such investments where private entities cannot. Want an example? I'll give you one: the interstate highway system."
ReplyDeleteInteresting example, since the only thing preventing a road system spanning state lines is the arbitrary rules and inefficiencies created by the various state governments, and their inability to work efficiently together.
Pop Quiz: The country with the best highway system in the world? N.Korea. Number of citizen cars? Zero.
http://farm3.static.flickr.com/2204/2467321340_db82e56a45.jpg?v=0
But obviously government can do things, and a few of those things might even be necessary, Bastiat's point is that socialists are short sighted in that they only discuss the value of government while ignoring the costs.
FDR wrote: "Interesting example, since the only thing preventing a road system spanning state lines is the arbitrary rules and inefficiencies created by the various state governments, and their inability to work efficiently together."
ReplyDeleteWell, that's not the only thing preventing it.
Mere acquisition of the land necessary to build it is one such thing. If we adhere strictly to the free enterprise model, the last person who holds a piece of land along the route chosen, especially if engineering concerns make it a mandatory acquisition, can command an essentially infinite price for his bit of land. While this may not entirely prevent the project from being feasible in a technical sense, it may make the project impossibly expensive.
But even then, how would the owners of the individual sections of road collect money for the use of their road except through tolls? It's only relatively recently that technology has advanced to the point where usage can be tracked automatically on a per-automobile basis. And all the owners would have to agree on many standards, not the least of which is the toll tracking method.
Impossible? No. But very, very difficult.
Nevertheless, I do agree with your basic point: socialists conveniently ignore the costs and arguments that fly in the face of their pet theories. As do many "free market" capitalists. Getting it right requires a balance that has rarely been achieved and which has never lasted for long.
"Well, that's not the only thing preventing it."
ReplyDeleteDoesn't the term "interstate" mean in spite of state-imposed barriers?
"Getting it right requires a balance that has rarely been achieved and which has never lasted for long."
True, considering the original U.S. Constitution has been decisively defeated.
If our Founding Fathers could see 65% Federal government confiscation of personal income, incorporations of the states dominating Federal outlays, the push for bureaucratic control of every citizen's life and death, and the move to abdicate the very sovereignty they died for to world financial governance for the sake of monarchical plunder, they would certainly rise against us.
It's hard to imagine the good that would immediately spring from every U.S. personal income doubling-to-tripling overnight, just by elimination of that prohibited in the U.S. Constitution as written. Not to mention the reversal of 97% theft of what little wealth is permitted to be retained by the covert actions of the same ruinous king's bank they fought to smite.
Actually realizing our Constitutionally guaranteed wealth would be truly overwhelming, riches would spill from the highest windows of every home in the nation.
FDR wrote: "Doesn't the term "interstate" mean in spite of state-imposed barriers?"
ReplyDeleteThe barriers in question would not be state-imposed, but would stem directly from the property rights that the landowners would have (and which in the general case are highly desirable to protect -- personal property is an anathema to many socialists). Rights in general are not to be thrown away merely because they are inconvenient. That road leads to autocratic rule of one form or another.
FDR also wrote: "Actually realizing our Constitutionally guaranteed wealth would be truly overwhelming, riches would spill from the highest windows of every home in the nation."
Most definitely. Indeed, tariffs were the primary method by which the federal government funded itself prior to the passage of the federal income tax. This had the beneficial effect of encouraging domestic production, an advantage that income taxes do not share.
I'm not one of those people who believes that import tariffs should be used to give domestic producers some sort of edge necessarily, but I do believe they should be used to level the playing field, so that the price being paid for a foreign-produced good reflects the number of man-hours required to produce it. If foreign competition can produce goods with less total human labor than domestic sources (total labor includes *everything*, from the labor required to produce the raw materials to the labor required to produce and maintain the labor-saving automation), then the foreign competition deserves to "win" (to encourage domestic producers to become more efficient), but only to the degree that they are in fact more efficient.
The outsourcing we have seen in the past 30 years was done not because production elsewhere can be achieved with less human labor, but only because the human labor elsewhere is/was cheaper on a per-man-hour basis when denominated in dollars.
It is for reasons such as this that I prefer to measure the cost of a good or service in terms of the amount of human labor required to produce it, and not the dollar cost, at least when determining whether or not a given economic policy is sound. I believe adding a currency into the mix only serves to complicate such matters, especially when inflation and deflation are included.
If I were designing a currency, I would back it not with gold or some other type of asset, but with the population itself. If the amount of currency in circulation were always directly proportional to the size of the population (the working population, in particular), then I think the value of the currency would remain stable (at least, as stable as is possible).
FDR, I would be very interested in your thoughts on that.
"Wouldn't it be better if the market decided how many plows need be created? The government forcing production for a non-existent need does nothing but waste capital and create dislocation of the market."
ReplyDeleteAre you kidding me? Both John and James need a plow. How can you label non-existent?
Bastiat used this as an analogy, which by definition is a simplification.
ReplyDeleteA key error our socialist friend fall into.
Who said you needed 2 farmers? I agree that you have just generated the demand for 1 more plow, if and only if each farmer can sell all his produce. Otherwise, James has achieved an unfair competitive advantage through a subsidy and has driven John out of business.
Thus government intervention has created added inefficiencies for the system as a whole. The efficient John has been eliminated and society is picking up the bill for the inefficiency deficit. Furthermore, with John out of the picture, James has even less incentives to be efficient.
You can see this in the current bank crisis. Most banks were dying because they were bad at what they did (manage risk). Government came in and bailed them out (gave them the plow they did not deserve). Small risk-adverse banks (John) that could have grown to compete with the existing inefficient banks, now find they are competing against subsidized government entities. They cannot compete against this, so they will fold. As a result the large banks which were already inefficient will not have any nimble competitors, so they will become EVEN MORE inefficient (James will go to the local bar and brothel). Multiply this throughout different industries and that is the effect of the current policies; massive losses in productivity. Welcome to socialism.
Best,
Armagedon
Getting ahead of criticism.
ReplyDeleteYes, you could guarantee loans to consumers so that all produce is sold, but that becomes an infinite loop. You cannot engage in this loop because there are real world limitations to production, and resources are scarce (only so many plows can be made before steel runs out). Eventually, somebody (mainly the government and ergo taxpayers) ends up paying the inefficiencies as they accumulate. In our case these have been inflated away or consolidated into debt.
Incidentally, this too is another of the problems of the fiat currency system. It requires voraginous continues production and consumption to keep the machine going.
Armagedon