Frederic Bastiat (1801-1850)
The Setting: The so-called Laissez-faire school in France during the nineteenth century was very dominant and influential. It even permeated the popular culture - finding its way into novels and plays. The ideas of the harmony of interests, trade being mutually beneficial and that free markets brought general prosperity were all popular. One novel that was very popular was Handbook of Social Economy: Or the Workers ABC by Edmond About (1828-85). These were basically writings by workers on how the free market benefited them.
One of the most influential of his time was Claude Frederic Bastiat. Although forgotten by much of mainstream economics, he was a lucid and brilliant writer. His influence eventually spread beyond France.
Bastiat's Life: Bastiat was orphaned at age ten, and was raised and educated by his paternal grandparents. When his grandfather died, Bastiat, at age twenty-five, inherited the family estate, which enabled him to live the life of a farmer and scholar for the next twenty years (mostly scholar). He was fluent in English, Italian and Spanish (besides French).
His publications: Economic Sophisms (1845) a collection of witty essays on protectionism and government controls, sold out quickly, going into several editions, and was swiftly translated into English, Spanish, Italian and German.
Also, his Selected Essays on Political Economy - including the most popular essays, "The Law" and "What is Seen and What is Not Seen" (1848), and of course Economic Harmonies (1850) - his two volume theoretical magnum opus, only partially published upon his early death - but was published posthumously.
He was an avid reader and was most heavily influenced by Say, partially by Smith, by Destutt de Tracy, and a libertarian Charles Comte (A Treatise on Legislation, 1827).
Bastiat's first published article appeared in April of 1834. It was a response to a petition by the merchants of Bordeaux, Le Havre, and Lyons to eliminate tariffs on agricultural products but to maintain them on manufacturing goods.
Bastiat praised the merchants for their position on agricultural products, but criticized them for their hypocrisy in wanting protectionism for themselves.
"You demand privilege for a few, whereas I demand liberty for all."
He then explained why all tariffs should be abolished completely.
Bastiat continued to hone his arguments in favor of economic freedom in most of his essays. Although he is not credited by many historians of thought as adding any original theory to our body of knowledge (although some disagree) – he is credited for having put certain theories in understandable language – as well making economics fun to read.
Bastiat's Ideas
Economic Harmonies
While Bastiat was writing in France, Karl Marx was writing Das Kapital, and the socialist notion of "class conflict" that the economic gains of capitalists necessarily came at the expense of workers was becoming popular.
Bastiat's Economic Harmonies explained why the opposite is true - that the interests of mankind are essentially harmonious if they can be cultivated in a free society where government confines its responsibilities to suppressing thieves, murderers, and special-interest groups who seek to use the state as a means of plundering their fellow citizens. In this way, he was also a leader in the ideas of Public Choice theory.
His Main Contributions:
Wants Drive Economic Activity - Not Production:
His criticism of Smith for his distinction between "productive" labor (on material goods) and "unproductive" labor (in producing immaterial services), Bastiat pointed out that all goods, including material ones, are productive and are valued precisely because they produce immaterial services. Exchange is the mutually beneficial trade of such services. This built upon Say's insistence that all market resources were "productive", and that income to productive factors were payments for that productivity. Therefore, Bastiat said that "value is measured by services rendered, and that products exchange according to the quality of services stored in them". Here, talking about subjective value as being the reason that people trade and where the value of resources comes from -- the consumer.
He continually emphasized that consumption was the goal of economic activity. His often repeated triad was:
Wants -
Efforts -
Satisfactions.
Wants are the goal of economic activity, giving rise to efforts, and eventually yielding satisfactions. Furthermore, he noted that human wants are unlimited, and hierarchically ordered by individuals in their scales of value.
So he said, "it is necessary to view economics from the viewpoint of the consumer. . . . All economic phenomena . . . must be judged by the advantages and disadvantages they bring to the consumer."
So his focus on exchange, instead of simply production, was itself a contribution.
Capital Theory (going along with Economic Harmonies - that markets and capital accumulation are good for everyone, including workers!)
Bastiat contributed to capital theory by explaining:
1. How the accumulation of capital results in the betterment of the workers: (productivity of labor increases - therefore wages increase)
2. How the accumulation of capital results in the cheaper and better quality consumer goods (which also betters workers by increasing real wages):
3. How the interest on capital declines as it becomes more plentiful: (so more workers can become entrepreneurs).
Thus, the interests of capitalists and labor are harmonious, not antagonistic, and government interventions into capital markets will impoverish the workers as well as the owners of capital.
Bastiat also explained why in a free market no one can accumulate capital unless he uses it in a way that benefits others, i.e., consumers.
Subjective Cost and Revealed Preference Theory
Bastiat viewed economics as "the Theory of Exchange" where the desires of market participants "cannot be weighed or measured. . . . Exchange is necessary in order to determine value." Thus, to Bastiat, value is subjective, and the only way of knowing how people value things is through their demonstrated preferences as revealed in market exchanges.
Voluntary exchange, therefore, is necessarily mutually advantageous.
So to many, this was an important theoretical innovation in the history of economic theory - the understanding that value is created by voluntary exchange, when so many others before him (Smith, etc.) and Marx during his time harped on the labor theory of value
The Broken Window (opportunity cost analysis)
Bastiat's greatest contribution to subjective value theory was how he applied the theory in his essay, "What is Seen and What is Not Seen." Where he pointed out that there are unseen parties and both short and long term effects of government policy (and other economic happenings). A good economist – to Basitat – is one that can point to these unseen parties and to the long term effects of things.
Have you ever been witness to the fury of that solid citizen, James Goodfellow,*1 when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: "It's an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?"
Basically he had three levels of economic analysis:
1. First-level - common sense. The destruction of property in breaking the window is not good. So people have sympathy for the store owner.
2. Second-level - sophisticated analyst or what Rothbard calls a "proto-Keynesian" analysis. Destruction of property, by compelling spending, therefore stimulates the economy and has an invigorating "multiplier effect" on production and employment.
3. Third-level - the economist. Vindicates common sense and refutes the theory of the sophisticated analyst. Here is where he considers what is seen and what is not seen!
It is basically the best application of opportunity cost analysis that one can provide.
In that essay, Bastiat, by relentlessly focusing on the hidden opportunity costs of resource allocation, criticized the idea that government spending can create jobs and wealth, war is good for the economy, technology destroys jobs, protectionism is good for the economy, etc..
Political Economy - Government
Bastiat is perhaps best known for his work in the field of political economy - the study of the interaction between the economy and the state as opposed to pure economic theory.
"The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else." "The Law"
While establishing the inherent harmony of voluntary trade, Bastiat thought that governmental resource allocation is necessarily antagonistic and destructive of the free market’s natural harmony. Since government produces no wealth of its own, it must necessarily take from some to give to others – this is the essence of government to Bastiat.
Also, as special-interest groups seek more and more of other people’s money through the state, they undermine the productive capacities of the free market by engaging in politics rather than in productive behavior (again the unseen losses).
Majority Vote and Morality:
Government was necessary, according to Bastiat, but only if restricted to its "essential" functions (protecting life, liberty and property).
“No society can exist unless the laws are respected to a certain degree," but at the same time that could only occur if the laws themselves were respectable.
Majority vote (or a law decided on this basis) cannot be justified on moral grounds -- because "since no individual has the right to enslave another individual, then no group of individuals can possibly have such a right."
All income redistribution through majoritarian democracy is therefore "legal plunder" and is, by definition, immoral.
Following Say - The slogan, "if goods don’t cross borders, armies will," is often attributed to Bastiat because he so forcefully made the case that free trade was perhaps the surest route to peace as well as prosperity.
He understood that throughout history, tariffs had been a major cause of war.
Free Trade and Peace
In Economic Sophisms, Bastiat created the most complete case for free trade ever constructed up to that time, which applied such economic concepts as:
1. the mutual advantage of voluntary trade,
2. the law of comparative advantage (which we will go over under Ricardo),
3. the benefits of competition to the producer (and worker) as well as the consumer,
4. and the historical link between trade barriers and war.
Free trade, Bastiat explained, would mean "an abundance of goods and services at lower prices; more jobs for more people at higher real wages; more profits for manufacturers; a higher level of living for farmers; more income to the state in the form of taxes at the customary or lower levels; the most productive use of capital, labor, and natural resources; the end of the "class struggle" that . . . was based primarily on such economic injustices as tariffs, monopolies, and other legal distortions of the market; the end of the "suicidal policy" of colonialism; the abolition of war as a national policy; and the best possible education, housing, and medical care for all the people."
Bastiat was a genius at explaining all these economic principles and outcomes by the use of satire and parables, the most famous of which is "The Petition," where he very cleverly asked the government to prohibit the sun because it was unfair competition to those who make lights.
Another of Bastiat's most memorable satires is his criticism of the protectionist argument that a "balance of trade" is necessarily desirable.
A French merchant is said to have shipped $50,000 worth of goods to the U.S., sold them for a $17,000 profit, and purchased $67,000 worth of U.S. cotton, which he then imported into France. Since France had therefore imported more than it exported, it "suffered" an "unfavorable" balance of trade. A more "favorable" situation would have been one where the merchant attempted a second transaction in the U.S., but had his ship sunk by a storm as it left the harbor. The customs house at the harbor would therefore have recorded more exports than imports, creating a very "favorable" balance of trade. But since storms are undependable, Bastiat reasoned, the "best" policy would be to have the government throw all the merchants goods into the sea - thereby guaranteeing a "favorable balance of trade.”
Bastiat's Legacy:
At his time he was extremely influential across Europe. He formed a free trade association and because of his ideas, free trade associations rapidly established themselves in various countries in Europe. Examples include Belgium (follower Charles de Brouckere), Italy (Francesco Ferrara - a professor of political economy at the University of Turin) and Sweden (Johan August Gripenstedt and G. KI. Hamilton, professor of economics at the University of Lund - even named his son "Bastiat"!).
Today, Bastiat's legacy is still carried forward in some circles (most Austrian circles), not mainstream economics.
Deb's Commentary: I think it is sad that many contemporary economists seem to believe that the act of communicating economic ideas -- especially economic policy ideas --to the general public in the style that Bastiat did is somehow unworthy of a practitioner of "economic science." In other words – if you don’t add in some graphs and equations – nobody will listen to what you have to say or think it is important. This is why Bastiat is often over-looked in the history of economic ideas. Too bad. Perhaps we need another Bastiat today more than ever.