Friday, July 29, 2011

Bastiat on Business – July 29, 2011

When a company or an industry fails to meet its objectives or falls short on its promises to its customers, the result is a localized disruption (or correction) in the economy. For example, if Acme Products of Utah invests more than it should in labor, the fallout for this mal-investment is borne solely on Acme Products of Utah, its customers and some of their employees – the rest of society is spared from Acme Products of Utah’s mistake.

Compare this to a government’s mal-investment. As Bastiat points out, the government has “enormous power” and the policies it puts in place are wide sweeping and inescapable. No other single entity in the modern economy has the power to do so much good…or so much damage. If the US Government mal-invests the citizens’ tax dollars, everyone is harmed. Because the government has enormous power, it can also make enormous mistakes – destroying an enormous amount of wealth.

Bastiat, like most free market economists, strongly believed that, apart from a few true public goods, the market can produce everything a government can – and more efficiently. With this in mind, he questions the value of government regulation, tariffs, and entitlement programs. Because, if the private sector can produce nearly everything, and keep mistakes localized, why then should we allow a government to take on too much responsibility and expose everyone to the associated risks?

In his rebuttal to the social ideas proposed by Mr. de Lamartine (a poet and distinguished statesman), Bastiat asks this very question - what happens when the state gets it wrong? What happens if the state mal-invests the people’s money or regulates an industry poorly – and thus causes underproduction and prevents wealth creation? Instead of mal-investment being limited to a particular industry or company, when the state gets it wrong, the whole of society suffers. In Bastiat’s mind, the cost of getting it wrong far outweighs the benefits of having the government take on something that the private market is perfectly capable of solving itself.

The Enormous Power of Government (excerpt)

Exerpt from "The Law" by Frederic Bastiat
Translated from the French by Dean Russell
Published by: Foundation for Economic Education - Irvington-on-Hudson, New York

As long as [socialist] ideas prevail, it is clear that the responsibility of government is enormous. Good fortune and bad fortune, wealth and destitution, equality and inequality, virtue and vice - all then depend upon political administration. It is burdened with everything, it undertakes everything, it does everything; therefore it is responsible for everything.

In regulating industry, the government has contracted to make it prosper; otherwise it is absurd to deprive industry of its liberty. And if industry now suffers, whose fault is it?

In meddling with the balance of trade by playing with tariffs, the government thereby contracts to make trade prosper; and if this results in destruction instead of prosperity, whose fault is it?

But if the government undertakes to control and to raise wages, and cannot do it; if the government undertakes to care for all who may be in want, and cannot do it; if the government undertakes to support all unemployed workers, and cannot do it; if the government undertakes to lend interest-free money to all borrowers, and cannot do it; if, in these words that we regret to say escaped from the pen of Mr. de Lamartine, “The state considers that its purpose is to enlighten, to develop, to enlarge, to strengthen, to spiritualize, and to sanctify the soul of the people” - and if the government cannot do all of these things, what then? Is it not certain that after every government failure - which, alas! is more than probable - here will be an equally inevitable revolution?

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