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?

Friday, July 15, 2011

Bastiat on Business – July 15, 2011

Bastiat on Business – July 15, 2011

Except for the institution of slavery and prevalence of tariffs, Frederic Bastiat could see very little wrong with the United States. In fact, Bastiat says, “These are the only two issues where, contrary to the general spirit of the republic of the United States, law has assumed the character of a plunderer.” The prophetic outcome of these two issues would be the Civil War. The South resented the Washington, D.C for imposing tariffs on their agricultural goods, and the North exploited the dying and barbaric institution of slavery to justify a war to prevent the South from seceding from the Union.

Bastiat believed deeply that people will not tolerate plunder forever. The institution of slavery was, and rightly so, falling out of favor around the world, and high tariffs and State’s rights were indeed the main motivation for secessionist tendencies. A population oppressed long enough will surely rebel. The South did – and Bastiat predicted it:

Slavery and Tariffs Are Plunder

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

Slavery is a violation, by law, of liberty. The protective tariff is a violation, by law, of property.

It is a most remarkable fact that this double legal crime—a sorrowful inheritance from the Old World - should be the only issue which can, and perhaps will, lead to the ruin of the Union. It is indeed impossible to imagine, at the very heart of a society, a more astounding fact than this: The law has come to be an
instrument of injustice. And if this fact brings terrible consequences to the United States-where the proper purpose of the law has been perverted only in the instances of slavery and tariffs - what must be the consequences in Europe, where the perversion of the law is a principle; a system?

Friday, July 8, 2011

Bastiat on Business - July 8, 2011

The United States' trade deficit is often discussed and often maligned by our politicians. The truth is, a nominal trade deficit is nothing to be afraid of. To put things simply, in exchange for a "deficit" we get cheap stuff and are able to focus our entrepreneurial talents on other things besides making shoes, t-shirts, or automobiles. Instead of fearing China, let's thank them for the inexpensive televisions, footballs, and pens they are supplying us.

The sooner we Americans understand that we live in a post-industrial economy the better, and we can move on to finding our comparative advantage once again. I imagine that Bastiat would agree with me when I suggest, our protectionist attitude toward yesterday's industries is what is holding us back. I say, let us not make the television but design better ones. Let us not make automobiles, but make spacecraft instead. Let us not make the footballs, but have the leisure time to watch football on our inexpensive HDTVs made in China.

Like always, Bastiat gives a clear and entertaining explanation of trade, and the naïveté that our "leaders" show when discussing of trade.

The Balance of Trade

Exerpt from "Select Essays on Political Economy"
Seymour Cain, trans.

Published by: Foundation for Economic Education - Irvington-on-Hudson, New York

The balance of trade is an article of faith.

We know what it consists in: if a country imports more than it exports, it loses the difference. Conversely, if its exports exceed its imports, the excess is to its profit. This is held to be an axiom, and laws are passed in accordance with it.

On this hypothesis, M. Mauguin warned us the day before yesterday, citing statistics, that France carries on a foreign trade in which it has managed to lose, out of good will, without being required to do so, two hundred million francs a year.

"You have lost by your trade, in eleven years, two billion francs. Do you understand what that means?"

Then, applying his infallible rule to the facts, he told us: "In 1847 you sold 605 million francs worth of manufactured products, and you bought only 152 millions' worth. Hence, you gained 450 million.

"You bought 804 millions' worth of raw materials, and you sold only 114 million; hence, you lost 690 million."

This is an example of the dauntless naïveté of following an absurd premise to its logical conclusion. M. Mauguin has discovered the secret of making even Messrs. Darblay and Lebeuf laugh at the expense of the balance of trade. It is a great achievement, of which I cannot help being jealous.

Allow me to assess the validity of the rule according to which M. Mauguin and all the protectionists calculate profits and losses. I shall do so by recounting two business transactions which I have had the occasion to engage in.


Friday, July 1, 2011

Bastiat on Business - July 1, 2011

Economists like to point out the humor in the 'double thank you.' As in, when you buy a pizza, and you say "thank you" while the cashier also says "thank you." The truth is, nearly every transaction that occurs in our $36.5 trillion economy is mutually beneficial. You want the pizza more than your money, and the pizza maker wants your money more than the pizza.

Why then is the marketplace often depicted as a combative arena - employee vs. employer, buyer vs. seller, supply vs demand, etc? As Frederic Bastiat illustrates throughout Economic Harmonies, the free market is the most peaceful way to societal advancement. Think back on all of the transactions you have ever made in your life. Now compare those (and the value of those) to how many times you have been cheated. It is amazing that in, what could be argued to be mankind's most complicated creation, the market works nearly harmoniously.

In this Chapter, Bastiat looks at a main component of a free economy - the roles of both the producer and of the consumer. He illustrates that these are not opposing forces, but combined forces working toward satisfying each others' wants.

The Producer and the Consumer

Exerpt from "Economic Harmonies" by Frederic Bastiat
George B. de Huszar, trans. and W. Hayden Boyers, ed.
Published by: Foundation for Economic Education - Irvington-on-Hudson, New York

In general, we devote ourselves to a trade, a profession, or career from which we do not expect to receive our satisfactions directly. We render and we receive services; we offer and we demand value; we make purchases and sales; we work for others, and others work for us; in a word, we are producers and consumers.

When we go to the market place, we have different, even opposite, points of view, depending on whether we go as consumers or producers. In the case of wheat, for example, the same man does not desire the same thing when he goes as a buyer as when he goes as a seller. As a buyer he hopes for abundance; as a seller, for scarcity. These hopes stem from the same source, self-interest; but as buying or selling, giving or receiving, supplying or demanding, are completely opposite actions, they cannot fail, though they have the same motivation, to give rise to conflicting desires.

Desires that clash cannot both simultaneously coincide with the general welfare. In another work I have tried to show that men's desires as consumers are the ones that are in harmony with the public interest, and it cannot be otherwise. Since satisfaction is the end and purpose of labor, since the amount of labor depends solely upon the obstacles it encounters, it is clear that labor is the evil, and that everything should be done to lessen it, while satisfaction is the boon, and that everything should be done to increase it.