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?

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.


READ THE REST HERE

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

11.12
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.

11.13
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.

11.14
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.

READ THE ENTIRE CHAPTER HERE

Bastiat on Business - June 24, 2011

Frederic Bastiat on the redistribution of wealth, or what he describes as legal plunder.

In The Law, Bastiat explains that the redistribution of wealth is theft which has been legalized. He explains that anyone can identify legalized plunder by asking yourself the following:

"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."

The Law and Charity

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

You say: “There are persons who have no money,” and you turn to the law. But the law is not a breast that fills itself with milk. Nor are the lacteal veins of the law supplied with milk from a source outside the society. Nothing can enter the public treasury for the benefit of one citizen or one class unless other citizens and other classes have been forced to send it in. If every person draws from the treasury the amount that he has put in it, it is true that the law then plunders nobody. But this procedure does nothing for the persons who have no money. It does not promote equality of income. The law can be an instrument of equalization only as it takes from some persons and gives to other persons. When the law does this, it is an instrument of plunder.

With this in mind, examine the protective tariffs, subsidies, guaranteed profits, guaranteed jobs, relief and welfare schemes, public education, progressive taxation, free credit, and public works. You will find that they are always based on legal plunder, organized injustice.

Bastiat on Business - June 17, 2011

Bastiat on "rent-seeking" (i.e. going to the government and asking for special concessions for your company or industry or protection from "unfair" competition).

This is becoming more and more popular as the government acquires more and more power. And when the scheme fails to produce wealth (as it so often does) the schemers and bureaucrats blame the free market - and the answer, they claim, is more regulation and consumer protection. A win-win for government, and a lose-lose for everyone else.

In this work, Frediric Bastiat sarcastically petitions the French government to protect all candlemakers and the related industry from unfair competition... from the sun.

The Candlemaker's Petition

We are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly that we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds—in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honorable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

Read the entire petition HERE

A real world example of rent-seeking HERE

Bastiat on Business - June 10, 2011

** NEW FEATURE **

Look for a new "Bastiat on Business" post here every Friday. These posts will consist of Bastiat works, references, and quotes dealing with business, management and entrepreneurship.

We start things off with one of Frederic Bastiat's more famous, and more timeless observations - The Broken Windows fallacy. In this example, Bastiat explains away the idea that government stimulus programs or wars help employment and the economy as a whole. Think "Cash for Clunkers"...

The Broken Window

excerpt from:
Seymour Cain, trans. / George B. de Huszar, ed.
Publisher - Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc. 1848

Have you ever been witness to the fury of that solid citizen, James Goodfellow, 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?"

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs' worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
Let us next consider industry in general. The window having been broken, the glass industry gets six francs' worth of encouragement; that is what is seen.

If the window had not been broken, the shoe industry (or some other) would have received six francs' worth of encouragement; that is what is not seen.

And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.