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When Liberals Misread Bastiat
August 26, 2012, 7:46 am
Filed under: Uncategorized

When Liberals Misread Bastiat:

It s always good to seeᅠFr←d←ric
Bastiat
ᅠdiscussed outside of libertarian circles, because
even when his views are misstated, the mere mention of his name
might prompt curious readers to check him out for themselves. That
can t hurt!
So thank you, Matthew Yglesias,ᅠwho
wrote last week inᅠSlate
:
. . . Bastiat sᅠalleged broken windows
fallacyᅠinvolves simplyᅠassumingᅠthat
there s no such thing as genuinely idle resources or an output
gap. In that context, yes, it s a vibrant intuitive depiction of
crowding out. But this doesn t counter any Keynesian or monetarist
points about the viability of stimulus during a recession induced
by nominal shocks, it involves assuming that no such recessions can
occur even though they plainly do. In defense of Bastiat, at the
time he was writing the modern industrial business cycle was a very
new thing and theᅠvastᅠmajority of economic ups
and downs were caused by things like bad weather which as you can
see in the corn futures market today is indeed a decisive
consideration in an agricultural economy. But that s no excuse for
people sitting around in 2012 to be pounding the table with an old
book that s non-responsive to modern issues professing to be
baffled why people don t find it more persuasive. [Emphasis in
original.]

Yglesiasᅠassertsᅠthat Bastiat merely made
certain assumptions about the operation of markets, but Yglesias
does not demonstrate that this is the case and couldn t.
Was Bastiat unfamiliar withᅠJ. B. Say?
Lord Keynes and his fans may think he refutedᅠSay s
Law of Markets
, but, tellingly, they had to
misstateᅠthe
law
ᅠfirst. It s not that supply creates its own demand,
but rather that supplyᅠisᅠdemand. One produces a
good either to consume it oneself or, more commonly, to trade it
for another good. Demand and supply are two sides of the same,
well, coin which reminds me to add that Say s Law holds not just in
a barter economy but a monetary one
also aᅠfreedᅠone, that is, unlike
theᅠcorporate
state
ᅠwe all occupy.
Time Structure
True, someone might sell a good and not spend the money
received. But this would lead to
idlenessᅠonlyᅠif the economy did not consist in
aᅠtime
structure of production coordinated by interest rates
. In other
words, money not spent is saved and available for investment (that
is, paymentsfor producer goods and labor, which will
be spent on consumer goods) at stages remote from the
consumer-goods level; that is, long-term investment in production
forᅠfutureᅠconsumption. (As Austrian
macroeconomistᅠRoger
Garrison
ᅠsays, people saveᅠfor
something
.)
Given our insatiable demand for goods, in
aᅠfreedᅠmarket a general glut couldn t happen;
if prices were free to fluctuate in response to changed conditions
or entrepreneurial error, the price of goods plentiful relative to
demand would fall, while the price of goods deficient relative to
demand would rise. Entrepreneurs would then adjust their plans, but
since change is the rule, the market would never reach a state of
rest. Say s Law is about a (free) process through time, not general
equilibrium.
Can Yglesias really be serious when he writes that Bastiat s
position involves assuming that no such recessions can occur even
though they plainly do ? It is Yglesias who assumes what must be
proved: namely, that the business cycle is a natural feature of the
free market, rather than the consequence of government s
corporatist meddling with money, banking, and interest rates.
Vulgar Liberalism
Yglesias furnishes the latest example of vulgar liberalism, as
Kevin Carson calls it. This is the attribution of the evils of
corporatism big-business power, recessions, long-term structural
unemployment, exploitation of labor, and more to its antithesis,
the freed market.ᅠKeynesians look around, see unemployment and
idle resources, and conclude (oftenᅠencouraged by libertarians)
that since the free market let this happen and doesn t seem to be
doing anything about it, government stimulus is in order.
That s like walking into a movie in the middle, thinking you
understand the plot. There are certainly idle labor and idle
resources today. But that mere observation says nothing
aboutᅠwhyᅠthey
are idle
. Ludwig von Mises and F. A. Hayek, bolstered by
theᅠanatomists
of corporatism
, provided an explanation. Critics are welcome to
rebut it, but they shouldn t pretend it doesn t exist.
Business Cycle
As the Austrian economists explain, central-bank inflationary
policies that artificially depress interest rates encourage
longer-term production activities that wouldn t have been
undertaken otherwise, given the level of real saving. When the boom
ends, the malinvestment of labor and resources is revealed. Labor,
equipment, and land that had been attracted to
productionᅠinconsistentᅠwith true consumer
demand must now be rearranged. The misshapen economy must be
permitted to assume a more appropriate shape. But that takes
entrepreneurial risk, time, and money (savings). If the correction
is to occur quickly and with minimum hardship, the government must
get out of the way. In particular, it
mustᅠnotkeep interest rates artificially
low
ᅠ(discouraging saving) or create uncertainty about the
future regulatory and tax regimes. The world is uncertain enough;
to the extentᅠgovernment
increases uncertainty
ᅠabout regulation and taxation,
investors will be encouraged to run in place and not make grand new
commitments. This prevents the needed effort to align labor and
resources with what consumers want (or will want in the
future).
Government spending may stimulate the use idle resources, but
that s not good enough. We don t want justᅠany
use
ᅠof recourses they re scarce, after all. We want uses
that consumers would approve of. Politicians, whose decisions face
no market test, areᅠcluelessᅠin
that regard.
So, contra Yglesias, when a fan of Bastiat s sees
theᅠbroken-window
fallacy
ᅠin government stimulus spending, she is on the
firmest of ground. Every dime the government spends whether
acquired through taxation or borrowing is a dime that someone in
the private economy won t be spending. If people are not spending
already which isᅠnot
the case
ᅠthese days we must look to the earlier government
interventions that brought about that condition and
thenᅠrepealᅠthose anti-market corporatist
policies, regulations, and taxes.
This
colum originally appeared in The Freeman.ᅠ

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