When Liberals Misread Bastiat

It’s always good to see Frédéric
Bastiat
 discussed 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, who
wrote last week in Slate
:

. . . Bastiat’s alleged broken windows
fallacy involves simply assuming that
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 the vast majority 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.]

Yglesias asserts that 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 with J. B. Say?
Lord Keynes and his fans may think he refuted Say’s
Law of Markets
, but, tellingly, they had to
misstate the
law
 first. It’s not that “supply creates its own demand,”
but rather that supply is demand. 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—a freed one, that is, unlike
the corporate
state
 we all occupy.

Time Structure

True, someone might sell a good and not spend the money
received. But this would lead to
idleness only if the economy did not consist in
a time
structure of production coordinated by interest rates
. In other
words, money not spent is saved and available for investment (that
is, payments for 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
for future consumption. (As Austrian
macroeconomist Roger
Garrison
 says, people save for
something
.)

Given our insatiable demand for goods, in
a freed market 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. Keynesians look around, see unemployment and
idle resources, and conclude (often encouraged 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
about why they
are idle
. Ludwig von Mises and F. A. Hayek, bolstered by
the anatomists
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
production inconsistent with 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
must not keep interest rates artificially
low
 (discouraging saving) or create uncertainty about the
future regulatory and tax regimes. The world is uncertain enough;
to the extent government
increases uncertainty
 about 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 just any
use
 of recourses—they’re scarce, after all. We want uses
that consumers would approve of. Politicians, whose decisions face
no market test, are clueless in
that regard.

So, contra Yglesias, when a fan of Bastiat’s sees
the broken-window
fallacy
 in 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 is not
the case
 these days—we must look to the earlier government
interventions that brought about that condition—and
then repeal those anti-market corporatist
policies, regulations, and taxes.

This
colum originally appeared in The Freeman.Â