Bastiat Lenses

     

In June 2001 a group of about 200 liberals - true liberals - from around the world boarded some buses for a short ride through southwestern France from Pau to Frédéric Bastiat's hometown of Mugron. I was thrilled to be among those visiting Mugron to celebrate the bicentennial of Bastiat's birth.

As the buses pulled into town, my companions and I could see the bust of Bastiat standing prominently, on permanent display, in the center of Mugron's town square. But something wasn't right. Not only was Bastiat wearing a necklace of "Monopoly" money, but also, surrounding the pedestal that supported his bust, were a few dozen noisy young men and women. When the buses' engines fell silent we could hear this mini-mob chanting "Taxe Tobin maintenant!" - the Tobin tax now!

Somehow, members of the French anti-globalization group Attac had learned of our plan to commemorate Bastiat's 200th birthday. And the Attac-ers had every intention of disrupting our modest and peaceful commemoration. They partially succeeded.

Whenever one of our speakers rose to say a few words, the Attac-ers - some of whom had gained access to a nearby clock-tower - clanged a loud bell that drowned out our speakers' remarks. After we abandoned our efforts to listen to a few speeches about Bastiat and his legacy, we walked to a nearby spread of food and wine that was set up for our enjoyment. The Attac-ers joined us, and helped themselves uninvited to our food and drink.

The rich irony of the attack on our bicentennial birthday commemoration would not have been lost on the great man whose birth we liberals had come to celebrate. And exploration of this irony goes far toward reinforcing the message in Robert Leroux's fine lead essay.

Most obviously - that which is first seen! - is the bizarre misuse today of the word "liberal" in English-speaking countries. A group of people, having paid their own way (and having secured all requisite permits from the local government) to peacefully celebrate the life of a scholar, suffered harassment, disruption, and thievery from thugs who object to Bastiat's ideas. Attac proudly used physical force to prevent speech critical of protectionist policies - policies that deny consumers the right to spend their money as they see fit as well as thwart the social and economic improvements that result from free trade.

Yet in modern American English the Attac-ers are called "liberal," while those of us who celebrate freedom of consumer choice - and who applaud the dynamic changes brought about by globalization - are called "conservative."

One can only imagine the fun that Bastiat would have had satirizing this grotesque change - a change that occurred long after his death in 1850 - in the popular meaning of the word "liberal."

Another irony was the Attac-ers' call for a Tobin tax.

The Tobin tax (named after the late Nobel laureate economist James Tobin) is a small tax on foreign-exchange transactions. (Indeed, the name Attac is an acronym for Association for the Taxation of Financial Transactions for the Aid of Citizens.) The chief purpose of this tax is to suppress short-run cross-border speculation in asset values. Such speculation is mistakenly believed to be harmful - an error caused by a classic failure to heed Bastiat's most famous advice, namely, to understand that much that is unseen always lay behind that which is seen.

What is immediately seen about international speculation is a rapid fall in a country's asset prices whenever speculators sell currency and other assets in that country. But what is not seen is far more important.

What is not seen includes a government's bad policies that are the ultimate cause of speculative countrywide selloffs of assets. Speculators sell only when they believe that the prices of the assets they own will fall - and nothing puts across-the-board downward pressure on the prices of assets in a country quite like unwise economic policies implemented by that country's government. A Tobin tax would indeed diminish such speculation today and might, today, protect some innocent people from suffering large declines in the values of their financial portfolios. An unseen consequence, however, of such a tax will be asset prices that reflect less accurately and less quickly the likely long-run consequences of government policies. In response to this loosened discipline applied by financial markets, governments will become even more prone to pursue economically destructive policies.

Over time, asset values will be lower than otherwise because market forces - hamstrung by less-constrained governments - will be weaker in harnessing human creativity, capital goods, and raw materials in ways that generate economic growth. [23]

No one can doubt that the most frequent mistake made by people (like the Attac-ers) who do not understand economics is their failure to see the full range of consequences of economic and political activities. Nor can anyone doubt that Bastiat's classic essay "What Is Seen and What Is Not Seen"remains the gold-standard explanation of the significance of 'seeing' what is typically not seen. [24]

Of course, the set of economic consequences that a person sees is determined by the clarity of his or understanding of economics. The better one understands economics, the more visible is the invisible hand - in broad outline and scope, if not in rich detail. Economics, when done well, might be thought of as corrective eyewear.

Bastiat's great genius was his unsurpassed skill at crafting quality lenses that were inexpensive to acquire and comfortable to wear. Writing with lucidity and humor, he distilled for his readers the essential features of economic processes. Any vision-impaired person could with ease and comfort - and, indeed, also with enjoyment - slip on a pair of Bastiat glasses and soon gaze upon features of reality that were previously hidden.

An unfortunate irony of Bastiat's excellence at crafting such economic-vision-enhancing lenses is that he remains largely ignored by professional economists. If I may continue with the analogy of crafting lenses, we might say that economists since Bastiat's day have become obsessed with building microscopes and telescopes and, in the process, have ignored the important task of fitting the public with corrective eyewear.

Many of these microscopes and telescopes are useful. They reveal to specialists previously unseen esoteric phenomena, for example, in the case of an economic microscope, why corporations might choose debt financing instead of equity financing, and in the case of an economic telescope, the consequences for economy-wide employment of people choosing to increase the amount of money they hold.

Unfortunately, several of these microscopes and telescopes serve more to distort economists' vision than to enhance it. A microscope, for example, that allows its user to discover and focus on a potential "market failure" - say, the potential for adverse selection to infect the market for medical insurance - too often hides from that economist other market phenomena that are at work to remedy this problem.

Bastiat was indeed not consumed with building microscopes and telescopes. Again, he devoted his efforts chiefly to an enterprise far more important: crafting corrective economic lenses for the masses. But only because he was expert in all the phenomena, microscopic and telescopic, that the best scholarship of his day revealed to professional economists could Bastiat so brilliantly craft such fine-fitting lenses that allowed ordinary men and women to see without distortion or bias all that is most relevant in economic reality.

The lenses that Bastiat crafted were so expertly shaped and polished that they work today just as well as they did when he first produced them.

Partly because of his sterling clarity and humor, and partly because so much of his effort was spent on fashioning vision-correction for the masses (rather than on building highly specialized microscopes and telescopes), Bastiat is held today - as he has been held for a long time - as having been something less than a first-rate economist. This attitude toward Bastiat is wholly unwarranted.

Not only can better understanding of basic economics by the general public reduce the demand for destructive government interventions, but so too can such understanding improve the work of professional economists. Economists who concentrate on peering through microscopes and telescopes too often do not see - when they stand back from their specialized instruments - the important, if less esoteric, economic phenomena that Bastiat's more quotidian lenses make visible. Too many professional economists today, no less members of the general public, would have much better economic vision if they were to wear some Bastiat lenses.

[23] The more-sophisticated proponents of the Tobin tax insist that the tax, by preventing only short-run speculation, decreases short-run market volatility. But those who advance this argument are blind to a reality highlighted by economist Tim Harford: A Tobin tax "will reduce liquidity, which in most theoretical models and most empirical studies increases short-term volatility." (Harford, "A Poor Excuse to Rob from the Rich," Financial Times, Feb. 2, 2013.) The bulk of the empirical evidence supports Harford's point. See, e.g., Robert Aliber, Bhagwan Chowdhry, and Shu Yan, "Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility," European Finance Review, vol. 7 (2003) pp. 481-510; Katiuscia Mannaro, Michele Marchesi, and Alessio Setzu, "Using an Artificial Financial Market for Assessing the Impact of Tobin-like Transaction Taxes," Journal of Economic Behavior & Organization, vol. 67, (August 2008), pp. 445-62; and Neil McCulloch and Grazia Pacillo, "The Tobin Tax: A Review of the Evidence," IDS Research Reports, vol. 2011, issue 68, (May 2011), pp. 1-77.

[24] "What Is Seen and What Is Not Seen" in Frédéric Bastiat, Selected Essays on Political Economy, trans. Seymour Cain, ed. George B. de Huszar, introduction by F.A. Hayek (Irvington-on-Hudson: Foundation for Economic Education, 1995). Chapter 1: What Is Seen and What Is Not Seen </title/956/35425>.